In personal finance, it's common for

people to focus on things that they

can't control, like trying to pick a

winning investment while ignoring the

things that they can control, like

setting the right goals and making a

solid long-term plan. This often leads

to mistakes. 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. I'm Ben

Felix, chief investment officer at PWL

Capital, and I'm going to tell you about

the top 10 biggest mistakes in personal

finance so that you can avoid them.

This first mistake might be

controversial and I feel a little bad

saying it, but I don't think it gets

enough attention. 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.

I'm pretty happy having an engineering

degree regardless. Advanced

certifications like the CFA charter in

finance tend to boost average incomes

even further. 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. Again, how much a given

person earns is a complex issue.

Education costs time and money. And that

aside, you shouldn't choose a career

that you dislike just because it pays

well. As always, personal finance is

personal. That being said, no amount of

frugality can solve the effects of

having a low income. Financial

well-being increases unsurprisingly

steadily with increasing household

income. Finding ways to save money is

important, too, and I'll talk more more

about that in a minute. But finding ways

to boost your earnings is one of the

best things that you can do for your

personal finances. The next big mistake

is not saving enough. If you've been

successful at boosting your income above

the minimum level needed to live, you

need to be saving a portion of those

earnings for the future when you may

want or need to stop working. In

addition to being necessary for things

like retirement, saving money is

strongly related to financial well-being

at all income levels. There's no perfect

amount to save, but there are some

guidelines. Someone with a very

aggressive savings goal, like early

retirement, might save a huge portion of

their income, while someone who plans to

work until a normal retirement age might

save less. Similarly, someone starting

to save later in life will need to save

more than someone starting early. A

common number that gets thrown around is

10% of your income in addition to your

contributions to government pension

plans like CPP in Canada or Social

Security in the US. It's probably

reasonable advice. An academic paper

finds that a 10% savings rate from age

25 to age 65 into a 100% stock portfolio

with 1/3 in domestic stocks and two/3s

in international stocks results in an

average retirement income level,

including social security above their

working year's income level. A 2011

study in the Journal of Financial

Planning uses historical data to

calculate the minimum savings rate you

would need to maintain in order to

retire, even the worst historical cases.

It's kind of like the 4% rule for

retirement spending, but flipped on its

head. The important point from that

research is that if you wanted to work

and save for 40 years and then live in

retirement for 40 years with a 70%

income replacement rate, excluding

Social Security in this analysis, you

need to save a minimum of 11.28% of your

income during your working years. If you

want to work fewer years, replace a

higher portion of your income, or have a

more conservative investment portfolio,

you'd need to save a higher percentage

of your income. I'll come back to that

point later. Figuring out the exact

amount you should be saving really

requires sitting down with a good

financial planning calculator or a

financial planner and mapping out your

long-term goals so that you can chart

the path to get there. It also requires

juggling priorities. For example, a

young family paying for daycare or

prioritizing family experiences might

settle to save less now and more later.

Speaking of goals, not setting financial

goals is another one of the biggest

mistakes in personal finance. People

make wild financial decisions when they

don't have at least a rough idea of

where they want to end up. It's worth

thinking hard about the financial goals

you want to set, which isn't always

easy. If I ask you what your financial

goals are, you probably won't be able to

tell me, even if you think you can. It's

weird to think about. When prompted

properly, people often realize that

their goals that they've set themselves

fall short of what they really care

about. There are a couple ways to elicit

more meaningful goals. One is using

categorical prompts, showing people

categories that financial goals might

fit into. Another is the use of a master

list, a comprehensive list of goals

collected from many people. In 2022, I

conducted a study where I asked 310

people to write down their goals. They

were then asked to double the list and

were then presented with the permavv

model of well-being as potential goal

categories. Perma V stands for positive

emotion, engagement, relationships,

meaning and accomplishment. And the V is

vitality. When you ask someone what

their goals are, they might say, "I want

to retire." But when you say goals might

fit into these six categories, they tend

to come up with more meaningful goals

that get closer to what really matters

to them. Using the data from my study,

Morning Star's behavioral research team,

this was pretty cool that they used our

data, found using natural language

processing that after being introduced

to the permavv model for the categorical

prompts, people tended to list deeper

goals that reflected their values rather

than the more surface level goals like I

want to retire. My study also resulted

in a master list of goals that people

can still find on the PW capital

website. This master list can be used in

addition to the permavv categorical

prompts as part of a structured goal

setting process. Understanding your true

goals is important because the path to

getting there to your true goals might

be very different from the path to

achieving some other surface level goal

or the uncharted path of doing whatever

feels right in the moment. Related to

setting the right goals and to saving,

another critical personal finance

mistake is overspending on the wrong

things. Spending money often feels good.

Having new material possessions feels

good, at least for a while. The problem

is that people adapt pretty quickly to

these feelings. Even something major

like a fancier new house will only tend

to make you happier for a bit. The

reason is pretty simple. Our happiness

is largely shaped by our

minute-to-minute experience rather than

our stable life circumstances which we

adapt to. The problem is that people are

not good at predicting what will make

them happy in the future. They tend to

imagine that things, often material

things, will boost their happiness much

more than they actually will. Think

about a potential major purchase like a

cottage or a boat. I'm not saying these

are bad purchases, but just just stick

with me for the example. When you think

about those purchases, you'll tend to

think about sunny days on the beach

where everyone's happy and getting

along, the boat's running, and the

cottage doesn't need repairs. Those days

do exist, but so does sitting in traffic

on a sweaty Friday afternoon trying to

get out of the city, kids fighting in

the back seat, the boat not running

properly or needing maintenance, and

having to rush to the cottage on a

weekday because of a burst pipe or

something like that. Again, I'm not

saying don't buy a cottage or a boat,

but I think it's important to consider

the time and money tradeoffs associated

with any major expense. How you spend

your time will affect your happiness

more than what you own. People who value

their time over money do tend to be

happier, make more frequent social

connections, and have a stronger

relationship with their spouse, and they

tend to be more satisfied with their

job. The other way this shows up in

financial decision-making is that all

else equal, spending less money today

gives you more ownership of your time in

the future. While we're required to

work, we trade our time for money by

necessity. Work has lots of

non-financial benefits, too. I'm not

anti work by any means, but being able

to choose how you spend your time and

choose the kind of work that you do is a

great position to be in. Spending less

today on stuff that doesn't make you

happy will get you there sooner, all

else equal. This highlights the

compounding long-term effects of

suboptimal spending today. For any

purchase or major expense, consider what

you are actually trying to accomplish by

spending those dollars and whether there

are more efficient uses of your time and

money to get there. Think about how

spending your money now will change how

you spend your time both now and in the

distant future. Related to the

compounding effects of poor spending

decisions today, 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. What even

is risk? It's usually framed as

volatility. Volatility is certainly a

psychological risk, but for a long-term

investor who does not need to spend

their money tomorrow, I don't think

volatility is the best measure of risk.

I think a lot of people do get scared by

the concept, the the thought of risk

because they imagine losing all or a lot

of their money. And when markets are

volatile, it can seem like that's going

to happen. Or maybe they did lose all of

their money trying to pick winning

stocks or crypto tokens or whatever. But

total loss is an unlikely outcome for an

investor who owns a cross-section of all

of the publicly traded stocks in the

world through a lowcost index fund.

Stocks do not guarantee a good long-term

outcome. Don't get me wrong here.

They're still risky in the long run. 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 put

it in terms of savings rates from one of

the papers that I mentioned earlier, 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.

Basically, if you're just holding a

highinterest savings account instead of

investing in stocks, you would need to

save 57% of your income to match the

expected outcome of the global stock

investors 10% savings rate. Getting

comfortable with taking risk is a good

thing, but it's easy to take the wrong

kinds of risk, which is another major

personal finance mistake. Trying to pick

individual stocks, looking for the next

Bitcoin before it moons, and using

options to bet on stock price movements

are more like gambling than investing.

I'd call anything that has a negative

expected return with the possibility of

some occasional wins due to luck

gambling. While investing has a positive

expected return with the possibility of

some bumps along the way. The difference

is that while you can win with gambling,

you can. It does happen. The longer you

play, the more likely you are to lose.

Just spend 10 minutes reading our Wall

Street Bets if you need proof. Whereas

with investing, the longer you play, the

more likely you are to come out ahead.

Investing is usually pretty boring. If

you already have a lowcost, 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 say 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. A British

Columbia man yoloed a Tesla options play

from $88,000 to $415 million before

losing everything.

Everything's obvious in hindsight, but a

little diversification would have gone a

long way here. 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. Some examples are

income splitting with lower-income

family members either through strategic

household expense allocations or

prescribed rate loan planning,

optimizing the use of registered

investment accounts like the RRSP, TFSA,

and FHSA in Canada, donating appreciated

securities from a taxable investment

account rather than donating cash, and

maximizing the use of the primary

residence exemption for any period of

time that you owned multiple properties.

There are more examples for people with

corporations. Even simple things like

choosing the right tax year to use your

RRSP deduction can have a big impact.

Similar to and related to tax planning,

ignoring estate planning is another big

mistake. 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. Another big

mistake that can really hurt both

financially and psychologically is

marrying a financially incompatible

spouse. There are two broad spending

profiles, tight wads and spend thrifts.

Tight wads don't like to spend money

while spenthrifts do. The crazy thing is

that tight wads and spenthrifts are

statistically more likely to end up

marrying each other than another tight

wad or another spenthrift. Opposites

attract in this case. I guess the

problem is that the more spouses differ

on the spending dimension, the more they

tend to fight over money and the more

they report marital dissatisfaction.

Spouses with more similar spending

profiles tend to be happier. Financial

disagreements are already one of the

strongest predictors of divorce and

divorce can be financially devastating.

This is messy stuff. The tightwad

spendthrift trait is pretty stable over

time. So, if you're considering

committing to someone who has financial

tendencies that bother you, just know

that they probably won't change.

Underinsuring catastrophic risks is

another big personal finance mistake.

Insurance has a negative expected

return. It has to for insurance

companies to stay in business. Despite

its negative expected return, it does

make sense to buy insurance for risks

that if they materialized, you or your

family would not be able to recover

from. For example, when you have

financial dependence but are not

financially independent, it is very

important to replace your future

earnings in the event of an untimely

death with life insurance. Disability

insurance is important to ensure your

future earnings whether you have

dependence or not. Nobody likes to think

about death or disability, but not

planning properly for these unfortunate

events can be financially catastrophic.

covered calls. No, I'm just joking. FB

Canada, the credentiing body that issues

the CFP in Canada, defines six areas of

financial planning which at the very

least require conversations about these

common mistakes. Going through the

financial planning process with a

financial planner is highly likely to

reduce mistakes and improve expected

outcomes.