FINANCIAL MISTAKES TO AVOID
Let’s face it, we are all human, and we all make mistakes. hopefully when it happens, you are able to keep those mistakes on the minor side of things, and just move on and learn your lesson. I’ve personally taken up the habit of calling my mistakes stupid tax. Back into a mailbox? Stupid tax. Spill your soap making chemicals and burn a hole in the countertop? Stupid tax. Or, my wife’s favorite, get a speeding ticket? Stupid tax. We have all been there, and it never feels good. Just remind yourself that the only mistakes you should be upset about, are the ones you didn’t learn from. In a perfect world, you would learn these things without ever having to make the mistakes. To help with that, I wanted to go over some of the biggest financial mistakesI regularly see people making.
BUYING BRAND NEW CARS
There is a certain portion of the population who can feel free to ignore this one. If you have over $1,000,000 in assets go ahead and splurge. For everyone else, let me explain. The average car payment in America is currently $563 for a new car, and $397 for a 3 year old used car on a 6 year loan(If you want my full opinion you should never take out a car loan period but i digress). That is a difference of $166. If we assume an 8% growth rate, investing that $166 monthly for the life of the loan would get you an end result of just over $15,000. Now here is where it gets really wild. let’s imagine you bought that car when you were 30 years old. You invested your $166 a month, and then let it sit until you retired 30 years later. At that same 85 growth rate the difference between the cars ends up being worth over $150,000 in retirement. I hope you enjoyed that new car smell.
NOT HAVING LIFE INSURANCE
Full disclosure here, I also own a life insurance agency. I started the agency not to be a big moneymaker, but because I got tired of referring clients out to insurance agents who tried to sell them expensive unnecessary policies (more on this coming up). If you have kids, own a home, or have a spouse depending on your income, you need term life insurance. It’s cheaper than you think, and although I sincerely hope it turns out to be a waste of money, I have seen far too many occasions where someone didn’t have the coverage they needed, and they left their family heartbroken, and financially burdened. The right coverage will not make the passing of a loved one any easier, but it will allow you time to grieve, without having to worry about putting groceries in the fridge.
HAVING THE WRONG TYPE OF LIFE INSURANCE
Referring to the above section, most people I talk to have a need for term life insurance. But let me be clear with this next part. NOBODY NEEDS PERMANENT LIFE INSURANCE. Whole life, variable life, indexed life, whatever you want to call it, it is all garbage. It’s the reason I started an insurance company. I saw way too many clients with insurance agents trying to cram this stuff down their throats. Salespeople talk about it like it is the cure all to all of your financial problems. It’s not. It’s expensive, it’s a terrible investment’ it has outrageously high fees, and the only person who will ever make any money on the policy is the person who sells it. Never buy this stuff, and if your insurance agent brings it up, fire your insurance agent. Want me to tell you how I really feel?
NOT PAYING DOWN DEBT
Very common question I hear, “Should I pay off my credit card, or invest in my Roth IRA?” I understand why people ask it, and It’s a smart question to ask. It shows that someone is really thinking about their financial life. But the reality is that most credit cards carry in interest rate of over 12%. So if you pay it off you make a guaranteed 12% rate of return. There is not an investment in the world that can offer you 12% guaranteed. So pay it off.
BUYING TOO MUCH HOUSE
I remember buying my first house. I also remember how shocked I was to see how much house we qualified for. So let this be the warning, your mortgage officer will likely offer you a far bigger loan than you should accept. Keep your house payment to about 30% of your income and you’ll be much happier.
BORROWING FROM FAMILY AND FRIENDS
This is probably the single most common mistake on this list. Borrowing money from your friends, your parents etc. It seems like a really good idea, hey Mom and Dad may not even ask for interest. But as the parable goes, “the borrower is slave to the lender”, it creates an extremely awkward dynamic. Thanksgiving dinner tastes different when mom is wondering when you’re going to pay her back.
LENDING TO FAMILY AND FRIENDS
Take everything from above and turn it around. Just as it’s not fun to owe money to family, having them owe you can actually be even worse. If you have the means, and you want to help a friend, I encourage you to do so. But don’t make it a loan make it a gift. I can’t tell you how many stories I have heard of ruined relationships because of loans that never got repaid. If you give money to a family member do just that, give it.
BUYING AN ANNUITY
The same insurance agent who tried to sell you whole life insurance is probably also the one trying to sell you an annuity. Now, if you like paying over 3% annually, making lower returns than the market, and having your money locked away for as much as ten years, go right ahead. Whatever you think that annuity is going to do for you, there is a better way to do it. Want to know why you see so much marketing for them? I can tell you. I used to be licensed to sell them after all. Let me put it this way, at Balanced capital we charge 1% or less per year to manage investments for clients. Annuities commonly pay the advisor as much as 10%. Upfront. Is it what’s best for you? Or, is it what’s best for the advisor?
INVESTING IN FADS
Bitcoin, Gamestop, Gold, you name it. There is always something in the news that is making people rich overnight. Make no mistake, with each of these trends there were a lot of people who got very wealthy. The problem ,is that usually, by the time you are hearing about the investment, it’s too late. Markets move very quickly, and truly being ahead of them usually involves a good bit of dumb luck.
STUDENT LOANS FOR THE WRONG DEGREES
I know I am going to catch heat for this one, but hear me out. I am not completely against student loans. I am also not against earning degrees in liberal arts. I am against the combination of the two. Taking out a student loan needs to be done with the mindset that it is an investment. Taking out that loan will allow you to earn a degree that will increase your income potential. In other words, it needs to have a positive ROI. Taking out a loan for a degree in something that will not get you hired, or will not increase your income is no longer an investment, it is a luxury. And I never recommend borrowing money to pay for luxuries.
PAYING MONTHLY INSTEAD OF ANNUALLY
I honestly see this happening for two reasons. Some people don’t have the cash to pay bills in advance. If you are in that spot, work to gt on a tight budget and build your savings. If you already have a savings, it’s likely you just never thought to look. If you did, you would see that things from car insurance to software subscriptions can be cheaper if you pay annually upfront rather than monthly.