When it comes to money, there are some general rules that most people advise you follow like spending less than you make and investing in your retirement as early as possible. Both of these pieces of advice is very useful however there exists many other very powerful pieces of advice that the majority of people simply don’t know which, if used, could dramatically change the trajectory of their financial success. Here are seven of the money traps I personally find the most deleterious to financial success that I hope by sidestepping can expedite your path to riches!
Mistake #1: Getting The Most Education Possible
If you want to succeed in today’s world you must go to college and get a great education. This is advice that has been passed down from parent to child for countless decades. Because this path has become engrained in our society, many people continue to go down this road. However, with more and more people getting degrees, the value of this certificate has declined in its value. It’s for this reason that people are now pursuing more education to separate themselves from the pack. In the business world we live in today, it may take that advanced degree or extra certificate to help you stand out from other applicants when trying to get that job you’ve been pursuing.
Now, in many cases, getting more education is a smart decision. You can’t become a doctor or lawyer without an extensive education but pursuing numerous degrees doesn’t always make financial sense.
Student loan debt is now the second-highest form of debt in the United States after mortgage debt. It has surpassed both auto loan debt and credit card debt, with over $1.52 trillion owed in 2018, according to Forbes. That comes out to an average of $37,172 per graduating student. Quite frankly, it’s a financial epidemic.
Before getting into any student debt at all, I think it’s smart for students to take the time they need to truly deliberate on the career they want to pursue. This could come in the form of job shadowing or taking a gap year before enrolling in college. Before throwing down thousands of dollars, you should have a very good idea of what field you want to pursue and specific jobs you could see yourself working in upon graduating. Of course, once you have this nailed down you need to know how you will finance your tuition and sadly this is no small feat! In a perfect world, you could work during the summer and have enough money to cover your tuition and living costs but sadly with today’s inflated education costs this simply isn’t feasible.
In fact, in my opinion, college has become outrageously expensive. The average cost of one year’s tuition and fees at a private college for the 2018 to 2019 school year is $35,676. Even if that cost stays frozen for the next four years — which it won’t — that would come to $142,704 over four years. There’s no way that a young adult working at student wage can save that amount of money to fund their tuition.
This is why you must be analytical when considering taking on a new degree. While a college degree is useful across many fields, master’s and other advanced degrees are generally not. Before you make any decision on getting more education, I think it’s wise to do a cost benefit analysis. Identify the total cost of the program you want to take and then the increase in income this degree will give you. For instance, my CPA designation cost me roughly $25,000 but it has allowed me to make at least that much per year more than I would if I would have only pursued a bachelor’s degree. Therefore, while education is good, more may not always be better!
Mistake #2: Paying Off Your Mortgage ASAP
For most people, when they buy their first home, they feel an overwhelming sensation to pay down their mortgage as quick as possible. Maybe they were raised to believe that all forms of debt are bad or want to rid themselves of the financial pressure that comes with having a large loan. Whatever the case, paying down your mortgage as quick as possible isn’t always the best strategy if you want to maximize your financial success. In fact, the decision to pay down your mortgage as your main priority or use your cash for other purposes should take into account a few factors.
The first factor to consider is what you’re paying in interest. At a 3.5% interest rate, for example, you can effectively earn a 3.5% return by paying off your mortgage early. But you can almost certainly earn higher returns by investing that money elsewhere, such as the historical 7% to 10% returns offered by stocks.
If you’re paying 7% interest on your mortgage, that’s a different story. You may decide that a guaranteed 7% return by paying off the mortgage appeals to you more than chasing possible 7% to 10% returns elsewhere.
Another factor to consider is your age. The older you are, the less time you have to recover from losses, and the more vulnerable you are to sequence of returns risk. At 65, your risk tolerance is lower, and paying off your mortgage has a guaranteed return on investment by reducing your living expenses. At 25, however, why not chase those higher returns by investing aggressively? You have less to lose and more time to make it up.
The final factor to consider is the psychological impact carrying your debt has. For some people, carrying a mortgage doesn’t bother them but for others, the thought of owing a bank a thousand dollars or more a month for 25 years is stressful and while I just said that it can be more lucrative to invest your money in the market than use it to pay down your debt, sometimes you need to make financial decisions that help you prosper mentally rather than financially. In this case, paying down your mortgage sooner may give you the peace of mind you need and allow you to lock in a return equal to your mortgage interest rate.
Mistake #3: Not Discussing Money With Friends & Family
Many people grew up where their household looked down upon money, calling it the root of all evil and having negative emotions towards it probably because they weren’t living in financial abundance. Unfortunately, money has grown to become a taboo subject amongst not just strangers but friends and family as well and while it’s tacky to brag about how much you make, there are times when talking about money can be very beneficial. For example, sharing budgeting strategies, investing tips or tax strategies with a friend can help them protect and grow their wealth and strengthen your friendship at the same time.
There’s an old adage that says, “Smart people learn from their mistakes. Wise people learn from others’ mistakes.” If we don’t discuss our experiences and financial strategies with others, we deny ourselves the chance to learn from each other’s mistakes.
I find it incredibly sad that so many people feel like they’re going it alone financially, suffering in silence and isolation. You’re not alone. Several of your friends and family members are going through similar struggles, but they’re reluctant to admit it or talk about it, just like you are.
Open the doors to start talking about money gradually. Share one of your long-term goals in an aspirational way, rather than a bragging way. Ask people for their experiences and opinions. For example, you might say, “We’re trying to tighten up our spending to save enough money to buy a house next year. It seems like you’ve done a good job with your budgeting; where were you able to cut back without losing your quality of life?”
You can share tips and ideas and hold one another accountable when you’re open to discussing money with friends and family. Just remember to never judge others and never show off financially.
Mistake #4: Pay With Credit As Little As Possible
There is a large group of people who believe that credit cards and the consumer debt that goes along with them are evil and in some cases they’re right. Carrying credit card debt of 21% is no fun and perpetually carrying this high interest debt will ruin your ability to grow your wealth. However, the people who are the most against this purchasing tool are generally those who have trouble controlling and managing spending. They simply cannot resist pulling out their credit cards to buy new items, not even considering whether they have the means to actually afford it.
For these types of people, yes, credit card spending isn’t the best strategy but for those who are more diligent and disciplined, credit cards offer a wide variety of benefits.
First, paying on credit, when paying on time, helps you build credit. This credit is essential when applying for mortgages, jobs or even trying to sign up for a cellphone plan.
Next, is protection from fraud. If your card is compromised, you can have the card issuer investigate the situation and reverse the charges which is not always something you can do on debit. The next obvious benefit are the rewards. From free flights to cashback, picking and using the right credit cards can be very lucrative especially if you have a lot of monthly expenses to charge.
Finally, paying on credit grants you short-term financing. Buy something at the start of the month and you will typically have 30 days to come up with the funds to cover the purchase (however if you’re doing it right you already will). Therefore, unless you lack purchasing willpower, there is no reason to avoid using credit cards.
Mistake #5: You Must Follow The Rule of 100
The “Rule of 100” dictates that you should subtract your age from 100 to determine what percentage of your portfolio you should invest in stocks. The rule goes on to say that the rest should be invested in bonds. It’s nice and neat and simple but it’s also bad advice.
Life expectancies are higher today than they were a generation ago, and bond returns are lower. That means that investors should invest more in stocks if they want to have the value in their portfolio they need to cover themselves financially into their old age.
A better rule would be 120 minus your age to determine your stock exposure, or 110 minus your age if you’re more conservative. This ignores other asset classes, however; I personally invest in real estate to serve a similar purpose as bonds in my portfolio. As you get older, rebalance your portfolio periodically to ease your investments into more conservative assets. But don’t be too conservative, or you risk anemic returns.
Mistake #6: You Should Spend 25%-30% of Your Income on Housing
In an ideal scenario, you’d spend 0% of your income on housing by either house hacking or taking a job that provides free housing. However, reality is rarely ideal.
In some wildly expensive markets like San Francisco and Manhattan, single renters may not be able to find even a room for less than 50% of their net income. Housing costs are a problem for younger adults especially; USA Today reports that today’s 30-year-olds have spent an average of 45% of their total lifetime income on rent.
What people so often ignore about budgeting is that it’s a zero-sum game. If you spend more on housing, you have less to spend on transportation, food, entertainment, clothes, and investing to build wealth. That makes housing part of a larger lifestyle equation. A Manhattanite who spends 50% of their income on rent likely forgoes a car, so instead of spending $9,576 a year on transportation like the average American, they may spend $200 a month on public transportation.
But, if you can arrange to spend less than the traditional 25–30% on housing costs, don’t feel as if you need to make up the difference by spending more in other areas. Use these low housing costs to your advantage so you can save and invest more and make the financial strides that will help you meet all your money goals!
There you have it, 6 money traps you must watch out for!