Ross Cameron, day trader and founder of Warrior Trading, has learned a lot of lessons about both the markets and personal finance over the years—and he’s keen to pass them on.
Most people think that becoming financially independent means you need to make a lot of money, but Cameron thinks that’s not necessarily true. He believes financial independence comes from being responsible with both your finances and your life.
Based on blunders he has made during his own career, here are seven of the worst financial mistakes Cameron feels are holding people back from financial independence.
Mistake No. 1: Not knowing when to hold and when to fold
Cameron warns against getting caught up in a sunk-cost fallacy—the reluctance to change course, even when the outcome doesn’t look rosy. This fallacy may lead you to rationalize investing more into a project you’ve already spent a lot of time, effort and resources on, despite all the data telling you to stop.
The founder says knowing when to quit and abandon an initiative that isn’t panning out as expected has been key to the work he does through Warrior Trading, where he embraces rapid experimentation. He believes the stakes stay low when he carries out small tests or experiments, checks the results as a proof of concept and then reinvests in the areas that are showing success.
Cameron adds that he consults with his team members without being tied to his own ideas because he wants his staff to be fully on board with his decisions.
Mistake No. 2: Being too conservative while you’re young
Many people don’t understand when it’s the right time in their life to take risks and when it’s not.
“We’ve always been told that when you’re younger, that’s the time to take more risks when it comes to advancing and developing your career and when it comes to how you invest the money that you’re saving, even if you’re only saving a little bit,” Cameron says.
The reason? It’s because you have a lot of time on your side. According to the Warrior Trading founder, the last thing you want to do when you’re 64 years old and planning to retire in a year is to have all your life savings invested in something that could drop 50% in value overnight.
“But I’ve seen people do exactly this,” Cameron says. “Conventional wisdom is that when you’re younger, that’s the time to be heavily invested in higher risk assets, but as you get older, you want to pull back on the equities and increase on those more conservative investments.”
Mistake No. 3: Not setting goal posts
Cameron believes it’s a big mistake to not set goal posts because that’s the only way you know what you’re working toward.
So, how do you set a financial goal post? How do you figure out how much money you need to retire?
For years, financial advisers have used the rule of 4%, which states that if you have an account, you can draw 4% off that account indefinitely as long as it’s invested in stocks and bonds. The reason is because the historical performance has been 7% to 8%. By withdrawing 4% per year, you’re not taking all of the growth out of the account in any given year.
Mistake No. 4: Not budgeting or having a contingency plan
One of the big mistakes Cameron recalls making when he was younger was setting a perfect budget for himself based on how much he was making and his expenses, but with no allocation for savings.
“I was just trying to basically keep my head above water, but what I failed to do was plan for the unexpected—and [the unexpected] kept happening to me like clockwork,” the Warrior Trading founder says. “Every month, something would come up.”
His dog got hit in the face by a porcupine: $500. The boiler broke down: $700. Since he hadn’t budgeted for the unexpected, everything went on a credit card.
“It didn’t take long for me to build up $30,000 in credit card debt,” Cameron says. “It’s important to know how much you’re spending relative to how much you’re making. It’s important to allocate some of what you’re bringing in to go aside to savings and then investing your savings.”
He adds that you should go beyond and plan for the unexpected by having some contingency allowance.
Mistake No. 5: Being “house poor”
Being “house poor” is when you buy a house that takes up too much of your income — shrinking what you should be able to use for savings and other expenses.
“The problem with buying a bigger house or even a bigger apartment is that everything is then proportionally more expensive,” Cameron says. “Your insurance is higher, your taxes are higher. Your utilities are higher… your maintenance is higher. Everything goes up.”
He claims the conventional wisdom for your mortgage payment is that it should not be more than 28% of your total pretax income, but based on his observation, so many people, especially in today’s housing market, end up “getting into houses that are 35%, 40% or higher, whether it’s a combination of rent or mortgage.”
“Because when you add in all these extras, it just becomes bigger,” the founder says.
Mistake No. 6: Paying interest instead of earning interest
Cameron says that while it’s vital to take some loans to establish a good credit history and get funding for things not usually purchased with cash such as a mortgage for a house, many people don’t adequately think through the cost-benefit of their loans and credit.
“The thing with interest is that it’s compounding, so it’s growing,” the founder adds. The sooner you can start taking advantage of compound interest [instead of it taking advantage of you], the faster you will fast-forward your ability to become financially independent.”
Mistake No. 7: Not taking advantage of tax-free accounts
“This one drives me nuts,” Cameron says. He recommends contributing to an IRA, whether you’re self-employed or a regular employee.
“I know so many people who are in their 40s or 50s who have never contributed to a tax-free account,” the founder says. “This is the mistake that I made.”
From Cameron’s experience, trading without utilizing an IRA can lead to you overpaying on tax unnecessarily.
Quitting too quickly, being too conservative while you’re young, not setting goal posts, not budgeting or having a contingency plan, being house poor, paying interest instead of earning interest, and not taking advantage of tax-free accounts—these are the seven mistakes Cameron believes are holding many people back from financial independence.
