Often, to teach people how to do something right, you have to show the consequences of mistakes. The elementary “Don’t cross the road on red, or you might get hit by a car” is much more persuasive than “cross the road on green”. And if we’re talking about money, that’s the approach we’ll take, because even a hypothetical loss of finances perfectly mobilizes the brain and attention. Here are 6 mistakes that are most often made by novice investors, and to each of them added tips on how to avoid them.
Investing a Safety Cushion
Let’s get the definition straight. A safety cushion is your minimum expenses per month multiplied by 6, which you can access quickly.
What we don’t measure, we don’t control. That’s why it’s important to keep track of expenses, otherwise it can’t be counted. We multiply it by 6 months, because that’s the period in which it’s possible to fix life’s financial situation by tightening our belts.
Why do you need a safety cushion?
- If something happens to your business/job in life, if you don’t have a “safety cushion”, what business will you go into or what job will you look for? Obviously, the first one you find. And if there is a safety cushion, the one you like.
- If you already have investments and you urgently need a significant amount of money, you will have to pull out of your current investments and lose interest or take out a loan and get caught paying interest yourself.
That’s why all investments are made with money over and above the safety cushion.
No Strategy: Investing for the Sake of Investing
The next mistake is that there is no long-term investment plan for 10-20 years and no exact date of withdrawal, so at the first failure, one gives up.
Investment for investment’s sake doesn’t work, like betting at https://tonybet.com/en/forecast with no strategy will bring no profit. There has to be specifics: how much money do I need in total so I don’t have to work anymore, when can I buy a car, when will I become financially independent, and so on.
Concreteness is the filter of substance:
- It takes away unnecessary emotions; they’re unnecessary in investing.
- It adds internal strong motivation to get to the end.
In general, there is no such thing as a failed investment, as you either get an experience or a profit.
Profitability Is the First Thing
So all sorts of pyramids, cryptocurrencies, and other dubious projects collect tons of money from inexperienced investors, playing on their greed.
Now what is the first thing to look at?
- Risk of loss.
- The risk of not making a profit.
- The amount of entry.
Not Distinguishing Between an Asset and a Liability
An asset is something that brings money into your pocket. A liability is something that takes money out of your pocket.
So buying a car, a watch, a house are liabilities because it takes money out of your pocket to maintain them. But if you bought a car or a house to rent out, it will be an asset, because then it will bring in a monthly income. So the key mistake here is to think that when you buy a car, a house or a watch, you are buying an asset.
And remember, your liability is someone else’s asset in someone else’s balance sheet.
Speculating, Not Investing
Speculation is when you make money the moment you exit a trade (most often a sale). Investing is when you have a systematic (most often monthly) inflow of money.
Speculation is not a bad thing, you just shouldn’t confuse it with investment. The value of an investment is just the cash flow it provides because that’s what you can live on and not work.
Lack of Expertise
There is no understanding of how to distinguish successful investments from failed ones. Hence, it is either not worth investing in something you do not understand, or it makes sense to contact an expert.
Here you should not skimp on the services of an expert, if you do not understand the subject, it can save you large sums.