Managing money can be a challenge even for people who are pretty smart about most aspects of their lives. In fact, finance expert Ramit Sethi has identified one big money mistake smart people make often. Here’s what it is.
Are you making this common money mistake?
According to Sethi, smart people often focus on the wrong things when it comes to managing their money and controlling their spending — and it can cost them.
“Common money mistake that smart people make: trying to over-analyze the mundane,” Sethi said. “Should I switch savings accounts to eke out an extra 0.2%? (Who cares). What if I prepay these taxes but get a refund on those? (Who cares). How can I optimize our spend on broccoli? (GTFO).”
As Sethi points out, it’s really tempting to focus on these small decisions because you feel like you have direct control over them — and often harbor misconceptions about how big of an impact micromanaging your financial life and making tiny cuts to your credit card spending can actually have.
“It is really hard for ANYONE to fight for simplicity — but especially smart people! They take pride in their ability to ‘beat the system’ and figure out loopholes. But they don’t know when to stop. This need to optimize is ultimately a key driver for American unhappiness,” Sethi warned.
How can you overcome it?
If you are trying to grow your bank account, dealing with the little stuff can indeed feel easier. After all, reducing grocery spending is something most people can find a way to do — whereas, developing a smart money philosophy and making meaningful changes to your relationship with money can be a lot harder.
Sethi recommends focusing on big-picture decisions rather than on these little mundane details, and he’s absolutely right. He urges you to focus not on issues that will affect your bottom line by a few dollars here or there but instead to dedicate your time to bigger-picture matters like increasing your income, reducing investment fees, and keeping big expenses like your housing or car payment under control.
The bottom line is you need to keep some perspective on what money decisions actually matter in the long run. And, most of the time, this does not involve cutting simple day-to-day expenses (unless your spending is really out of control).
Giving up your latte and saving $5 a day is going to make a small difference, but increasing your income by getting a big raise or starting your own business is going to make a big difference — as is making sure your housing costs are less than 25% of your budget so you have the ability to save and invest enough.
Overcoming this money mistake is a matter of deciding what’s worth your time and effort. If a decision you are thinking about or a change you are considering making is going to make a negligible difference in how much you are actually able to sock away in a brokerage account, don’t bother worrying about it. Instead, devote the time you’d spend on it to identifying a step you can take that could affect your bottom line by thousands — or even tens of thousands — over the year or longer.