Lazy Man and Money

10 Biggest Money Mistakes Analyzed

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Money MistakesDo you have money mistakes? Of course you do, right? We all have money mistakes. I spend way to much time (and it’s part of how I make a living) limiting mine as much as I can, but I still have money mistakes.

There was a Twitter thread that went viral (for money conversations at least) about money mistakes that caught my attention. It caught my attention because everyone agreed that it was very good. I agree that it was very good too. However, I thought that each mention of a money mistake had a lot more nuance that deserved a deeper look. That’s just the way Twitter is.

I thought it would make for a good blog post to explore some of those nuances. Unfortunately, I’m sure this will come off as if I’m criticizing Nick Maggiulli Of Dollars And Data, but I’m actually a big fan of his work. I’m a subscriber of his newsletter and I recommend that you subscribe as well.

10 Biggest Money Mistakes Analyzed

I’ll be embedding all the Tweets in this post, but you can read the money biggest mistakes here. Some of my responses are a little snarky to make this a little more fun.

“1. Grow Income instead of Cutting Expenses”

The main problem that I have with growing income advice is that it is rarely actionable. If I asked everyone reading this who wants more income, I bet all of you would raise your hands. Making a case for more income in many careers is a long, slow, tedious climb up the corporate ladder.

Alternatively, you can add a side hustle and trade time for money. That can work depending on your life situation. It was easier for me before we had kids. If this works for you, I suggest combining this income with cutting spending to maximize overall savings. Then invest those savings for passive income.

It’s far less complicated to give people advice on how to cut spending. There are a lot of ways to save money. What’s best for you greatly depends on your personal situation. If you are a high income earner with high expenses, growing income more may not be the answer.

“2. Not Thinking Like an Owner”

I agree with this advice, but I think it isn’t the best example.

Brady took stock options (ownership) in Under Armour in 2010 (Source) that were up 800% in August of last year… and Under Armour stock has doubled since then. Tom Brady certainly has a significant ownership stake in his nutrition/sports performance company, TB12 Sports.

Peyton Manning had ownership of 31 Papa John’s franchises (Source.) Manning sold ownership after the CEO got involved in some scandals. I’m sure Manning owns stakes in other businesses, even if it is stock from his many, many endorsements.

Madden may have ownership in some things, but he took $150 Million to license his name in perpetuity to Electronic Arts for the famous Madden Games (source).

“When the company’s stock first went public, he was offered an opportunity to buy it for just $7.50 a share. Thinking EA was just trying to milk money out of him, Madden declined. He later called this decision the ‘dumbest thing [he] ever did in [his] life’ — and for good reason.

EA’s stock was priced at $70 by 1999 and reached an all-time high of close to $150 a share in July 2018 — thanks in large part to the franchise that bears Madden’s name and will for the foreseeable future.

In fairness to John Madden, EA went public in 1989 with a market capitalization of about $84 million. So he was actually getting paid for his name almost twice what the whole company was worth. According to this calculator, an S&P 500 investment would have grown more than 1000%, meaning that John Madden’s name could have reasonably gotten him 1.5 billion.

I don’t know about you, but if the dumbest thing you’ve ever done still nets you 1.5 billion (or half that if he invested more conservatively), it’s still a good day.

But what about Jerry Richardson?

First, it’s hard to connect Richardson’s success with being an NFL player. While he was a player, he only played for 2 years and was far from a star. He used the bonus money from winning a championship game and used that to start the Hardees business. I’m not sure how much the championship bonuses were in 1960, but I bet it wasn’t much. Many other people could have had the same starting money with a little opportunity or inheritance.

In short, it’s more coincidence that he’s a wealthy football player than causation.

As Axios points out, “But the story of how [Richardson] came to sit in [the Carolina Panthers owner’s] box is complex and interesting and improbable and kind of inspiring.”

Richardson started Hardee’s just 6 years after McDonald’s got its start. It proved to be the perfect time for fast food restaurants.

Also from the Axios article, “In 1993, toward the end of his career, Richardson and several investors paid the NFL $206 million to create the Carolina Panthers as an expansion team. That may have proven to be the most shrewd business move he made. The Panthers are now worth north of $1.5 billion, according to Forbes.”

I feel it would be more accurate to say Brady/Manning are more “business owners” than Richardson was a football player. It’s also worth noting that Richardson didn’t start his business ownership until his playing days were over. Brady is obviously still playing. They both have 40 years of earnings and compound interest growth to get where Richardson’s net worth is today. Even with inflation, I wouldn’t bet against them.

The main advice of “think like an owner” is true, but remember that it was improbable that Richardson would be a successful entrepreneur. Don’t go start a burger stand thinking that you’ll make a few billion dollars.

“3. Overemphasis on small wins vs. big wins”

I don’t want to say that you shouldn’t prepare for a salary negotiation. However, I’ve been on both sides of a few salary negotiations, and I can tell you it wasn’t much of a negotiation. The numbers were preordained.

I hope the numbers in your salary negotiation haven’t been preordained. If that’s the case, then it’s certainly worth spending a few hours to prepare to maximize the return there. There’s a chance of a $800/hour return on your time (using the example above). That’s year after year and compounds with future raises. The thing that gives me pause is that the chance isn’t 100% and it may be zero.

Driving across town to save $40 on a television does have a few benefits though. Personally, I like to get out of the house. I like to visit electronics stores. That’s entertainment for me. Also, the chance you are going to save $40 is 100%, which contrasts with the possible 0% chance at $4000. Finally, this kind of frugality can become habit-forming (in a good way!) and lead to savings in other areas. I’ve personally found that I’ve become frugal enough that I don’t have to worry about budgeting.

One last thought: Since I’m being a little snarky with this article anyway, does has anyone actually driven across town to save money on a television set? If I buy locally, I either buy from the one electronic store (an independent one) or Wal-Mart. (We don’t even have a Best Buy.) However, most of the time I would buy a television on a deal that I saw online.

“4. Timing the market”

No one knows what the market is going to do. That is a universal truth.

However, on January 23, 2020, I wrote How I’m Managing Stock Market Risk in 2020, specifically about how the 10 year bull run had made me nervous. I increased my bond holding. That turned out to be very useful when the market crashed in March. The bonds didn’t go down very much and I was able to sell them and buy stock indexes on sale while the market was going down.

With the market back up to new highs, I’m selling some down stocks and buying back the bonds again. I’m still staying fully invested, I’m simply trying to reduce my investment risk in this market environment

There is significant research into using CAPE (Shiller PE) into asset allocation. All of that essentially amounts to “timing the market.” It’s timing the marketing using valuation.

(If you don’t know what I was writing about in last paragraph, just stick to the buy and hold method. It has always done well in the long run… with the exception of Japan’s Lost Decade(s).)

“5. Borrowing too much”

Borrowing too much is a universal mistake. The problem is that “too much” isn’t defined. Eating a strawberry might too much for a single ant, but it’s not enough for me. Borrowing $100,000 is too much for me, but it wouldn’t be for Jeff Bezos. Often, you don’t know where the line of “too much” is until things have gone south and your DeLorean is in the shop.

I think a bigger money mistake is not understanding good debt vs. bad debt.

“6. Paying attention to other peoples’ finances”

Like everything else on this list, this is very sound advice.

I wonder if the average person gets caught up in how much money Tom Brady or Jerry Richardson has. We all know that there are celebrities that are richer than us.

It’s the people in your personal circle that can be more difficult. When I lived in Silicon Valley there were 10 very expensive sports cars on my street. Society and relationships can become strained with big financial differences. I don’t “worry” about them, but it’s hard to imagine that people’s financial well-being doesn’t have an overall effect on those relationships.

“7. Too much lifestyle creep”

Just like the “borrowing too much”, it’s hard to know the correct amount of lifestyle creep. Often you can only tell in hindsight.

Technically spending more than 0% of your raises pushes your financial independence further away. Some people’s goals aren’t financial independence. Everyone has their own comfort level with their savings percentage and this is the same way.

I don’t want to tell you how much lifestyle creep is too much. That’s a personal decision for you to decide. The key thing to understand is that if you save and invest more, you get to financial independence quicker.

“8. Investing in products you don’t understand”

As a parent to a 7 and 8-year-old (who get very good grades in school), I have trouble explaining how stocks work. I think I could do it, but it wouldn’t be a slam dunk. Trying to explain an ETF or index fund would only be more complicated. I’m not sure there are a lot of investments that can be explained very well to a 5-year-old.

The Teen Titans Go explain how rental properties work in an episode down to the details of getting a mortgage from a bank for leverage to build equity. It’s quite good and they explain it quite well. I understand it, but I’m not sure they do.

The advice of investing in simple products is sound. I don’t agree that an average 5-year-old should be able to understand many investing products. Fortunately, if you are reading this blog or the original money mistakes Tweet, you are probably not 5 years old.

“9. Paying too much in fees”

This is a universal mistake. However, I’ve been reading this advice since I started investing in mutual funds back around 1990. Most of the investment options I’ve seen put expense ratios in fairly clear view and show how your money would have grown after expenses.

I hope there aren’t too many still around making this mistake.

“10. Obsessing over not having enough money”

Let’s end on my favorite piece of advice. I’m guilty as charged of this one. We’ve reached to the point where we’ve stopped our retirement contributions. We’re pushing too many chips for age 60 and not enough for now.

I don’t mind leaving hundreds of thousands in inheritance though. I do enjoy the security of not having to worry about money. I don’t want to sound too much like a Scrooge McDuck, but sometimes having money is as comforting as spending it.

So what you think? Have you made these money mistakes? Let me know in the comments.

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Comments

  1. Forrest McCall says

    Great post. I like your thoughts on growing your income instead of cutting expenses. I think both are important, but there has to be a balance. After all, if you increase your income but spend it all, that’s not worth much in the end!

    Reply

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