It’s list time! Long ago when I first started this blog, I promised to do a list post every week. Since then, I have had the longest brain fart coming up with ideas. Thank you to those of you who made suggestions!

Here we go!

I’ve said many times that seeing success in your personal finances is pretty simple: spend less than you earn over a long period of time. If this is the heart of your financial plan, your plan will be prosperous.

With that said, there is one other thing you’ll need to do…

You must avoid the financial pitfalls that can derail your financial success.

I call these the worst money mistakes anyone can make. I’m listing them below in a countdown fashion along with some suggestions for avoiding them. Here are the top ten:

10. Not having an emergency fund.

An emergency fund is your the front line of defense against unexpected financial problems.

And believe me, unexpected financial problems happen pretty regularly. Washing machines break, cars need repairs, kids need braces and so on. It’s a fact of life. Accept it.

If you don’t have an emergency fund, you will likely have to borrow money (either from a person of off the plastic) when an emergency pops up. And as we’ve seen before, borrowing is the worst money mistake.

So how much should you save in your emergency fund? If you’re a Dave Ramsey fanatic like me, Baby Step #1 is to have at least $1,000 in the bank. Once you’re debt free, a good rule-of-thumb is to have six months of living expenses saved up. Keep it in a safe place! Not the underwear drawer, not the freezer… keep it in the bank. Don’t worry about earning a ton on it, no one ever became rich by making money off their emergency fund, just make sure it is safe and accessible.

9. Neglecting to make a Will.

Money magazine reports that 57% of Americans do not have a will, including 69% of parents with kids under 18.

Without a will, guess who decides what happens with your finances and your kids?

The state!

Do you really want to let your state decide these issues for you? Hmph! Especially if you live in Illinois.

To avoid this horrible money move, you need a will and the other documents that account for good estate planning. Along with a Will you need a Durable Power of Attorney and Living Will. For some guidance, shoot me an email and ask me any questions. I also have some great options for you to get all of these for an incredibly low price!

8. Not having enough insurance.

Think of insurance as a very big emergency fund that supplements your cash emergency fund. It covers the things you couldn’t save up to cover in advance, helping to replace/protect the largest assets you have – your career, your home, your investments – if you experience a major accident, death or injury.

Here is a quick list (a list within a list… gotta love it) of insurance policies that every family needs (notice I said needs… not wants… you need this stuff):

• Auto and Homeowners Insurance – choose higher deductibles in order to save money on premiums.
• Life Insurance – Purchase 20-30 year level term insurance equal to 10-15 times your annual salary.
• Long-Term Disability – If you are thirty-two years old, you are twelve times more likely to become disabled than to die by age sixty-five. The best place to buy disability insurance is through work at a fraction of the cost. You can usually get coverage that equals from 50 to 70 percent of your income.
• Health Insurance – The number-one cause of bankruptcy today is medical bills; number two is credit cards. One way to control costs is to look for large deductibles to lower your premium. The HSA (Health Savings Account) is a great way to save on premiums.
• Long-Term Care Insurance – If you are over sixty, buy Long-Term Care insurance to cover in-home care or nursing home care. The average nursing home stay costs $40,000 per year.

In addition to that list, I would add umbrella insurance to cover general liability – in case you’re sued for one reason or another (and we all know what a sue-happy country we live in these days.)

One more bit of advice: do not go overboard and become over-insured. No one needs to win the lottery when misfortune occurs. For example, your family most likely does not need a $10 million life insurance policy on you. If you have one and you don’t make $1 million a year or so, you’re probably spending too much on life insurance. But you do want to be sure you have enough life insurance to replace your assets in times of trouble or loss.

7. Marrying the wrong person.

Wait… what? Yeah. Read on.

There are actually two major financial mistakes related to marriage: marrying a spender and getting divorced.

Couples where both spouses know and apply basics of finance do much better than ones where one or both spouses have bad financial habits. The Millionaire Next Door says:

What if your household generates even a moderately high income and both you and your spouse are frugal? You have the foundation for becoming wealthy and maintaining your wealth. On the other hand, it is very difficult for a married couple to accumulate wealth if one is a spendthrift. A household divided in its financial orientation is unlikely to accumulate significant wealth.

In addition, a divorce is a major hit to any couple’s finances. According to the Journal of Sociology, those who divorced saw their wealth shrink by 77 percent. A smaller decline would occur if the couples just split everything down the middle. Instead, they both go broke trying to take everything from each other.

So here’s some advice regarding money and marriage:

• Discuss finances prior to marriage.
• Get educated on finances as part of marital counseling. I recommend Dave Ramsey’s Financial Peace University.
• Marry a money-wise spouse.
• Stay married – if you have financial issues, seek counseling or financial help.
• Share in financial decisions while married.

6. Not saving.

As I noted earlier, the formula for financial success is pretty simple:

#1: Spend less than you earn
#2: Do #1 for a long time

If you do these two things, you will be wealthy. Why? Because you’re saving money. See… money is 20% education and 80% behavior. You have to change yourself and break bad habits.

On the other hand, if you’re not saving, you are not making progress financially. And the longer that you wait to save, the harder it will be to catch up later.

A great move to make is to save a portion of every paycheck you receive. A good rule-of-thumb is to start out by saving at least 10% of your income, and from there the amount should increase over time.

Remember this simple breakdown:

10 – 10 – 80

Memorize these numbers… and live them out!

Give 10%, Save 10%, Live on 80%

And some may ask just what you are saving for? Any major expense you know you’ll have in the future: a house, retirement, cars, college costs for kids, etc.

5. Buying too much house.

A house is probably the biggest purchase most of us will ever make. And unfortunately, many people buy homes incorrectly:

• They let a bank or real estate agent set the amount they are able to spend on a home.
• Then they find a home they “love” that is even more expensive than that.
• So the home becomes a financial stretch to the point where they can barely make payments – as long as nothing goes wrong.
• Then something goes wrong – which it always does because life happens.
• But because things are so tight, when a money issue occurs (sickness, pregnancy, unexpected expense, and so on) everything falls apart financially (or at a minimum it starts the financial drop).

Instead of that, here’s my formula for buying a house:

• Buy a house you can easily afford – one where you can make payments and still have some financial cushion.
• Put at least 20% down.
• Put extra payments into your budget as well as bonuses, gifts, second job income and all other “extra” sources of money into paying off the loan (assuming you have no other debt).
• Become debt free in 7-10 years.

For those of you who want a bit more, the book Stop Acting Rich gives more precise rules:

If you’re not yet wealthy but want to be someday, never purchase a home that requires a mortgage that is more than twice your household’s annual realized income.

4. Waiting to invest.

There are three factors that determine how well your investments (savings) perform:

• The amount that’s invested (how much is invested)
• The rate of return on your investments
• The length of time they are invested

Most of what we see in the media deals with getting the best return on your money. But actually, the factor that most influences the value of your investments is the time you have it invested.

And the longer you wait to save and invest, the more you’re costing yourself.

Here’s an example that illustrates the high cost of waiting:

• Smart Saver starts saving $3,000 every year, starting at age 20. After 10 years, her $30,000 total contributions are worth $62,000 (at an annual growth rate of 10%). At age 30, Smart Saver stops saving and makes no further contributions. She just lets the money grow at an 10% annual rate of return for the next 30 years, until age 60. At age 60, the $62,000 will have grown to $1,230,000.
• Her sister, Late Saver, waits until age 30 before she starts saving $3,000 a year. Unlike her Smart Saver sister who stopped saving after 10 years, she doesn’t stop saving. She saves every year for 30 years, from ages 30 until she is 60. At age 60, her account is worth only $656,000.

Let’s drive it home:

• Smart Saver invests a total of $30,000 over the course of 10 years, stops investing for 30 years and ends up with $1.2 million.
• Late Saver waits 10 years, invests a total of $90,000 over the course of 30 years and ends up with only $656,000. (By the way, you won’t last your full retirement on anything less than $1.5 million. Hello Wal-Mart).

Now I’ll add a couple extra points to this example to show how Smart Saver could really have made it big in saving and investing for retirement:

• If Smart Saver would have kept saving $3,000 her whole life, she would have ended with almost $1,829,000.
• And if that $3,000 would have been $5,000, she would have ended with $2.8 million.

So the solution for this money problem is to:

• Save early
• Save often
• Save more as time goes by

3. Being deep in debt.

The leading investing company, Morningstar, says that, “Over a lifetime, the average American will pay over $600,000 in interest.”

$600K? YOUCH! This is a pretty big example of the fact that debt is very costly — it can rob you of hundreds of thousands of dollars.

The solution to this mistake is simple:

• If you’re in debt, start taking steps on how to get out of debt today.
• If you’re not in debt, don’t get into debt.

2. Not working to maximize your career.

Your career is your most important financial asset. This is because the average American can reasonably expect to earn in the neighborhood of $2 million during his/her lifetime. But if that person works hard and grows their income at 8% per year, they could have more than $3 million more than that. If they don’t, their $2 million can dry up to a bit over $1 million (or even less). So not working to make the most of your income can cost you millions of dollars.

To avoid this bad money mistake, simply develop and execute a plan to make the most of your career. You can negotiate your salary. You can also make money online.

And let me add a couple other mistakes you do not want to make because they can derail your career and your income as well:

• Do not quit your job without another job lined up. While it may be stressful to work where you do — not having enough to eat is much more stressful.
• You must take care of yourself physically. Eat well, get plenty of rest, exercise and enjoy life. Your career and its earning potential are dependent on you being able to work.

1. Over-spending.

If your outflow exceeds your income, you are in trouble.

The first step to gaining wealth is spending less than you earn — it’s vital to making any progress. So when you over-spend, you’re doing the most damage possible to your finances.

Here’s what Stop Acting Rich says about the issue:

Most people will never earn $10 million in their lifetime, let alone in any single year. In fact, most households (97%) are unlikely to ever earn even $200,000 or more annually. So what if you are unlikely to become rich by generating an extraordinarily high realized income? The only way you will become rich is by being like those millionaires at the other end of the continuum: by living well below your means, by planning, saving, and investing.

There are two types of over-spending that can ruin your finances:

• Over-spending on the little things – the small amounts that seep out of your pockets here and there and eventually become large.
• Over-spending on the big things – homes, cars, boats, cottages and so on.

The top complaint I hear from people who don’t have balanced budgets is, “I don’t make enough money.”

I’m telling you that in the vast majority of cases (probably 95% or more), it’s not the amount these people make – but the amount that they spend that’s the problem.

In some cases, yes, it’s true that people simply don’t make enough money to save, invest, etc. As such, they need to concentrate on increasing their income as much as they need to control over-spending.

I once sat down with a guy who made $160,000 a year. That’s a pretty good income! When I saw his income, I thought “this will be a piece of cake” to make a balanced budget. But once we got through the mortgage on the houses (plural) he owned, the four luxury cars he leased for himself, his wife, his kids, and the amounts they spent on clothes and vacations – they had spent it all and then some!

And people who make much, much more can spend it all as well. Here’s a quick review of several wealthy people who spent more than they made – despite the fact that they made a bundle:

• Mike Tyson — The famous boxer reportedly earned $300 million in his career, but it wasn’t enough to support a lavish lifestyle. He filed for bankruptcy in 2003, owing $27 million.
• MC Hammer – Despite a former $33 million income, he filed for bankruptcy in 1996.
• Scottie Pippen – The former Chicago Bulls star lost $120 million in career earnings due to poor financial planning and bad business ideas.
• Evander Holyfield – Four-time boxing champ reportedly made over $250 million in cash during his boxing career, but despite this he is now flat broke.
• Some others who made big money and spent it all and then some include: John Daly, Nicolas Cage, Bernie Kosar, Gary Coleman, Kim Basinger, Don Johnson, Michael Vick, Andy Gibb, Isaac Hayes, Lenny Dykstra, Latrell Sprewell, Mick Fleetwood, and Marvin Gaye.

This is why over-spending is the #1 money mistake – because no matter what your income is, if you spend it all plus some, you’re going backwards financially and you’re losing ground.

What to do to combat this: develop a budget and live on it.

As I mentioned before, the 10-10-80 rule is a good, simple budget to begin with.

From there, the 10’s should get larger as you give and save more through the years. The 80% should become a smaller number over time. You may still end up spending more in total because your income is rising too, but as a percentage of what you earn, spending should decline as income increases.

That’s my list of the worst money mistakes anyone could make. What do you think of it? Did I miss anything? Is the order wrong? Feel free to add your thoughts in the comments below.