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“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”
This is some of the best advice. If you can consistently avoid making huge mistakes, you should come out way ahead in life. Bad financial decisions can haunt people for years. So in this vein, I thought I’d share the top 14 worst money mistakes that you should try your best to avoid.
Playing It Too Safe When Investing
In your 20s, you should invest in stocks. Whether that is a passive index fund, like the S&P 500, or individual stocks, the stock market is where your money should be. Unfortunately, statistics have shown that too few millennials invest in the stock market. According to a Bankrate survey, just over 25% of 20-somethings invest in the stock market. That means that 75% either invest in bonds or worse, do not invest at all.
In your 30s, you should have plenty of time to deal with the volatility of the market before you reach retirement. Over time, the S&P 500 has had an annualized return of over 10%. That definitely beats the 4% return of bonds. Meanwhile gold has performed even worse averaging just under 2%.
While you may wish to diversify, in your 30s, holding more stocks is the wisest position. Wealthfront and Betterment do an excellent job of adjusting your portfolio over time, if you’re looking for a robo advisor to assist in the creation of your portfolio.
Related article: The Benefits of the S&P 500
Saving in the Wrong Places
A friend of mine has been saving for a downpayment on his home for over 10 years now. You may be thinking– that’s great. They are saving in order to avoid PMI. Normally, I would agree with this sentiment.
However, over the years, my friend decided to save this money in an online bank account instead of investing it in the stock market. He was convinced that he would be able to snatch up a foreclosure at a great deal, so he wanted to stay liquid in cash.
The problem is that it has been 10 years. He still hasn’t pulled the trigger on a house. Every time he gets close, he gets cold feet.
In the meantime, the stock market has doubled, even though the top of the market was back in 2007. So while I think it is a great idea to avoid PMI, you should also have a strategic savings plan in place.
Prioritizing Your Child’s Education over Your Retirement
One of the best pieces of financial advice is that your kids can take out loans for college, but you cannot take out loans for retirement. While I understand the desire to provide for your child’s future educational expenses, you should not do so at the detriment of your own retirement.
The priority should be your retirement in your 30s. You should take advantage of your employer’s 401(k) plan, especially if they offer a match. You should also take advantage of other tax-deferred accounts, such as the Roth or Traditional IRA.
Once you are on the right path with retirement, then you can start funding your child’s educational needs.
While we may not want to think about potential problematic situations, we still need to plan for them. Whether it is life insurance or disability insurance, you need to consider unfortunate events that could occur in the future.
Many people forego certain insurances because of cost. Just think about how costly it will be if life does not go according to plan and something terrible happens to you.
You may receive some insurance through your employer. However, by the time you reach your 40s and 50s, those coverages may not be applicable anymore. That is why it is important to obtain the proper insurances in your 30s to lock in for the future.
Related article: A Comprehensive Guide to Your Insurance Needs
Failing to Talk about Money before You Get married
Recently, my wife and I joined a marriage ministry at our church. The other week, I spoke on finances in a marriage prep class for engaged couples.
The first question that I asked the couples was if they knew how much money their future spouse made. Most of them answered that they had a general idea of the figure but weren’t exactly sure.
Not off to a good start.
The second question I asked was if they knew how much debt their future spouse would bring into the marriage. Some people really had no idea.
Again, not off to a good start.
It is vital to be completely transparent about finances before marriage. Don’t you know that the most prevalent source of stress within a marriage is due to money matters? Trust me- nobody wants a debt-related surprise the day after the wedding.
Spending Too Much Money on Your Wedding
According to The Knot, the average wedding in the US costs over $35,000. That is a record high in the US. Yes, it is a special day, and it should be memorable. But at what cost to your future?
Most of the time, the specific minor details (e.g. wedding invitations), which can still be costly, aren’t even very memorable to the bride and groom afterwards. Determine the elements that are really important to you, and then find ways to cut costs in the other areas.
Don’t let one day’s expenses to hinder you from achieving your financial goals in the future. While it is a once-in-a-lifetime event, you should also consider life afterwards as well.
Giving Your First Kid the Best of Everything
While my wife wants my son to look nice, she has found ways to do so without breaking the bank. We are huge proponents of buying children’s clothes and toys from thrift or consignment stores.
We have found kid’s clothes with the tags still on them, shoes that look like they’ve never been worn, and even toys still in boxes.
Related article: Saving Money When You Have A Baby
Spending Too Much on Cars
Just because you may have driven a beat up, older car in your 20s doesn’t necessarily mean you should upgrade just because you are in your 30s and making more money.
Today, car owners in their 30s and 40s have the highest level of car debt. They owe nearly $14,000 on average, according to the Housing Finance Policy Center.
As most of you know, vehicles are depreciating assets that drop each year.
By how much do these depreciating assets drop?
On average, a new car loses 19% of its original value after the first year.
After 2 years… it drops by 31%.
After 3 years… it drops by 42%.
After 4 years… it drops by 51%.
After 5 years… it drops by 60%
How would you feel losing 60% on an investment?
That’s why instead, I am a big proponent for buying used vehicles in their 5th year. By that time, a lot of the depreciation has taken effect. You can still receive a high quality car while saving a substantial money, allowing you to invest the rest.
Related article: The Best Tips for Buying a Used Car
Going to Grad School without a Good Reason
A lot of my friends are thinking about going to grad school. The problem is that many of them are unsure as to why they should go. Most of the time, they are convinced that it will open up doors.
When I went to grad school, I thought the same thing. I figured that it would allow me to market myself better and that it would grant me connections. Now, five years later, I still work the same industry as when I received my MBA, and I have yet to market myself with my degree.
Unfortunately, since I didn’t have a plan, I wasn’t able to leverage grad school for all that it could have been. Therefore, I probably wasted some money in the process. Personally, I think I would have been better off investing the money instead of paying for grad school tuition.
Bottom line: If you enroll in grad school, have a concrete plan in place for the future. Not something vague, as in my case.
Assume You’re Going to Make More Money in the Future
Some people forego saving when they are younger because they believe they will reach their peak earning in their 40s and 50s. Why save now when you can save in the future?
Unfortunately, it takes quite a few years of savings to become a millionaire. There is real power in compound interest. While it’s never too late to start saving, it’s much easier to save for retirement earlier than later in life.
Invest Too Conservatively
It drives me crazy when I see people at work investing 100% of their retirement in the G Fund, which is the equivalent to short-term treasuries. The G Fund’s one-year return is 1.83%, which is not much higher than the 1.30% return of my Ally savings account.
Over the past 10 years, the G Fund has returned 2.63%. In contrast, the S&P 500, which peaked in 2007, has doubled its return. That includes the volatility of the Great Recession, when stocks lost nearly 50% of their value.
When I ask people why they invest so conservatively, they normally shrug and say that they don’t want to deal with the ups and downs of the market.
While the volatility of the market can be tough to watch at times, the contrast is that it will be much more difficult to achieve retirement if you are only receiving 2% returns on your investments each year.
Personally, I’d rather take on a little bit of risk to receive greater rewards in the future.
Accumulating Debt to Fund Your Lifestyle
Debt can be a great tool for building wealth, especially if you are utilizing student loans or a mortgage to buy a house. On the flip side, debt can be a double-edged sword as credit card debt can quickly derail your retirement dreams.
The average credit card balance of those in debt is nearly $17,000. If you make the monthly minimum payment, it would still take you 15 years to pay off that debt. In actuality, you would be paying double for the items that you purchased via credit card. You have to ask yourself if the items you are purchasing today are really worth double their price in the future.
Buying a House You Can’t Afford
Buying a home is a big step, and you need understand that you will potentially lose some flexibility in the future. For instance, I have a friend that bought a nice house, but over time, his job started to wear on him. He decided that he wanted to start over and transition to another industry.
Unfortunately, when he bought his home, it was at the top of the housing market. He was nearly $200,000 underwater on his house. Due to that circumstance, he simply couldn’t take a pay cut and delve into another field. Unfortunately, his dream died right then and there, all because he lived in a house that he really couldn’t afford.
Keeping Up with the Kardashians
Full disclosure: I’ve never seen an episode of the show. But, I know some people who are obsessed with them. The obsession moves towards trying to emulate them, whether that is buying their cosmetics or clothing. Purchasing all of their merchandise costs major bucks. In the long-term, is this craze really worth it? Fads vary so drastically year by year.
I think Will Smith said it best:
“Too many people are buying things they can’t afford, with money that they don’t have… to impress people that they don’t like!”
Comparison is the thief of joy. Stop comparing yourself to your peers and be thankful for the blessings that you have, as little or as big as they may be.