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The Dumb Financial Mistakes Smart People Make

When it comes to personal finance, nobody’s perfect. But there are many of us who make mistakes that can range from silly to just plain reckless.

Even smart people make mistakes with their money. Here are just a few of the biggest ones.

Spending more than you make

Credit can be a good thing. It allows you to purchase something right away even if you don’t have the money. All you have to do is pay it back at a later date. Credit can also be a bad thing if you abuse it. Expensive trips to the mall or some exotic locale may bring you temporary happiness. But if you can’t afford what you buy, you will likely go deeper into debt, making you feel helpless and alone. If you find yourself spending more than you earn, create a budget, stick to it, and only buy what you can afford.

Spending too much on a home

You know how your mortgage is pre-approved for a certain amount? That’s the most a financial institution will lend you. Just because you can borrow that amount doesn’t mean you should. People that spend too much on a home often feel house poor. They’ve spent the maximum amount possible and they also have property taxes, utility bills, and maintenance costs to pay. That leaves them with little to no money to save for emergencies, retirement, or a vacation. While owning a home can feel great, having no money left over at the end of every month isn’t a good feeling. Once you’re pre-approved for a mortgage, consider spending less than what you can afford in order to give yourself some breathing room when you become a homeowner or buy a larger home.

Taking on too much risk

Almost everyone wants to be rich, but not everyone is prepared for the risks that come with investing in the stock market. With the recent market turmoil, many investors were worried about seeing the value of their investments drop. If you’re making your own investment decisions, fill out an online investor questionnaire to determine your risk tolerance. It should help provide guidance on how much of your portfolio should be in stocks, bonds, and cash.

Buying financial products you don’t understand

Not everyone is a stock market genius, but not every financial product is simple. Many investors are looking for a quick buck. When income trusts were popular back in the early and mid-2000s, investors piled in and the value of trusts shot up. However, the federal government cracked down on them and the bubble soon burst. There are also investments like preferred shares or split shares, both of which offer high dividend yields. While both of these look like great ways to earn income, they’re not for the faint of heart. Invest in something that’s fairly simple.

Not having a will

A will determines what happens to your assets when you die. Without one, someone else will make the decisions for you. Let’s use Ontario as an example. The law says a spouse gets the first $200,000 while the remainder is split equally amongst the spouse and the children (if any). Not married or don’t have any kids? Then the estate goes to other relatives. If you have a common-law spouse, your assets don’t automatically go to him or her. He or she will need to file a dependency claim in court. And your estate will go to the provincial government if it can’t find any living relatives. Do yourself and your family a favour by getting a will.

The bottom line

Smart people can make terrible decisions when it comes to spending, saving, and determining what happens with their money. It’s up to you to avoid these mistakes from happening.