In life, we all make questionable decisions like that time you took back your ex when she promised to never key your car again. Unfortunately, while some bad decisions can be rather inconsequential, others can have crippling effects on your life. As such, knowing which decisions will impact you the most and how to get them right is key to achieving financial success and here are 5 money decisions that most people get wrong which you would be best to avoid!
Decision #1: Paying on credit versus cash
When most of us go to buy something these days, the process is basically automatic. You pull out your payment method of choice, hit a couple buttons, complete the transaction and move on with your day. It seems simple enough, right? Well, yes it’s simple but even a simple process like the one I just explained can be mishandled without proper guidance.
You see, I think one of the biggest falsehoods in the world of financial advice today is the notion that credit cards are bad or evil. I don’t know about you but when I swipe my credit card at the store or punch in its numbers online I don’t get demonishly possessed or go into a fit of rage. All crummy jokes aside, I do see why some financial experts advise people to be careful with their credit cards. Yes they can lead to overspending and they do come with ridiculously high interest rates but that’s like saying you shouldn’t drive a car just because it goes fast and you can get into an accident when doing so. Life is about managing risk and the use of credit cards is just another risk I believe you should be taking.
So why am I so bullish on spending on credit cards over something like debit or cash? Well, I am glad you asked! Look no further than the numerous benefits you get when spending on credit and it will all start to make sense. Want rewards for spending money? Use a credit card. Want some sort of recourse if you are scammed into an unwanted purchase? Use a credit card. Want to ever borrow money but need credit to do so? Use a credit card.
Now, let’s look at what paying cash gets you. A lighter wallet. That’s it. I guess if you wanted to lose weight, spending cash is the go to move but beyond that there is no real benefit even if studies say that it could cause you to spend less when you are actually handing over real cash.
Therefore, unless you make up the small percentage of people who become possessed by spending demons when they get their hands on a credit card then chances are the right financial decision for you is to use credit cards when spending and enjoy all the benefits that their use can offer!
Decision #2: Actively or Passively Investing
Picture this. You’re about to run a 100M race and the grand prize for winning is a lifetime of financial riches. You’re about to set up at the blocks and right before you kneel down someone comes and puts a weighted vest on you. The race starts and due to the weight you come dead last and fail to win the grand prize. Pretty tragic right? I guess it isn’t given that this is a fake scenario but I’m sure you can imagine how harrowing this would be if it happened in an area of your life that would impact your long-term financial well-being.
Well, when you actively invest, you are in many ways strapping on a weighted vest and that vest will slow down or completely halt any financial progression you’re looking to gain. Now, before I explain what I mean by this, let’s first go over what it means to be actively investing. Active investing involves employing a hands-on approach to investing. Think of Uncle Frank who is constantly buying and selling stocks that his buddies at the gym recommend to him. Passive investing on the other hand involves buying pre-established funds and holding for the long-term (think index or mutual fund investing).
Now, it’s pretty obvious why active investing isn’t working out for Uncle Frank (because he’s an idiot) but you may be wondering why this is far from advisable for most people and I’ll get into that now. The first issue with active investing and why it can be a less than ideal decision is that most people don’t set themselves up to succeed. For instance, like Uncle Frank, they invest based on unfounded advice. It’s the blind leading the blind and I think you can see how that can steer you wrong (pun intended).
Next, active investing requires proper timing. When you think about flipping a coin, most people understand that your chances of calling the right side in one instance is 50/50. However, your chances of calling it right more and more consecutive times starts to decline as the game goes on. Well, the same thing happens with active investing. Sure, you have a 50% chance of timing your purchase properly but then you need to time the exit as well so all of a sudden making the right decision on both ends falls to just a 25% chance of being right. As you can see, even though on the surface, timing the market seems rather easy, the math isn’t in your favour.
Finally, whenever you take an active investing approach, you subject yourself to two unfortunate costs: transaction fees and your sanity. I don’t think I am telling you anything you don’t know when I say that it costs money to execute trades which will result in more fees as you trade more often however the other cost to consider is your sanity. Attaching your emotions to your stock holdings and trying to time when to buy and sell will have your blood pressure at hypertension levels and if you ask me, no amount of returns is worth compromising your health. It’s for this reason that investing passively and letting the fund do the work is what tends to be best for most people but ultimately this is a choice you will have to make for yourself!
Decision #3: Buying or Renting A Home
Don’t go to college? You’re a failure. Don’t earn 6-figures by 30? You’re a failure. Don’t own the nicest home on your street? You’re a failure! There are so many social expectations these days that are harming the mental and financial health of young adults that it’s no wonder we are all stressed and unhappy. Now, as much as society wants us to push the limits of our mortgage approval and buy the biggest house on the block, we need to take a step back and look at whether buying a house even makes sense in today’s day and age.
I’ll be the first to admit that there is a ton of pressure on young people to buy a home even if it’s not the right decision for you personally. Now, what makes it a right or wrong decision? I’m glad you asked. First, we all have different life aspirations. Some people may have a stable job in a city they love and plan to live in forever and for those people, owning a home may make sense. However, for Luke the world traveller, owning a home may be less practical as he is constantly looking for new adventures in different cities and countries. However, location is just one of the considerations that should rattle in your brain as you consider buying or renting a home.
What about responsibility? Are you ready to deal with pipe breaks, busted air conditioners, redoing the siding on your home or do you prefer having your living quarters being run like an in and out hotel room. I know for myself, there was no way I wanted to shovel or maintain a yard at 28 years old which is why I opted to buy a condo over a freehold and why I’ve rented in the past to again avoid as many “adult” responsibilities as possible.
At the end of the day, buying or renting is not just a financial decision. The choice requires you to balance your financial and lifestyle needs and this decision should strictly be your own (even if your parents want you to own a white picket fence home).
Decision #4: Investing or Paying Debt
In the past year, the number of new investors has hit record highs and as someone who is all about more people taking control of their financial lives, I am all for it. Unfortunately, for many of these investors, focusing on investing is like worrying when the light will turn green when your car is on fire — you’re focused on the wrong thing.
Again, I am all for people wanting to get into the investing game especially when they take the time to educate themselves and make the best financial decisions possible however sometimes inaction is the best action. What do I mean by this? Well, before investing, you need to ask yourself if there are any other financial priorities that should be taken care of first. For instance, if you don’t have even a penny set aside for emergencies then putting $1,000 into Tesla stock probably isn’t the smartest move. Now, another financial obligation that may be worth tackling prior to investing is your debt. Notice I said “may be” because the decision to pay off debt rather than invest is one with nuance.
As you know, debt can come in many different forms. You can have student debt, auto debt, lines of credit, mortgage or those criminally offensive payday loan debts. All these debts come with different terms and more importantly different rates of interest. This interest rate is a key factor in the decision to pay off your debt or invest instead. For instance, if you can invest in an asset that is expected to yield a 10% return then it makes sense to pursue that option over paying down your 2% student loan. Alternatively, if you are neck deep in 20% credit card debt then all of a sudden that 10% investment should probably take a backseat. Therefore, like many situations in life, the right decision is not black and white. While we all want clear lines to follow, this isn’t one of those cases therefore, before deciding to invest, ask yourself if there are other financial obligations that need to be met first and then, and only then, should you consider handing over money to help fund the next Tesla truck or roadster.
Decision #5: Paying versus Learning For Free
I’ll be the first to admit that I love free stuff. In a world where there is no free lunch, those rare moments where you get something for free are moments to relish in. However, over time I came to learn that even free things come with a cost, one that is often hidden from the untrained eye. The lesson that I came to learn over time and one that you need to be aware of is “you pay attention to what you pay for” and if you don’t already live by this mantra then you definitely should.
You see, in life we tend to value things that come with some sort of cost. For instance, you will probably value a new job more if you have to go through five grueling interviews to get it rather than if it’s handed to you on a silver platter. The cost in this case, is your effort. Alternatively, you will probably be more invested in a partner you had to court for months rather than one that pursued you. The cost here is of course your time…and probably the cost of numerous dates, flowers and boxes of chocolate. In short, we value things that come with some sort of a cost and place more attention on said things.
Well, the same goes for learning and as you already know, the more you learn the more you earn which is why understanding the psychological impacts of the resources we use to get ahead financially is paramount. Fortunately, or unfortunately, I know how the cost of information and advice impacts action or inaction as someone who creates content online. In both my videos and my online courses, I share information that helps people build businesses, manage their finances and at a higher level improve their financial lives. Some people who consume my content see amazing improvements in their financial lives while others continue to dwindle in financial despair. What separates these two groups? You guessed it, their level of investment.
Those who pay to buy my course or get private coaching are always the ones who prosper the most because they have skin in the game and as such have a greater desire to get a return on their investment. Unfortunately, those who only consume free advice overlook the cost of their inaction and relegate themselves to continued financial mediocrity. From my personal experience, the only difference between those who get ahead in life and those who don’t is that those who succeed take those first steps that others fail to take. Unfortunately, when you devalue the resources that can help you make the necessary changes you need to be making, you act as your own worst enemy which is why if you ask me, paying to play is almost always the right move if you’re trying to see positive change in your life!