Conquer These 7 Money Pitfalls to Increase Your Investing Chops

by | Nov 28, 2023 | Real Estate Syndications

Embracing financial security is a journey many of us embark on with enthusiasm. We soak up wisdom from top financial podcasts and diligently follow advice written by financial experts. The dream…financial freedom, and cash flow confidence that comes from dependable passive income that flows regardless of the ups and downs of the stock market.

But here’s the catch – the foundation of wealth building is anchored in saving, having money left over at the end of every month.  It seems straightforward, yet lurking beneath for many are subtle yet detrimental money habits that chip away at their financial well-being.

It’s one thing to strive for better financial habits, but often, the real challenge lies in identifying the negative habits that are already part of your financial routine. These hidden culprits can lead to unnecessary spending, escalating credit card debt, and, most critically, an impediment in your ability to invest.

The first step towards financial liberation is recognizing these habits and understanding the financial shifts necessary to steer your journey towards prosperity. An honest assessment of your financial habits is key to making a positive impact on your wallet and investment potential.

Let’s dive into the 7 most common financial missteps that could be draining your resources and blocking your path to investment success.

1. Spending More Than You Earn

This is a classic trap: spending just a bit more than what comes in, leading you to depend on credit cards to bridge the gap. This seemingly harmless habit quickly snowballs into a daunting challenge, piling up fees and high-interest debts.

To break free from this cycle, evaluate your spending patterns against your long-term financial goals. Assess your yearly expenses against your savings. Consider these strategies to curb overspending and start hitting your savings goals:

  • Cut back on non-essential spending and impulsive purchases which are the primary ways overspending occurs..
  • Regularly review and cancel unnecessary subscriptions….often out-of-sight, out-of-mind expenses you continue to pay while no longer leveraging the service.
  • Keep credit card usage to a minimum, as late fees and interest charges make the item much more expensive than having saved up for it.
  • Tighten your budget, and seek out deals, discounts and coupons to get your savings going. But note that you can’t just save your way to your financial goals…as you build enough to start investing you will want to transition to spending more time on being a better investor (we recommend cash-flowing assets that generate even more savings).
  • Explore additional income sources, like part-time work or side hustles, to accelerate debt repayment and build savings.
  • Short-term sacrifices pave the way for long-term financial stability, gradually replacing bad habits with sound financial practices. For instance, I have always taken really good care of our cars and driven them to 300k miles or more…one of our cars we drove for 17 years. As a result, we saved tens of thousands in car costs over the years.

2. Lack of an Emergency Fund and Protection from Catastrophe

Emergency Funds: While many manage a checking account without overdraft fees, pay their bills on time, and are mindful of their credit scores, an emergency fund often gets overlooked. Many have a savings account too.

But did you know you should have money carved out for emergency expenditures like the critical house or car repairs that always pop up just when you don’t have any extra cash. Nothing can sidetrack your financial plan faster than unexpected expenses that can rob your savings account or create new credit card debt with interest charges and fees.

Financial experts advise that an emergency fund should be your first step towards financial stability, recommending at least three months’ worth of expenses set aside. Once set up, periodically review and adjust this fund to reflect your current financial state and spending habits. For instance, it is very common for higher income individuals to have one year or more in expenses set aside.

Protection: Relatedly, having adequate property, medical and life insurances are also critical to avoid being financially wiped out by a major life event. But being a savvy shopper here is key as costs and fineprint can vary widely by company.

3. Unclear Savings Goals

The standard advice is to save 20% of your income, but this figure may not suit everyone. Before you commit to this goal, reassess your current spending habits and income. Test different expense strategies to find what’s sustainable for you as a start. Then gradually look to increase each year towards the 20% or higher level.

It’s tempting to want to cut meal expenses to bare bones, say $200 monthly, to get to the 20% savings mark. Realistically, you’ll want to experience this low level of spend on a trial basis to make sure it’s reasonable and sustainable for you.

Once you have a grasp of your monthly financial needs, establish a budget. Your savings goal should be a percentage of your income that aligns with your essential expenses. Consider setting up automatic savings to ensure a portion of your income goes straight into savings.

4. Overlooking Tax-Saving Opportunities

Engaging experienced tax and financial professionals can significantly maximize your tax-saving opportunities. They can guide you in optimizing your deductions and exemptions and recommend any investment options for your income bracket.

Consider tax-advantaged accounts like IRAs and 401(k)s, and ensure your retirement and taxable brokerage accounts contribute to your wealth building. But always make sure your investments make sense beyond just the tax benefits. An IRA or 401K investment that grows at say 5%, will not make sense as the tax benefits will not totally offset the impact of fees, taxes and inflation (meaning you could have a negative return).

As a passive investor in real estate syndications, you have a great way to create passive income and tap into big tax benefits usually reserved for the ultra-wealthy. Discover more about this inside the GrowAbility Equity Club, an invaluable resource as you embark on your investment journey. It’s free to join and very helpful to new investors.

5. Misjudging Investment Risks

Investing in anything has risk. But if you follow proven methods of investing, it is a necessary and sure way to grow your money no matter where you are on your road to exercising good money habits.

Individual stocks can be very risky so you need to have great stock picking skills and you need to diversify into multiple stocks or other investments to lower your risk. Some develop skills to select the right stocks at the right time and consistently beat the averages. But many have looked at stocks like Meme stock Bed Bath and Beyond – a well-known brand that was having phenomenal growth during Covid – as a good name in which to invest. But many misjudged the risk of investing in a company literally going out of business and lost their shirts when the company got deep into trouble and went bankrupt.

Exchange-traded funds (ETFs) and mutual funds are already diversified so they are less risky. But you still need to understand the risks. Some funds will have low odds of losing lots of money, but will put you at risk of not generating the growth you need to reach your goals. Other funds will have high odds of growing your money to reach your goals over time, but will also have high odds of big losses in any given year.

If you’re looking to invest in tangible assets, consider modest rental properties or real estate syndications, which offer a favorable risk/reward balance with triple benefits of potential cash flow, appreciation, and tax advantages. Though still entailing risk, real estate syndication’s triple benefits reduce risk because you have more ways to profit (cash flow, appreciation and tax benefits) instead of one (appreciation).

6. Early Withdrawals from Retirement Savings

Although tempting, it’s best practice to leave your money invested unless absolutely necessary to withdraw it. The costs of prematurely withdrawing far outweigh the benefits. In addition to paying hefty penalties, you’ll miss out on potential financial growth from those investments and it may take a long time to rebuild your balance.

Additionally, early withdrawals almost guarantee you won’t be able to retire early. Compounding interest over many years is powerful but withdrawing money and reducing your compounding balance is a powerful wealth destroyer.

If you’re facing hardship and have no other option, consider discussing your early withdrawal options with a financial professional.

For some who have become more experienced investors, it can make sense to withdraw funds early and move to another investment vehicle where the higher returns and tax benefits create much better returns for you over time. Seeking ideas from experienced, objective financial educators like GrowAbility Equity is a good start, followed by consulting with financial professionals to help you decide what’s best.

7. Impatience in Diversification

Even when you’re seeing underperformance from a low-cost index fund, mutual fund or any other investment, don’t make any rash moves. Your financial goals will be best met with patience and perspective. Investment history is littered with people who moved their money out of the market or all investments and put it literally and figuratively under their mattresses, taking themselves out of the game to ever reach their financial goals.

Those with good money habits know that asset markets are often volatile in the short-term but steadily rise over the long haul. So you’ll want to generally stay the course. There are two situations where change might be warranted. One, getting out would be prudent if there is something investment-specific like a convicted fund manager or a company going out of business. The second case is when you find there is a better investment vehicle to meet your specific goals. For me, I diversified much of my wealth into real estate syndications because I could accelerate getting to my financial goals and real estate investing better fit my Investor DNA (risk/reward profile, interest and preference) than stock market investing.

If you’re ready to learn more about how to manage your finances while you’re investing, the next step is to join the GrowAbility Equity Club. With helpful insights on anything involving active and passive investing from ETFs to syndications, GrowAbility Equity can help you get rid of the bad and start practicing good habits.

Transforming Your Financial Trajectory

Having identified these seven pitfalls, take a moment to reflect on your financial habits.  In what areas do you need to focus?  Are they contributing to your stress?  How much better would you feel with late payments, credit card debt, and low checking account balances weighing you down?

Imagine the impact of having cash set aside, a comfortable budget in place, well-funded retirement accounts and a constant stream of new money to invest?

Now is the time to embrace sound financial practices and work towards your goals! As we approach the end of our discussion, it’s clear that transforming these habits is not just about personal discipline; it’s also about seeking the right guidance and support. This is where the opportunity to join the GrowAbility Equity Club comes in, offering you a platform to connect, learn, and grow in your financial journey.

Also, if you’re ready to take your financial understanding to the next level and dive deeper into the world of savvy investing, we invite you to schedule a wealth acceleration call with us.

Thanks for being a part of our community. Until next time, keep growing your ability to accelerate your wealth and legacy building—we’re thrilled to be a part of this journey!