In personal finance, people often focus on things they can’t control like picking winning investments - while ignoring the decisions that actually determine long-term outcomes. Some mistakes matter more than others, and the biggest mistakes can be the difference between living paycheck to paycheck for life and having a comfortable financial future. Let’s explore the top 8 biggest mistakes in personal finance so that you can avoid them.
This first mistake might be controversial: not earning enough money. I know that's not completely in your control. Luck, including the family and the country that you're born into, can have a big impact. Income inequality is a complex issue, but it remains true that for many people, especially younger people, your human capital, your ability to earn income by working or starting a business, is your most valuable asset. Investing in your human capital by getting a formal education or learning a trade, can increase the amount that you expect to earn over the course of your life, which is a pretty obvious benefit, but it can also make your income more resilient to bad economic times. More education leads to more income on average. And education in some fields like engineering, healthcare, and business have historically tended to be more economically rewarding than others. Maybe AI will change that. We will see. More education does not guarantee a higher income, but it improves the distribution of income levels that you can expect to participate in. Income and education are also associated with all kinds of other important metrics like happiness at least up to a point and both lifespan and health span.
The next big mistake is not saving enough. If you’ve managed to earn more than you need to cover basic living expenses, a portion of that income should be set aside for the future—especially for the time when you may want or need to stop working. Saving isn’t just about retirement; it’s strongly linked to financial well-being at every income level. There’s no perfect savings rate, but there are useful guidelines. Someone aiming for early retirement might save a large share of their income, while someone planning to work longer can afford to save less. And timing matters - starting later means you’ll need to save more to catch up. A commonly cited benchmark is saving around 10% of your income, on top of any government pension contributions like Social Security. It’s a simple rule of thumb, and it’s not far off from what research suggests. For example, one study found that saving 10% of your income from age 25 to 65 - while investing in a fully diversified stock portfolio—can result in retirement income roughly comparable to your working income, including government benefits.
Not setting clear financial goals is one of the biggest mistakes in personal finance. When people don’t have a clear idea of where they’re headed, they tend to make inconsistent and sometimes irrational money decisions. The challenge is that setting meaningful goals isn’t always easy. When asked, many people default to surface-level answers like “I want to retire.” But with the right prompts, they often realize those goals don’t fully reflect what they actually care about. One effective approach is using categories to guide thinking. Instead of asking “What are your goals?”, you ask “What are your goals across these areas of life?” This simple shift tends to produce deeper, more meaningful answers.
Another major personal finance mistake is not taking enough risk with your investments. Risk can sound scary, but taking the right amount of the right kinds of risk in investing is one of the most important things that you can do. Taking risk by owning stocks rather than bonds or cash in a diversified investment portfolio leads to higher expected returns and has historically led to higher realized returns over long periods of time. The expected returns available in financial markets are there for the taking, but they do require taking risk. But the expected outcome from investing in stocks is much better than that of bonds or cash. The implied cost of not investing in stocks is enormous. To match the expected retirement and estate outcome of someone who saved 10% of their income and invested in a 100% globally diversified stock portfolio, if you were instead investing in a target date fund, which increases the allocation to bonds fairly aggressively over time, you would need to save 63% more. 16% of your income. And if you were investing in a 60% domestic stock and 40% bond portfolio, you would need to save 19% of your income, nearly twice as much as the 100% globally diversified stock investor. Where it gets really crazy is looking at government bills.
Investing is usually pretty boring. If you already have a low cost, diversified portfolio, the next big challenge is not getting distracted by all of the financial products, advertisements, and news headlines that can entice you to make negative expected return bets. It's possible to win while gambling, as I mentioned before, leading you to believe that you're really smart, but it's important to remember what Daniel Conorman said about expertise in investing. It's very difficult to imagine from the psychological analysis of what expertise is that you can develop true expertise in predicting the stock market. You cannot because the world isn't sufficiently regular for people to learn rules. If you do end up on the winning side of a trade, you may consider trading your luck on a negative expected return gamble for positive expected returns by investing in a diversified portfolio. The longer you stay in the casino, the more likely you are to lose.
Missing tax planning opportunities is another big mistake. Paying your fair share of taxes is one thing, but there are government approved tax planning opportunities designed for people to use. They're a rare free lunch. The benefits of tax planning also depend less on the uncertain future returns of financial markets.
Another big mistake is ignoring estate planning. Not only can an improper estate plan lead to tax inefficiency and estate liquidity problems at death, it can lead to added anguish for your surviving loved ones. One of the biggest impacts of creating an estate plan is ensuring that your estate is set up to achieve your objectives. without an estate plan or at the extreme without a will in place at all. There are prescribed rules for how your estate will be distributed. The problem is that those rules are often at odds with what most people would do given the choice. Well, with the proper planning, everybody has that choice while they are alive.
The next costly mistake - both financially and emotionally - is marrying someone with fundamentally different money habits. Broadly speaking, people fall into two spending types: tightwads and spendthrifts. Tightwads feel pain when spending money; spendthrifts don’t hesitate to spend. Interestingly, these opposites are more likely to pair up than to marry someone like themselves. But that attraction often comes at a price. The greater the difference in spending styles, the more couples tend to argue about money—and the more dissatisfied they report being in their relationship. By contrast, couples with similar financial habits tend to be happier. This matters because financial conflict is one of the strongest predictors of divorce, and divorce can be financially devastating. To make things trickier, these spending tendencies are relatively stable over time. So if your partner’s financial behavior bothers you now, it’s unlikely to change dramatically later. It’s worth taking seriously before making a long-term commitment.
