Have you ever found yourself wandering down the wrong road? Maybe you took a wrong turn somewhere? Or maybe you were just plain lost?
Either way, we’ve all been there. We’ve all made mistakes.
And sometimes, those mistakes cost us money.
In hopes of helping you avoid some common mistakes people make with their money, I’ve put together a list of 19 dumb things people do with money.
After reading some of the items on this list, don’t worry if you find yourself saying, “Oh no, I do that!”
It certainly takes one to know one. One of the reasons I was able to come up with such a long list is that I’ve made a lot of the mistakes on this list at one point or another in my life.
So, in addition to the list of dumb things we do with money, I’ve also included some tips on how to stop making these mistakes and how to get back on the right path, financially speaking.
Grab your favorite beverage, sit back, and let’s check out the first ten ways we (myself included) can be dumb with our money in part one of this two part series on dumb things we do with our money.
1. Finance car purchases
According to this article, approximately 70% of new car purchases are financed.
In other words, 70% of you reading this are probably throwing away money on interest by getting a loan for a car.
Pay off your current auto loan as quickly as possible, then take the money you were paying towards your car payment, and sock it away into a savings account each month.
That way, next time you’re ready to buy a car, you won’t throw away thousands of dollars on interest in automobile loans over the course of your lifetime. Sure, you might not be able to drive that new Mercedes you were eyeing at the dealership, but it sure beats being enslaved to the bank for the rest of your life!
2. Carry a balance on credit cards
With credit card interest rates ranging from 10-25% or more, this is certainly one of the more expensive of the “dumb things” people do with money.
While I’ve certainly seen instances where people got into credit card debt through little fault of their own or due to a naive understanding of how compound interest can severely work against you, most of the time credit card debt is simply a symptom of a much deeper issue.
It typically shows that you have little self control and don’t plan your expenses using a spending plan (i.e. budget).
The solution, therefore, is quite simple.
Stop putting your hope and trust in “something” and put that hope and trust in “someone,” namely, the person and work of Jesus Christ (check out this recent blog post for help with this). Even if you’re a Christian, this is something we need to do daily!
Once you start doing that, start living on a budget and strive to always spend less than you earn.
Practically speaking, put your credit cards in a plastic container filled with water and stick it in the freezer.
That way, you still have access to the credit card(s) in case of an emergency, but hopefully, by removing the ease of access you currently enjoy, it will make you more likely to stick with your plan to stop living on borrowed money each month.
3. Spend money on things you don’t need
Speaking of spending, how often do you spend money on things you don’t really need?
Next time, when you’re about to spend your hard-earned cash, ask yourself this one question:
Is this a need or a want?
This question will help you realize there are very few things we really “need” in the purest sense of the word:
…for we brought nothing into the world, and we cannot take anything out of the world. But if we have food and clothing, with these we will be content.
1 Timothy 6:7-8, ESV
Check out this blog post for more details on how this question can help you spend less and save more.
4. Buy extended warranties
An extended warranty is just another form of insurance.
And usually, this particular form of insurance is a waste of money because the majority of the time, it goes unused.
To learn more about why extended warranties rarely make sense from an economic standpoint, check out this news article I was quoted in last year from U.S. News & World Report.
5. Pay for things you never (or rarely) use
An extended warranty isn’t the only thing people buy but never (or rarely) use.
Did you know that approximately 67% of people with gym memberships never use them?
Or that approximately 20% of purchased Groupons go unused?
The solution to this one is similar to number 3 above. Before purchasing something, ask yourself if it’s really a need or a want. And if it’s something that requires an ongoing commitment like a gym membership, make sure to sleep on it (maybe a few nights!) before making a decision.
Be honest with yourself.
Will you really get your money’s worth out of the treadmill at the gym? Or would running in a nearby city park (for free) be just as enjoyable and good for your health?
6. Purchase the wrong type of insurance
I can’t tell you the number of times I’ve had someone in my office who was unknowingly sold the wrong type or wrong amount of insurance by an overzealous salesman who masqueraded himself as a “trusted financial advisor.”
Instead of trusting your financial future to a salesperson, speak with a fee-only financial advisor who doesn’t sell products.
This advisor should work alongside an independent insurance agent and can give you unbiased advice in regards to what insurance products to consider and how much coverage might be a good fit for your situation.
7. Bail out “boomerang” adult children
According to Webster’s online dictionary, a “boomerang child” is…
A young adult who returns to live at his or her family home especially for financial reasons.
Many well-meaning parents help their children out by giving them a place to stay for a few months after college or after a job loss until they get back on their feet. The problem is that a few months usually turns into a few years…or longer!
Discuss your child’s timeline for their stay and if it’s more than a few months, they should start paying you rent. This will help teach them responsibility and give them an incentive to find a job.
If you feel bad about charging them rent, simply open up a savings account and deposit the rent check into this account each month. When they get back on their feet and it’s time to move out, feel free to give them back all or a portion of the rent money they paid you while living at home.
Just don’t forget to consult your financial advisor and your accountant regarding the possible tax implications of this gift!
For some great money habits to teach your kids at any age, check out this cool infographic.
8. Neglect to save for the future
The most recent data (June 2014) from the Federal Reserve Bank of St. Louis shows that the personal savings rate in America is just north of 5%.
Compare that to the 10-15% of gross income number that most experts will say is the minimum you need to set aside for long-term financial goals such as retirement and you can see we have a serious savings problem in our country.
Here’s what one old Proverb has to say about this issue…
Go to the ant, O sluggard; consider her ways, and be wise. Without having any chief, officer, or ruler, she prepares her bread in summer and gathers her food in harvest.
Proverbs 6:6-8, ESV
Surely if an ant is smart enough to set aside a few extra crumbs for the long, cold winter, we can set aside a few extra bucks during the good times, so that we aren’t “up a creek without a paddle” during the bad times.
For some help on how to get started, check out this post for an easy way to increase your income overnight by making sure you have the right amount of taxes taken out of your paycheck.
9. Fail to plan your spending
I think one of the main reasons people neglect to save money for the future is that they don’t plan their spending.
Or they try to, and after a few months of going over their budgeted numbers, they give up and say, “See! I knew this budgeting stuff didn’t work!”
If that’s you, then you don’t understand the purpose of a budget (or a spending plan as I like to call it).
The purpose of planning your spending isn’t so that you’ll spend exactly as much as you planned each month (although the more you do it, the closer you’ll get to your target). Rather, the purpose is to have a plan, so that when surprise expenses come up…and they always do…you’re more prepared than you would be otherwise and you know exactly how it will affect your financial situation.
This gives you the facts you need to make better decisions with the rest of your money so that a surprise or unplanned expense doesn’t derail your entire financial plan.
10. Rely on “rules of thumb” instead of seeking personalized advice
Everyone has their own “rule of thumb” they like to follow…
“Never spend more than 4% of your investment portfolio each year in retirement.”
“Set aside 10% of your income each year for retirement savings.”
“Always buy term life insurance.”
“The stock portion of your investment portfolio should be equal to 110 minus your age.”
While there isn’t anything inherently wrong with the statements above, the problem with these and a hundred other “rules of thumb” is that not everybody’s thumbs are the same size! Usually folks hear something on the radio or TV and they automatically think it applies to their situation.
You wouldn’t trust some radio or TV talk show host with your physical health, so why do you do exactly that with your financial health?
Instead, find a fee-only financial advisor in your area who will work with you to develop a personalized plan to help you and your family reach your goals. If there isn’t a fee-only firm in your area, find a firm that is willing to work remotely with clients in different areas of the country (like SageOak).
Wait, there’s more!
If these 10 things weren’t enough for you, don’t worry. In our next post, we’ll cover 9 more dumb things we do with money to finish off our list of 19.
As I said at the beginning though, if you find yourself saying, “Oh, no! I do that!” to some of the things on this list, don’t worry! It doesn’t take much to fix most of these problems and make better progress toward your financial goals.
In your quest for progress, just remember these wise words from C.S. Lewis…
If you are on the wrong road, progress means doing an about-turn and walking back to the right road.
Maybe it’s time for you to turn around and talk with someone about getting back on the right road.
Together, we’ll explore whether or not an ongoing advisory relationship makes sense in your situation!