Warren Buffett has said, “It’s good to learn from your mistakes. It’s better to learn from other people’s mistakes.”
As a CFP®, I’ve heard financial horror stories that made me cringe.
While individual mistakes differ, underlying reasons for the mistakes often don’t. It’s in these underlying reasons, where you can find the important lessons. Important lessons that apply to us all.
Here are 5 important money lessons you never want to learn the hard way.
Lesson # 1 ) You don’t have to make back money the same way you lost it
Say a friend of yours lost $1,000 playing blackjack. Would you tell them that the best chance of making their money back was to play more blackjack?
I hope not!
But this is the way a lot of us act–we tend to categorize our money. For example, if we lose money in stocks we think it must be made up in stocks.
But you can gain that money back in many ways–oftentimes with less risk and faster than the way you lost it.
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Lesson # 2) Index investors really do win in the long-run
Take 100 random drivers on the road. 50 drivers will be above average. 50 will be below. That’s just how the law of averages works.
But in one study, 93% of people believed their driving skills were in the top 50%.
The bias to overrate your own abilities is called illusory superiority.
One area this bias tends to impact our finances is in investing.
While research has shown the people who win are the index investors. That is the index investors who focus on minimizing costs and taxes and focus on savings rate.
The behavior doesn’t reflect this common knowledge. Due to overconfidence, many try to beat the market. The majority fail.
# 3) Nobody cares about your money as much as you
Getting scammed by a con-artist is one thing. It happens. It’s unfortunate.
But it’s less common compared to getting poor advice from a family, friend, or even a professional.
One of the hardest lessons to learn is that no one cares about your money as much as you do.
Once you realize this and take 100% responsibility, however, it can bring a tremendous amount of power to your life.
To quote Warren Buffett again, “Never invest in a business you cannot understand.”
You can apply this wisdom to all financial decisions. For example, if a life insurance agent tells you that you need a certain amount of coverage, run the numbers yourself. Understand why that recommendation was made.
It’s not that you shouldn’t trust anyone. Outside advice can be very helpful. But know that nobody cares as much as you do.
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# 4) Income doesn’t equal wealth
If you were to read the success stories of those achieving financial independence you’d be surprised.
The individuals who achieved financial independence the fastest were not the ones making the highest salaries. Nor, were they the ones who sold their businesses for millions.
Instead, the most important indicator of how fast someone could retire early was their savings rate, i.e. the amount of the total income they had saved.
We often confuse expenses with wealth.
Someone who drives a nice car, lives in a nice house, and takes nice vacations appears wealthy.
But that’s not necessarily true.
Many of the seemingly wealthy people have borrowed from their future to enjoy their lifestyle today.
It matters what you keep, not what you make.
- Related: How to Save Money for a House
# 5) Happiness comes before success
Many believe that success must become before happiness.
Whether that’s success in your career, reaching a certain financial milestone, or living in your dream house.
But science is now disproving this fixed idea.
Harvard researcher and author Shawn Archor has found:
“Before we can be happy and successful, we need to create a positive reality that allows us to see the possibility for both.”
This can be a hard lesson to learn. As the common mindset is to delay happiness until one becomes successful gives one the greatest chance of success.
But being happy actually helps you achieve your goals faster.
It’s also much more enjoyable.