The basic math that will lead you to financial independence is simple: spend less than you earn, and invest the difference.
But move that magnifying glass closer and you may find money mistakes holding you back. Read on to learn about the 7 deadly money sins you need to avoid if you want to achieve FI or early retirement.
If we’re honest with ourselves, most of us have and will make countless mistakes with money in our lives.
Certainly, I excelled at some of the basics: living a modest budget, resisting lifestyle inflation, maxing out 401K as early as possible. But I could have shaved years off my working life if I hadn’t made some key mistakes.
Chances are, you still hold some bad money habits as well.
In this post, I am going to list some of the most common high impact money mistakes that hard-working Americans trying to save for retirement make everyday, perhaps without even realizing it. I call these the 7 Deadly Money Sins.
These are mistakes that are so costly, you may as well as light a match to cash and watch it burn to ash.
Wait, you’re not going to tell me to cancel Netflix are you?
Absolutely not! Popular finance buff Dave Ramsey has a famous “motivational” speech on youtube where he names Netflix subscriptions and laziness as reasons why people don’t become millionaires.
The Secret Life of FI on the other hand could care less what streaming services you subscribe to or whether your occasional Frappuccino is Venti or Grande. I’ve never understood why traditional finance advice seems to focus on small expenses. Its more shaming than helpful.
As I explored in more detail here, certainly, you can cut Netflix or other low dollar expenses if they hold little value to you, but it’s not going to make you a millionaire. It may, however, make you miserable.
The money mistakes you should identify and focus on, instead, are the big mistakes that drain your earning potential.
And unlike entering into Frappuccino celibacy, avoiding the big money mistakes covered on Secret Life of FI will not negatively impact your quality of life. It will only improve it and give you greater peace of mind that you are in control of your finances.
Without further ado, here are the 7 Deadly Money sins, in no particular order.
- Too much cash in the bank
- Ignoring HSAs
- Investing in high expense funds
- Using a financial advisor
- After tax investments before maxing pre-tax 401K
- Not auto increasing Investment %
- Selling instead of holding
Let’s take a brief dive into each sin shall we?
Too much cash in the bank
I explore this one in greater detail in the Secret Life of FI blog here, but I can summarize the gist. Basically, if you are sitting on more than 3 months or so of living expenses in the bank, you are missing out on an incredible opportunity. I cost myself around a $200K opportunity over about 10 years on just this one mistake alone.
Many financial advisors will recommend 6 – 12 months of living expenses in the bank. But for most gainfully employed Americans, especially a two earner family, this “security” is unnecessary . . . and costly.
The likelihood that two full time employed spouses lose both their jobs and both run out of unemployment benefits at the same time is slim to none. If such an event did happen, a few extra months of savings is the least of your worries.
It’s riskier to sit on that money and let it get eaten up by inflation than it is to invest it. It’s not like it disappears if you invest it anyway. If calamity ever did happen, you could simply sell your brokerage assets or take a 401K hardship withdrawal, etc. By then, the money will be worth way more than if you left it in the bank.
Ignoring HSAs
Health Savings Accounts (HSAs) are bar none the best investment you can make. Its triple tax advantaged: you contribute tax free, it grows tax free, and you can withdraw tax free. Your employer probably even offers seed money of $1000 or so annually if you sign up.
You will undoubtedly need this money at some point in your life, so its foolish to leave this incredible opportunity on the table. I recommend you give the max contribution every year ($7300 family), which reduces your taxable income.
Unfortunately, most American do not take advantage of the HSA. They leave the employer match money on the table and give up the incredible tax free benefits of the HSA.
Investing in high expense funds
This is probably the most foundational of all of the 7 Deadly Sins, but Americans mess it up all the time. You can see why given the poor and limited choices some 401Ks offer.
This mistake also happens sometimes because two funds can look very similar in a 401K, such as two funds that are both called “large cap” growth funds. Be careful! One of those funds is likely an actively managed fund with a high expense ratio of 0.7% whereas the other is a passively managed fund which gets equal performance and has an expense ratio of 0.01%.
That difference could cost you hundreds of thousands of dollars over 30 years.
In a nutshell, you should scan every investment you own to make sure the expense ratios are low (VTSAX Vanguard Total Stock Market Index at ~0.04% expense ration is a good benchmark). If your investments are far north of that, reinvest it as soon as possible.
Using a financial advisor
Avoid using any money managers, especially while you are still accumulating wealth. Your strategy should be to buy and hold until you retire, so a money manager can do nothing for you but transfer slices of your hard earned cash into their own bank account.
You are no safer when you do retire. If you fork it over to a money manager, they are going to take either a high fee or a % every month to park it in the same type of index funds you can select yourself. This can cost you more than any other of the 7 deadly money sins.
Think about it. You know that FI is the point at which you have accumulated 25X your living expenses and can safely withdraw 4% a year to live off. But if you give it to a money manager who takes 1% every year, you have already reduced your retirement income by a whopping 25%. That cut is going to cost you years more of work.
If you need financial advice or analysis but want to avoid signing over your life’s savings, fret not. Though they are few and far between, there are advice only financial advisors who are paid by hour.
You want their wisdom and advice – not their slimy fingers on your cash to click a few buttons per year. An advice only advisor can provide this if you need it. Avoid anything else unless you are swimming in cash and are feeling charitable to people with finance degrees.
Not maxing pre-tax 401K
Some people try to get cute and buy Tesla stock or bitcoin because they read a snappy headline. Or maybe they decide to start a Roth IRA because someone with a bit more experience recommended it.
Not so fast.
If you are not maxing out pre-tax 401K first ($20,500 as of 2022), then you must really like paying taxes to Uncle Sam. All of those other little financial projects are being funded with after tax money, costing you potentially significant tax free growth opportunities.
How much? Let’s say you contribute $12,500 to your pretax 401K, and invest $6,000 to a brokerage account in 2022. That brokerage investment cost you big.
$2000 in taxes went to Uncle Sam in order for you to take home the $6,000 for your brokerage investment. But if you invest in the pretax 401K instead, you have $2000 more dollars to invest. That $2000 invested in a tax free account could be worth $30K in 30 years. That’s a year of living expenses for some retirees
Don’t skip the basics (maxing pre tax-401K first) and jump right to dessert. If you are investing anywhere outside of your pre-tax 401K before maxing, you are committing one of the 7 deadly money sins.
Not auto increasing Investment %
When you signed up for your 401K, you were likely given an option to sign up for automation that will increase your contribution year on year. An example would be if you start at 6%, you let the system raise this 2% every year until you max out.
Signing up for this is a no brainer. This ensures that your savings increases along with your salary and inflation. Your standard of living won’t change, but your ability to retire early will.
Too bad not enough Americans sign up for it. According to a recent study, only 42% of workers utilize this feature.
Selling instead of holding
Everyone has heard the maxim to buy and hold. But it can be concerning when you look at your 401K that some funds are doing better than others and to be tempted to sell. Shouldn’t I sell, you might wonder.
Everyday Americans do it all the time, especially within their 401Ks which can seem like harmless numbers on a screen that won’t matter for decades. Don’t be naive. This is a 7 deadly money sin and it can damage your retirement prospects badly. I committed this sin myself several times in my early career.
Keep in mind the only thing that matters about your investments is what they are worth when you sell them to withdraw for retirement years from now. Their value now is just a data point in time and not a reason to sell.
If you are following the Secret Life of FI Investment guidance and are in a low cost Total Stock market index fund, then you have no reason to mess around with your investments.
There is only one time it’s okay to sell or transfer from one fund to another while you are building wealth. This is if your current investments have a high expense ratio or are in low growth funds and you need to restructure your portfolio to a low cost Total Stock Market Index fund.
If you are selling or trading for any other reason, take a deep breath, relax, and slowly withdraw your trigger finger from the computer. Hold on to your investments and don’t play the day trading game. Nobody can win that game and neither can you, but you can and will lose it long term.
So there it is: the 7 deadly money sins you need to avoid if you want to fast track your journey to FI and grow your wealth as fast as possible.
A two earner household could hit a million dollar jackpot in 15 years by playing the long game and aggressively investing early on, while avoiding costly mistakes.
If you have made or are making any of these mistakes currently, take heart. Nobody is perfect. I will be the first to admit that I made countless money mistakes in my journey to FI, but I recovered, learned, and got back on my feet every time.
If you are making the same mistakes, don’t be embarrassed. The FI journey is not a straight line. We all fall. The challenge is to learn from your mistakes.
In the comments: do you struggle with any of these money mistakes? If so, what will you do going forward to steady the course? Any other deadly money mistakes you have encountered in your own personal journey?