About a year ago I was drifting about without any clear direction in life. Heck, I didn’t even have a job at the time and the search for one was difficult to say the least. Fastforward one year and that very same fellow now has only one clear goal in life: financial independence, preferably before the age of 40. Full steam ahead from here on out!
To me spending less, saving more, and investing the surplus feels like an epic, but highly uncertain quest, riddled with many temptations and pitfalls. Nevertheless, my first income and expenses report of 2015 showed yet again that I seem to have mastered the basics of financial freedom. That doesn’t mean I didn’t make any mistakes along the way though. Mistakes aplenty, but everytime they happened I also learned an important lesson.
Today I’d like to share three rookie mistakes that I fell victim to in some way or another when I just started out, but even now sometimes have difficulty with. If you are serious about financial independence you’ll want to avoid these missteps from happening on a constant basis as they could potentially postpone and jeopardise your early retirement plans.
1. Giving in to peer pressure
Probably the number one stumbling block for a lot of people is good ol’ peer pressure. Keeping up unnecessary appearances to friends or not being able to decline regular lunch invitations from coworkers can seriously increase your spending and reduce your savings rate. Joining in on other people’s spending bonanza, however, is not necessary to be a good friend and someone calling you out on it wasn’t a friend in the first place, at least in my book.
I’ve said it before and I’ll say it again, but not keeping up with the Joneses doesn’t mean you have to decline invitations from your friends to join them on a fun night out. Yes, going to a bar is an unnecessary expense from a financial independence point of view, but don’t forget to live a little. After all, what’s financial freedom without friends to enjoy it with?
Join social occasions that add value to your life, but cut out the unneeded ones like daily lunch at work, especially when you feel pressured by your environment.
2. Irrational saving behavior
Another common pitfall is what I like to call irrational saving behavior. Most people let go of their budgetary reins when they feel good about previous saving. “I saved 30% of my income last month, so I should be allowed to treat myself to a new television set!” is something I have heard all too often.
Regularly treating yourself because of an earlier smart financial decision more often than not cuts yours savings rate in half: one month you will be saving rigorously, while you will be spending it all the next because you did well the previous month. Bad idea!
If you still feel like you need a regular reward for your efforts, why not think of a growing stream of dividends from your investments as a benefit of your savings? And if that doesn’t work, try budgetting discretionary expenses every month as to smoothen your savings rate from month to month.
3. Fear of the stock market
A third big obstacle on the road to financial security and freedom is fear of the hazardous and predatory stock market, especially among inexperienced and uninformed investors. I too was in this position not long ago. Even Warren Buffet must have felt like a rookie when making his first investment! Luckily, educating yourself and taking baby steps goes a long way in overcoming this fear. Also don’t take risks you are not comfortable taking, or invest in stuff you don’t understand.
If you don’t crush your investing fears one way or another, you’ll probably end up waiting for the perfect time to commence your quest for financial independence. And as we all know, the best time to start saving and investing isn’t today but yesterday, as time is compounding’s best friend – and compound interest is your best friend.
As you can see, all three of these common mistakes could make financial freedom an impossible dream for you. If you give in to peer pressure, you’ll never save. If you do manage to save, but feel like a reward is in order, you’ll undermine your future savings rates. If you don’t invest your savings, your money’s value is set to drop year after year.
That’s why it’s important to focus on these three areas if you’d like to get to financial independence before long.
While peer pressure never affected me much and irrational saving is something I hardly ever do, I still am a little anxious of the stock market from time to time. However, the past few months I have grown immensely by reading up on the ins and outs of the market, but the biggest learning experience was actually entering the battlefield of the stock exchange itself.
I specifically searched for a cheap broker that offered free transactions as a sign-up bonus, simply to test the waters with a small sum of cash. When I finally felt comfortable putting my money in the market, I started pouring in more cash, further developing my confidence. Baby steps do help!
How about you? Are these very same things holding you back from unlocking your full saving and investing potential? Or maybe even postponing your quest for financial independence indefinitely?
Good piece of advices!
Peer pressure can be devastating indeed. Thankfully my wife and I are aligned on that and it helps a lot to grow are family mustache!
I’m not that much hurt by the second mistake but the third one is definitely one that I had hard time to overcome.
Thanks to Jesse from YNAB for his investing guide. That was the trigger for me!
But all this market fear is only due to not having the knowledge. And you are right with your baby steps. That’s the only way one can go trough it!
And remember: “Anyone who is not doing any mistakes isn’t trying hard enough!”
It helps to have a partner in crime that keeps your eyes on the goal so you don’t give in to peer pressure from friends and family. I’m glad to hear you and your wife share the same views.
I think you’re not alone in having the most trouble with overcoming your fear of investing. Having been there myself, risking your hard-earned cash isn’t easy – especially when you don’t have a lot of it yet. Education is key here like you said, which is also why I wrote some posts on the subject matter.
Also remember: if you don’t do anything, you can’t do anything wrong either.
Very well written and I took the opportunity you link your post to my last post. Hope you don’t mind?
Good weekend, RA50
Thank you for the kind words. Of course it’s OK for you to link back to my article, much appreciate it. I’ll be sure to check your post out.
Enjoy your weekend,
I agree. On point 1 – absolutely. It gets easier as you get older too, to avoid going out on weekends and such to spend money – at home and at work. I like to 1 day a week not bring my lunch, just cause I need to get of my office, otherwise its $3 lunches for me from home. Still you do need to live a little.
On point 2 – I average 30% per month at least. Some more, some less. I know some with that attitude, but I’ve never need something bigger than a bowl of ice cream or a few beers as a reward.
Point 3 – I never had a fear of the market, but I definitely had my growing pains. Those who waiver after a little bit either need to grow some backbone or should be ready to pay someone to manage their money for them.
These things definitely hold people back, many of my friends for instance. They are just excuses and sadly are keeping good people just working longer into their lives.
This is the first time someone has told me it gets easier once you become older. I hadn’t thought about that, but it actually makes sense because you’re pre-occupied with other things than hanging out with friends – children for example. If you feel like one weekly lunch outside the office is worth it to you, definitely keep doing it.
Growing pains are part of the process and if you can’t stand them, then financial independence definitely isn’t for you. Glad to see you had the fortitude to keep your money invested.
Let’s hope your friends one day do see the light and join in on our fun!
Great summary on the top 3 rookie mistakes. Fear of the stock market is quite big for a lot of new investors. It’s rough seeing your portfolio drop by 10%, 15%, or something even larger amount. The important thing is think about long term rather than short term.
Absolutely! It’s the one factor on the road to FI that you can’t really control, so a lot of people just give up before trying to reduce the risk that’s attached to it. In the long-run though, I believe it quite possible to rely on the stock market’s return with a relatively high level of certainty.
Always remember that the market is there to serve you and not the other way around.
The investment returns you enjoy will depend entirely on the price you pay for the investment: pay too much and you will get lousy returns.
It’s all fairly basic – the devil’s in the details 😉
Nice hearing from you, buddy! Glad to see you haven’t forgotten about us.
The devil might be in the details, but that’s where most people go wrong. They don’t take the time to properly educate themselves or investigate their investments. If you do, it’s hard to go wrong though.
Peer pressure and balancing a life are big ones. We’ve added money to our budget this year to spend more time with friends, but I want to cut out spending that we do because we think we have to.
Absolutely! For many people peer pressure, and balancing enjoying life and saving are the biggest first problems in trying to become financially independent. Without the right mindset I think it’s fairly difficult to overcome that barrier though, so it’s important we keep inspiring these people and show them how we got over it.
I hope you don’t cut out too much of your budget to spend on time with friends. Never forget that they’re more important than saving a quick buck here or there.
If you only have 3 rookie mistakes then you’re doing really well my friend! I’ve made mistakes… many mistakes…. But I learn, hopefully they don’t happen again.. and again.
At least you and I learn from your mistakes and make sure they don’t happen again! That’s far better than 99% of the population out there. We’ll be sure to get to FI either way.
I find peer pressure is a huge and often subtle challenge. Your environment and the company you choose to keep has an incredibly powerful sway on your behaviours. Sometimes that costs you a little if your friends have expensive tastes, but as you say, occasionally you just have to enjoy life, especially if you value the relationships. But even better if you can create a few awesome friendships with more ‘financially like minded’ people.
You’ve already developed a great amount of wisdom in such a short time NMW – I think you’re on track for a fantastic journey in life!
Having like-minded people definitely helps to keep expenses low, but I wouldn’t start a fight or a row with friends simply because the things they want to do are a little more expensive. Of course, that only holds true if their friendship enhances my life and when the things we do together are actually worth it. Spending for the sake of spending is out of the question.
Thank you for the kind words! Keep up introducing everyone to the investing islands, pal.
I think the biggest test will be the next market crash. We all know crashes are a great opportunity to pick up stocks at a discount but will I and many other dividend growth investors really keep investing money when we’re deep in the red? At that point there’s a good chance fear of the market and peer pressure (from wife/husband/family) kicks in real hard and you start doing irrational things.
For many people the next market correction will definitely be the biggest test. Seeing how the stock markets rebounded after the 2008 meltdown, I have decided for myself to sit things through and invest even more if at all possible.
When your family members start to question your strategy, I believe it might be more difficult though. That’s why I think it’s a good idea to have a regular chat about asset allocation and risk diversification.
Let’s hope we both hold on and enjoy the ride down by buying more and cheaper dividend growth stocks!
Eating out still sucks several hundred dollars a month that could be invested. I shrunk that some last year and will continue this year. The problem is no matter how hard I try my Chinese food never tastes as good as the local restaurant down the street.
Several hundred dollars a month sounds like it’s possible to save some more on eating out then. I understand that you have a lot of mouths to fill, but it’s these kind of expenses that make a big difference in the long-run.
You made me realise how long it’s been since I last had Chinese – might pick up a dish or two over the next couple of days.
I think many of us have experienced the peer pressure and as with everything, there is a balance that you can strike there too. ‘Never’ going out for lunch is the extreme, going out for lunch once a month might just be enough. Perhaps for some going out once a week would make a huge difference vs daily. The biggest part is the mindset. I believe in peer leadership whereby your own actions inspire others to consider making a change in their lifestyles.
In regards to mindset for savings, I like to imagine I have 10% of my dividend income each month that I can spend on a ‘want’ rather than a need. At the moment my average monthly dividend income is around $500, which means $50 can be spent on some lunches/dinner/movies/…
Last months saving rate did get hit because of a car expense and a weekend snowboarding 🙂 – but it was worth it and reduced my saving rate to 43%. I aim to make up for it in the next couple of months by bringing it back up to over 60%-70%. (Also this is purely after tax saving rate where I ignore to add 401k (max) contributions back in.)
Good luck on your journey and I’m sure you will find the FI you are looking for!
Might be nice to make some ‘best’ and ‘worst’ case scenarios too. If your worst case scenario gives you comfort to sleep at night, you are doing quite well.
Peer leadership is a beautiful word and accurately describes what I always describe as “leading by example”. By showing yourself how something can be done, you can inspire others to do the same and change their ways.
Man, having a snowboard vacation and a one-off car expense without dropping below 40% is truly remarkable! I wouldn’t be able to do that. On top of that you also have your 401(k), which boosts your actual savings even higher.
It’s actually a pretty good idea to set a certain percentage of your passive income as play money if you feel like to reward yourself on a regular basis. That way you’re not cutting too deeply into your savings rate.
Like you suggested, I have set a best and worst case scenario. At the moment I’m doing better than the best case scenario, so I should adjust accordingly. I thought I wouldn’t be able to save as much as I do and I underestimated the initial yield and growth part of my dividend income.
Best wishes and good luck over there too,
Very useful piece of advise there.
Peer pressure is not the easiest to combat even at this point and unless you balance it out with proper financial planning, the “friends” you have are only going to leave you out one by one.
It’s indeed important to find a balance between saving and spending time with your friends. Of course, spending time with them doesn’t mean you should spending money too. Many activities are completely free and are a lot of fun.
In the end though, FI isn’t worth it if you can’t enjoy it with your friends, so go out there and do silly and sometimes expensive stuff with them!
Fantastic article, I think it really captures the fears and obstacles of someone starting out on their journey to financial independence. It all applies to me right now, as I’m just starting out. The point about peer pressure is the biggest one for me – trying to balance a good social life with minimal spending is tough!
Actually starting and taking the plunge is another huge obstacle. Most people understand the concept of financial independence and would like to get started, but never find the “right moment”. I’m currently trying to get my best mate to get started with me. It should be easier with a “partner in crime”.
Glad you like the article and see yourself in some of the points I brought up – I hope you also found my tips helpful. I’m sure you’ll figure out something to balance your social life and savings goal.
Getting started and just trying your hand at FI is a big one too, like you said. Fear of the unknown paralyzes many people to take action, and not just to save and invest. And if you need a partner in crime, look no further. Our community is vast and we’re all partners in crime!
Best of luck,
You bring up several great points about rookie investing mistakes. I’d like to add one more to number three. After you get over your fear of the stock market and actually invest I’d like to suggest that rookies do not go after penny stocks nor chase high yield when dividend investing. Too often many are tempted by double digit yields only to get burned when dividends are cut or eliminated. Thanks for sharing.
Good one! When I tell people that I enjoy investing, they always start about the next hot stock or high-yielding equity as if that’s the only way a proper investor would get any return. I’d take low-yield and high-growth dividend stocks any day of the week though.
That’s a great advice there. We got to be realistic. I don’t know if oil has reached the bottom yet, but there is a rebound now. If it going to stay this way under 50$ oil companies will cut dividends, it could be discouraging to a new investor to see their stock value goes down, and they don’t see beyond the value to see the cashflow even with the dividend cut.
Oil is unlikely to remain low for a long enough time to force all oil companies to cut their dividends. They dealt with much worse declines and problems in the past without too much trouble, so don’t worry about it at this point in time.
Double-digit yields like DivHut is referring too often are problematic though, for obvious reasons. I wouldn’t touch investments like that with a ten-foot pole.
I can’t agree with you more especially the third one. People will have to be more educated to embrace the beauty of the stock market. It is one of only few positive addictions.
And it’s up to us to educate them! Yesterday I had a conversation with someone who I generally think is pretty clever and smart, but his utterly wrong view of what the stock market exactly is, baffled me once more. My head spins when people say stuff like “I’d rather stash my cash in a sock somewhere.”
All three are serious pitfalls. The third one is all too common among those that do actually invest. I can’t count the people I’ve spoken to who aren’t even sure if they are invested in the stock market at all! When I ask what they own, it usually sounds something like, “I, umm… I think it was low or medium risk?” When I ask what that exactly entails, they tend to say, “I’m not sure? I don’t think it’s in the stock market and won’t earn much, but I shouldn’t lose anything either.”
Poor financial advisors at financial institutions simply nab the sale and put clients into junk low-risk funds despite their time horizon being +15 years and allow them to wallow in mediocrity with high fees. People can see the risk of losing capital in the stock market but fail to see they’re getting eaten alive by inflation and fees with the junk they get shoved into by “advisors”.
Drives me crazy to see people suffering like this.
– Ryan from GRB
Ha, that’s something that I get a lot too. Weirdly enough, many of the medium-risk investments are in some way or another tied to the stock market without these poor folks even knowing because they simply don’t understand what they’re buying into.
You make a really good point about being afraid of losing capital in stock market, but not minding the high management fees. Hadn’t thought of that before!
Thank you for your valuable input,
I mostly had to comment to acknowledge the Zelda graphic. 😉
These are all rookie mistakes I see a lot of people make, specifically, young adults. Giving into peer pressure and lifestyle inflation is so easy to do once you graduate and find a full-time job. I know most of my peers aren’t concerned at all about their financial futures, or investing. Heck, even my parents are afraid of changing anything with their investments, even though I’m convinced their current broker is robbing them in fees. There are so many resources out there to help!
Great advice here, and I completely agree that taking baby steps helps!
Thought you would like that! 🙂
Many young people like us make these mistakes simply because they don’t know any better. Can you blame them if no one ever took the time to explain things to them?
I’m sorry to hear you think your parents’ broker is robbing them blind. I hope they take the time to read up on things and take matter into their own hands. There’s only one thing worse than losing money in stocks and that’s losing it to ridiculous management fees.
This is a great blog – I think a lot of people identify with the problems of being in a different place to where your peers are, and how to maintain your friendships when you don’t want to spend extravagantly. A lot of my friends are from my high-earning banking days, and we are good friends… but with different goals in life. But as you said – part of life is enjoying it, so it’s nice to accept that and think about to balance things.
Thank you very much, I appreciate that!
When all your friends are making a ton money than you are, it’s not always easy not to give in to their lifestyle inflation. I’m glad you have different goals in life and manage to stick to them.
Interestingly enough the last couple months my girlfriend has started investing and has experienced all three of these feelings. The biggest one would be the fear of the stock market and the worry of losing her money.
Even though the risk is always there to lose money. Now that she has seen an increase in value and dividend distributions she is really ramping up how much she is willing to contribute. Wishing she put more money in a couple months ago is heard from here commonly these days.
Thanks for sharing,
Mr. Captain Cash
Must be fun to experience someone else’s first steps into investing! Hope to one day introduce some people to it too.
Sure, there’s always risk, but there are ways to reduce that risk to a minimum. Long-term investing, stable companies with a wide moat, industry and geographical diversification, etc. are all easy solutions to taking on too much risk from the outset.
I understand that she wished she had put in more a couple of months ago, as I’ve been there myself, but it’s better to be safe than sorry now anyway!
Wish her good luck,