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The 4 worst financial blunders of the 21st century

Rick Newman
Columnist

Thrifty people know the basic dos and don’ts of getting ahead: Stick with a budget. Spend within your means. Don’t overuse debt. Let the Joneses keep up with themselves.

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But some important things have changed in the economy during recent years, and there are new rules for success that nobody has announced or posted on Buzzfeed. My new book, Liberty for All, describes the growing importance of self-reliance, resilience and entrepreneurship as prerequisites for success. It’s also important to avoid new pitfalls much of the middle class risks falling into. These are 4 mistakes that weren’t such a problem 10 or 20 years ago, but can lead to awful setbacks today:

Overestimating your value as a worker. The traditional career path is one on which you consistently climb higher--and get paid more. But that model doesn’t work for a lot of people anymore, because the skills required to earn a good living change faster than ever in our technology-driven economy. Many people changing jobs or looking for a new one after getting laid off assume their pay should be at least equivalent to whatever they were making before. Millions have endured this unhappy surprise: You’re not worth what you thought you were. One of the biggest weaknesses in the economy, in fact, is that employers are now creating plenty of jobs—but they pay less than the jobs of a decade ago.

Falling into the pay-gap trap can be ruinous for families with little margin for error. Here’s how to stay out of it: Make the conservative assumption that your pay will go up and down over the course of your career, rather than rising consistently until you retire. Learn how to live while saving 20% or 30% of your income, rather than the 5% or 10% some financial advisors say is enough. Force yourself to learn a relevant new skill every year or two, even if it’s a seemingly superfluous one such as mastering social media. If you prepare for your own obsolescence, it’s less likely it will happen.

Getting comfortable. Living a life of comfort—sizable home, plush car, cushy job, familiar routine--is synonymous with prosperity. But it can also breed complacency, which can be deadly if it blinds you to the need for change. Technology disruptors in Silicon Valley and elsewhere have put a bulls-eye on any profession, company or industry that can be revolutionized by software or machines that get the job done faster, cheaper or better. That means anybody who feels they can relax in their career better have ironclad job security or a hefty rainy-day fund. Nobody needs to be paranoid, but healthy respect for the financial risks you can’t foresee will prevent overspending on homes and cars and other bone-headed moves that make you vulnerable.

Trying to live like your parents. Somewhere during the last century or so, we got the idea that every generation had the right to a better standard of living than their parents. That’s how we define progress in a free-market economy. But we’ve made the mistake of interpreting progress as ever more stuff—which we can only afford by taking on more debt, since incomes are no longer rising at the healthy pace they were during prior decades.

It’s time to redefine how we measure progress. Instead of bigger homes and spiffier cars (and the loan payments that come with them), maybe it’s a simpler lifestyle with lower bills and more freedom to try new things. It pays to be more entrepreneurial these days, so it might be more important to save for a business idea than for a mortgage down payment. It’s also crucial to have the flexibility to go where the opportunity is, which means agility and mobility trump the comfort of hunkering down for years in a place of your own. “Stay hungry, stay foolish,” is a Silicon Valley saying popularized by the late Steve Jobs. It applies to the rest of America, too.

Giving up. There’s a crisis of quitting in America. The portion of adults either working or looking for work is at the lowest level since 1978. There are more women in the labor force now than there were then, but the percentage of adult men participating in the labor force, at 69%, is the lowest since the government started tracking the measure in 1948. And those economic dropouts aren’t retiring early to live on a fat pension or inheritance. Too many workers have simply given up when faced with a demanding job market that doesn’t seem to reward whatever they do.

Giving up is obviously one option, but a tougher overall economy doesn’t mean decline is inevitable for any given individual. There’s still a lot of opportunity in America (and beyond), and those who find it are the ones who compile skills like Monopoly properties, go where the action is and stay ready for something new, whether they choose it or simply confront it. You can still live better than your parents, if you prepare for tomorrow’s economy today and leave yesterday’s behind.

Rick Newman’s latest book is Liberty for All: A Manifesto for Reclaiming Financial and Political Freedom. Follow him on Twitter: @rickjnewman.