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?