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9 Personal Finance Mistakes You Might Be Making

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Frugality can be as simple as not buying things you don’t need and buying the cheaper item when you have a choice. But sometimes saving money takes a little more thought than that. And sometimes it takes a little more math.

I can hear some readers groaning already. More math?

Yes, more math. Maybe it would be nice if we could avoid it, but careful calculation is often an important part of frugality — and it’s easy to mess it up.

For examples of where you might go wrong, take a good look at the detailed list below. How many of these common personal accounting mistakes have you made?

1. Not Considering the Opportunity Cost

Investopedia explains that “Opportunity cost represents the benefits an individual, investor or business misses out on when choosing one alternative over another.”

In other words, if you invest $20,000 in solar panels, you miss out on whatever you could have made investing that $20,000 elsewhere. And if you haven’t considered that opportunity cost, you don’t really know if those solar panels make financial sense.

For example, let’s say you could “invest” $20,000 in new solar panels, to save (after all  maintenance, depreciation, and repair expenses) an average of $400 per year on electricity. That might seem like a wise move, but what would it really cost you to buy those savings?

Let’s say the money you would use is in a bank CD that pays 3% annual interest. In that case, the “opportunity cost” is the $600 in annual interest you make. Paying $600 per year to save $400 per year doesn’t make sense. You’re better off (by $200 annually) leaving the money in the bank and paying the higher electricity bills.

You have to consider the opportunity cost when investing to save or to make money. And you also have to consider the time and trouble (your time and peace of mind have value, after all).

For example, it might be tempting to buy a rental house to make 6% on your money, but what if the money was otherwise quietly making 5% in a bond fund or something similar.

In that case, after the opportunity cost you’re only making an extra 1% return. Is that worth the time and trouble of being a landlord? Maybe, maybe not (I wouldn’t do it).

Don’t forget to consider the opportunity cost!

2. Miscalculating Expenses When Choosing a Home

When comparing the cost of your various housing options, you might consider only rental rates or mortgage payments. That’s a mistake, because there are many costs associated with any given home, including heating, electricity, taxes, insurance, repairs, and maintenance.

Even the distance from your job is part of the cost of owning or renting a particular home. An extra 10 miles from work, for example, is an extra 100 miles (round trip) each week.

At an operating cost of 35 cents per mile for your vehicle, that’s about $150 extra per month. It might cost less to pay higher rent or a larger mortgage payment to be closer to work.

And don’t forget that opportunity cost. The $50,000 you put into a house could earn you thousands of dollars per year if invested, which might make renting the better deal.

Money isn’t the only concern when looking for a place to live, but it is important, so compare the possibilities fairly. And check out my article on 40 cheap housing options. How many different housing arrangements have you considered?

3. Ignoring The Value Of Your Time When Saving Money

It’s satisfying to save money on the things you buy, but sometimes it isn’t worth your time. In my article, “What’s Your Minimum Savings-Per-Hour Rate?” I go into detail on the subject, but the bottom line is that you need to earn enough for your time when it comes to applying frugal tactics and strategies.

Don’t make the mistake of spending hours to save a few dollars on a purchase. You have more valuable ways to spend your time, whether that means higher-value frugalities or just watching the sunset.

4. Ignoring The Value Of Your Time When Making Money

As explained in my post on manufactured spending, I sometimes buy debit gift cards on sale using cash-back credit cards, and then I convert them into money orders to liquidate them. The thing is, I typically make only $20 or so on a transaction.

If I left home just to do this, by the time I went to the office supply store with the sale, and then to Walmart to buy the money orders, and then to the bank to deposit them, I would be lucky to make minimum wage for my time.

That’s why I only do the deals when I’m out for other activities, and driving past the necessary stops anyhow.

It’s easy to get excited about new ways to make money, and forget to calculate the time spent on these activities. For example, as nice as it is to make money online from the comfort of your home, the average wage of $2 per hour on Amazon Mechanical Turk.

At that rate you’d be far better off just putting in a few extra hours at your regular job.

And if you don’t consider the value of your time, you might also be making the next mistake…

5. Not Comparing The True Wages Of Employment Choices

You probably look at what you’ll make when comparing your various employment options. But if all you look at is the paycheck itself, you’re not doing a fair comparison.

In my piece on how to calculate your real hourly pay I explain how I once made the mistake of working for $2.71 per hour for a temporary agency. Part of the calculation was the unpaid hours I spent waiting for work. Another part was the cost of the long drive to the work sites.

You have to look at both job-related expenses and the total time spent to earn your paycheck to properly calculate and compare various job options. Some jobs require expenses others don’t have, and others require unpaid hours commuting.

Be careful when calculating the value of benefits too. A job with health insurance is nice, but getting a higher-paying  job without it and buying a policy yourself might make more sense.

What’s the total value of your pay package after deducting all job-related expenses (even the cost of commuting or buying uniforms). Divide that figure into every hour you’re away from home for the job. That’s how you get a figure you can use to fairly compare jobs.

6. Thinking Your Car’s Only Operating Expense Is Gas

Your car gets 30 miles per gallon and gas costs about $3.00 per gallon, so you figure it costs $40 to take a 400-mile trip (10 cents per mile). It’s a common mistake.

You might pay only $40 at the time, but you know you wore down the tires and got closer to an oil change. And, of course, other maintenance and repair costs are directly tied to the number of miles driven.

So what’s the real operating cost of your vehicle? The IRS figure of 53.5 cents-per-mile is too high because it includes expenses that are fixed regardless of the number of miles driven, like insurance, licensing, and interest on a car loan.

I figure the operating cost of our car is about 30 cents-per-mile. To calculate your cost estimate you can track expenses or make an educated guess. The operating cost is probably at least double the cost of the per-mile gas expense.

Once you actually have an estimate you might rethink things like driving an extra 4 miles ($1.20 at $0.30/mile) to save a buck on a gallon of milk. Don’t ignore the true cost of using your car.

7. Treating Fixed And Discretionary Expenses The Same

When looking at big-ticket items like homes and cars, it’s tempting to stretch a little, and to start thinking things like, “Hey, we can afford this if we eat out less often.” Sure you can. Balance your expenditures with your income and you’ll be fine, right?

But here’s the thing: Fixed and discretionary expenditures are not the same. When tough times come you can always stop dining out and going to movies, but it’s not that easy to drop the car and house payments, right?

If things like rent, utilities, credit card debt and car payments take most of your income, you’ll be in trouble quickly when your income drops. On the other hand, if those fixed expenses take only half of your income you can enjoy vacations and concerts and other discretionary expenses, knowing you can immediately cut these when needed, and still cover your survival needs.

Don’t make the mistake of thinking fixed and discretionary expenses are the same. If financial security matters to you, aim for low fixed expenses.

8. Guessing When Budgeting

What’s your average electric bill?  Make a guess. Then go find the last year of your statements (online if necessary), add them all up, and divide by 12. You might be surprised.

Most of us are not very good at guessing about averages, and yet we think we’re good enough to budget based on those guesses. Instead, use actual bills, and, to get a better idea about your discretionary and irregular expenses, record all of your expenses for a month or two.

Use good information to make your budget. Guessing isn’t good enough.

9. Getting Fooled By The Sunk Cost Fallacy

The “sunk cost fallacy” is the general idea (or feeling) that the time, effort, or money you’ve already invested in something is relevant to forward-looking decisions. We all hate to quit something when we’ve worked long and hard on it, but since this post is about accounting errors, let’s stick to the monetary aspects of this unconscious mental habit.

For example, suppose, between the initial cost and renovations, you’ve invested $120,000 into a vacation condo, but now your plans have changed. You want to sell, but you’ll get only about $100,000. Maybe you overspent on a fancy kitchen.

You may be tempted to wait for a better price someday so you don’t “lose” money. Of course the loss is already there whether you sell or not, so a more-rational approach is to think about that $100,000 — do you want it to remain tied up in a condo or do you have a better use for it? The amount you’ve invested (the sunk cost) is irrelevant.

Recognize when you’re being swayed by the (largely) unconscious effect of past investments and choose to think rationally instead.

While you’re at it, look over this whole list of personal finance accounting errors and see if you’re guilty of any of them. If so, why not try a more rational approach?

If you can add to this list of personal finance accounting mistakes, please do so below… and keep on frugaling!

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