The Biggest Mistakes in Personal Finance

In the world of personal finance, many individuals focus heavily on factors outside their control, such as trying to predict winning investments, while neglecting the fundamental elements they can actually influence. Ben Felix, the Chief Investment Officer at PWL Capital, identifies the top ten biggest mistakes in personal finance that can determine whether someone lives paycheck to paycheck or enjoys a comfortable future. The first mistake is not earning enough money. While income is influenced by external factors like luck, family background, and geography, an individual’s "human capital"—their ability to earn through work—is often their most valuable asset. Investing in human capital through formal education, trades, or advanced certifications like the CFA charter significantly improves the distribution of potential lifetime earnings and makes income more resilient during economic downturns. Beyond wealth, higher education and income levels are statistically associated with increased happiness, longer lifespans, and better health. Felix emphasizes that while personal finance is personal and one should not choose a hated career for money, no amount of frugality can fully compensate for a fundamentally low income. The second mistake is not saving enough. Savings are essential for retirement and general financial well-being. While a 10% savings rate is a common benchmark, research suggests that to maintain a 70% income replacement over a 40-year retirement, a minimum savings rate of 11.28% is often required. Those who start later in life or prefer more conservative portfolios must save even more. For instance, an investor using a target-date fund might need to save 16% of their income, while someone relying solely on high-interest savings accounts would need to save a staggering 57% to match the outcomes of a globally diversified stock investor. The third mistake involves failing to set meaningful financial goals. Most people struggle to identify their true objectives, often settling for surface-level goals like "retirement." Felix suggests using the PERMA-V model—Positive emotion, Engagement, Relationships, Meaning, Accomplishment, and Vitality—to elicit deeper values. By using categorical prompts or a master list of goals, individuals can move beyond generic targets and align their financial path with what truly contributes to their long-term well-being. The fourth mistake is overspending on the wrong things. Humans suffer from hedonic adaptation, meaning the joy from material possessions, such as a new house or car, fades quickly. People are generally poor at predicting what will make them happy, often overlooking the "hidden" stresses of big purchases, such as maintenance or long commutes. Felix notes that valuing time over money is a stronger predictor of happiness and better social connections. Spending less on material goods today not only avoids the trap of adaptation but also grants more ownership of one’s time in the future. The fifth mistake is not taking enough investment risk. While volatility can be psychologically daunting, the long-term cost of avoiding stocks is enormous. For a diversified investor, the risk of total loss is low, yet the expected returns of stocks far outperform bonds or cash. Avoiding market risk necessitates much higher savings rates to achieve the same financial goals, making the "safe" path of cash holdings ironically risky for long-term security. The sixth mistake is taking the "wrong" kinds of risk, which Felix equates to gambling. This includes picking individual stocks, chasing cryptocurrency trends, or using options. Unlike diversified investing, which has a positive expected return, gambling involves negative expected returns where the likelihood of loss increases the longer one plays. He cites the extreme example of a man who turned $88,000 into $415 million through Tesla options only to lose it all, highlighting the danger of lacking diversification and staying too long in the "financial casino." The seventh and eighth mistakes are missing tax and estate planning opportunities. Tax planning is described as a "free lunch" because it relies on government-approved strategies rather than market uncertainty. This includes using registered accounts like RRSPs and TFSAs, income splitting, and strategic donations. Similarly, a lack of estate planning or a formal will can lead to tax inefficiencies and family anguish, as assets will be distributed according to rigid government rules rather than the individual’s actual wishes. The ninth mistake is marrying a financially incompatible spouse. Research shows that "tightwads" and "spendthrifts" are statistically likely to marry each other, yet these differences are a primary source of marital conflict and a strong predictor of divorce. Since these spending traits are usually stable, failing to align with a partner on financial values can be devastating both emotionally and financially. Finally, the tenth mistake is underinsuring catastrophic risks. Although insurance has a negative expected return, it is vital for protecting against unrecoverable events. Life and disability insurance are necessary to replace future earnings and protect dependents. Felix concludes that addressing these ten areas through a structured financial planning process is the most effective way to reduce errors and improve long-term financial outcomes.