The Second Biggest Financial Mistake You Can Ever Make

The first rule of financial independence is to not lose money. If you lose lots of money, you are ultimately losing valuable time. Losing time is the biggest financial mistake you can make because time is the most valuable asset.

Now let me introduce the second rule of financial independence: never expect your income to always go up. Expecting your income to always go up and to the right is the second biggest financial mistake you can ever make.

Life is not a straight line. Bad things happen all the time. If it’s not a pandemic that crushes your income, it might be a bear market. And if it’s not a bear market that leaves you jobless, it might be a health issue that prevents you from working.

The Biggest Financial Mistake Cost Me A Fortune

People over 40 don’t need to be told that life is both wonderful and difficult. For all of you still relatively early on your financial journey, please take heed.

Do not extrapolate the good times too far out into the future. If you do, you will likely make financial mistakes you will regret.

Back in 2007, at the time, I made the most amount of money in my career. I had gotten recently gotten promoted to Vice President and thought I had finally arrived! In my spreadsheet, I estimated I would “conservatively” make 10% more annually for the next five years. It seemed reasonable in a bull market.

When you’re flush with cash and have a promising career, why not reward yourself? So that’s what I did. I bought a two-bedroom, two-bathroom vacation condo in Lake Tahoe for $715,000. I thought it was a good deal because similar condos had sold a year earlier for $810,000.

Then in 2008, Bear Stearns and Lehman Brothers went bankrupt. The S&P 500 crashed by 38.5% and the housing market collapsed. Within a couple of years, my condo’s value plummeted to under $500,000. Neighbors were conducting short sales left and right, bringing everybody else down with them.

If only I had avoided the financial mistake of income extrapolation. I would be at least $300,000 richer today. Lesson learned.

Keep your income expectations conservative. If you do not, you may end up buying things beyond what you are capable of affording.

Feeling Like You Always Deserve More Income Is Dangerous

What I realized from The New York Times strike is there are two different worlds when it comes to income expectations.

The first world of income expectations is based on a meritocracy. The better you do your job, the more you tend to get paid. If you stink it up, then your pay will rightly be less. If you feel you aren’t getting paid what you are worth, you leave.

The second world of income expectations is based on always getting paid more, no matter what. The economy may be in a recession, your company’s stock price could be in the dumps, a nuclear bomb may have detonated, yet you still think you deserve to get paid more.

This second view of getting paid violates the second rule of financial independence. Having this entitlement mindset is dangerous.

Eliminate Entitlement Mentality If You Want To Get Richer

Here are examples of how entitlement can hurt your wealth and happiness.

  • You study for one hour for the final exam while your peers average studying for three hours. Your peers get A’s and you get a B. You’re pissed because colleges reject you, but not them. You start questioning why life isn’t fair and end up a lonely, spiteful person. Screw the rich for having it so good!
  • Three years out of college, you expect to go to the corner office. When you get passed over for a promotion, you start bad-mouthing your colleagues and undermining your boss. You think, do you know who I am?! You turn into a virus nobody likes. As a result, your career trajectory derails.

The New York Times workers went on strike for a guaranteed 5.25% annual pay increase for four consecutive years. Yes, I understand everybody wants more money for the work they do. It’s always good to fight for what you think you deserve.

But maybe the strikers are misguided given they are working in the private sector where profits matter more than in the public sector.

The Demand To Make More In A Bear Market

2022 was the year of a recession and a bear market. With the way the Fed is raising rates, we will likely go into another recession by year-end 2023. More than a million jobs will likely be lost.

Wall Street strategists expect no gains in 2023 for the S&P 500. More importantly, The New York Times stock price (NYT) is at a three-year low!

How is expecting a guaranteed 5.25% annual pay increase in a struggling industry while inflation is heading down logical? Plenty of people in the media are losing their jobs. Instead of striking, perhaps it would be more rational to revert to 2019-level pay given NYT is back to 2019 levels.

After a couple rounds of layoffs in 2004, I dared not ask for my MBA tuition reimbursement one semester. Although it was a company benefit, to ask would have put my employment in jeopardy. So I sucked it up and paid the $12,500 out of pocket.

I know I might sound cruel, but eliminating entitlement is really for everyone’s own good. The sooner you can better align your expectations with the current realities, the sooner you can make optimal financial decisions.

Just because you are a certain race, work at a prestigious organization, or went to some elite university, doesn’t mean you automatically deserve to make more. You deserve to make more when you do great work AND when the economic conditions are right.

What Happened Once I Abolished Entitlement Mentality

After making one of the biggest financial mistakes at age 30, I had to suffer for the next 15 years with the consequences of overpaying. The Lake Tahoe property was my albatross that made vacationing less pleasant every time I went up.

At least I learned to never again expect my income to always go up. Here’s what else I did to help build more wealth:

  • Most importantly, I developed a strong money mindset that nobody was going to save me. As soon as I stopped expecting to always get paid and promoted, I began doing everything I could to generate alternative income streams. Real estate became my salvation. I sucked up the pain of managing property because I knew it was my main way to get free from working forever.
  • Held off on buying big ticket items I didn’t need. For example, I kept my old $8,000 Land Rover Discovery II for 10 years and traded it in for a Honda Fit that I drove for three years. I used the $80,000 I wanted to spend on a car in 2005 and invested it in the S&P 500.
  • Stayed consistent with Financial Samurai. Writing three posts a week for ten years is not easy. But Financial Samurai is an important financial buffer / insurance policy. If all my investments fail, at least I will have Financial Samurai spitting out pennies.

Expect Nothing And Get Richer As A Result

The ideal situation is if you can negotiate guaranteed income raises and pretend like you have no safety net.

Do you know why millions of Americans didn’t bother saving for retirement in the 1980s? Because they expected their company pensions to take care of them.

But then some companies went bankrupt and pensions disappeared or had shortfalls. As a result, many of these Americans ended up less wealthy than workers who never had a pension.

If you expect your 401(k) will be enough for retirement, you won’t build a taxable portfolio to generate passive income. Even worse, if you expect Social Security to cover all your retirement needs, you might not end up saving and investing at all!

Please get in the habit of expecting little-to-nothing. If you expect nothing, then everything is upside. When everything is upside, you will feel happier and richer as a result.

Keep fighting for the pay and promotion you think you deserve. Just be aware of the current realities. If you can avoid the biggest financial mistakes, you will likely end up much wealthier than those who do not.

Reader Questions And Suggestions

Readers, do you work at a private sector job where you always expect to get paid more, no matter how the company is performing? What other private sector jobs offer guaranteed pay raises?

Pick up a copy of Buy This, Not That, my an instant Wall Street Journal bestseller. The book helps you make more optimal investing decisions so you can live a better, more fulfilling life. 

If you’re looking for a great retirement planning tool, check out NewRetirement. NewRetirement was built specifically for retirement planning and helping you stay retired. 

For more nuanced personal finance content, join 55,000+ others and sign up for the free Financial Samurai newsletter and posts via e-mail. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009. 

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