You’re doing it wrong! Not you, singular; but you, collectively. Among you, there are people undermining their personal wealth by doing things that seem like good ideas, but, in hindsight don’t really work out that way.
Here are ten things you might be doing, and why not to do them. (We’ve covered some of these in other posts, so this is primarily a handy checklist.) If you are not doing any of these, take a victory lap!
01. Spending more than you make
No explanation needed. Don’t do that! Even if you like buying things, or don’t have much income, or hope to get a better job soon. Make a budget, and stick to it. Make automatic savings contributions before you even look at your checking account balance. Establish and maintain an emergency fund. If you rely on a payday loan to avoid eviction, you’re doing it wrong.
02. Financing a car that is too expensive
For example, one that costs almost as much as your annual take-home pay, even if it’s really cool, or one you’ve always wanted, or you want a warranty. Please don’t do that. You can’t afford it; you’ll be underwater and can’t pay off the loan even if you sell the car; your insurance will be too expensive. You can get a reliable used car for under $10,000.
03. Carrying a balance on your interest-bearing credit card
Because you think it improves your credit history/score. It doesn’t. You just pay interest. You want to use a card to generate positive history, but you also want to pay off an interest-accruing card in full. Every month. No exceptions. And yes, that means you can’t use credit to finance your lifestyle (see point 1).
04. Taking out a loan to establish your credit history
You do not have to do that, when you can do the same thing with a credit card that you pay no interest on. Taking out a car loan as your first credit transaction is a very expensive mistake. A car loan with a double-digit interest rate means you are doing it wrong.
05. Not taking the match from your 401k
Even if you watched John Oliver’s show about 401k fees and you are now a born-again mutual fund expense watcher, please, please take any match your employer gives in your 401k. Even if the fund choices have 2% fees, it’s still free money. Even if you have expensive credit card debt, which you shouldn’t, the match is probably still the right move. You could be making 50% one-time gain on your money; that will cover a lot of fees.
06. Cashing out retirement funds
Don’t cash out your retirement funds to pay for things, or when you change jobs. This is almost never a good idea. Even if you can do it, you shouldn’t. That $20,000 in the 401k from the job you just left looks like it might be a good way to make a down payment on a house. Don’t be tempted. It will be much more valuable to you as $100,000+ when you retire, than as the $12,000 you’d be left with after paying taxes and penalties on it in the 25% federal and 5% state bracket.
07. Buying a house only to avoid paying rent
I have seen people buying a house they can’t afford only to avoid throwing away money on rent. You need to live somewhere. Renting is almost always cheaper if you aren’t sure where you want to live two, three or even five years in the future. Your transaction costs to purchase and then sell a property are “thrown away”, as are your payment towards interest, taxes, insurance, maintenance and repairs. Renting it out later isn’t as easy or profitable as it sounds, either. Even in a hot market, appreciation is not guaranteed, and major repair expenses are not always avoidable. Buy a house if you can afford to, and you know you want to live somewhere indefinitely, not to save on monthly payments. Owning a house is financially better as you own it longer. Over a short interval, monthly payment calculations alone are not enough to prove ownership is financially better than renting.
08. Co-signing loans you shouldn’t
While there can be some limited reasons to co-sign a loan, e.g. for your child, never co-sign a loan just because your significant other has no credit, or your parents want a better interest rate. If they need a co-signer, it’s because they are a poor credit risk. Once you co-sign, you are on the hook for the whole balance, even if you don’t have access to what the money went towards.
09. Paying financial planner high fees to invest in mutual funds
Paying a financial planner to invest your money in a mutual fund with a 5% up-front fee is not a good idea. Despite what you might have been told, this is never necessary, and doesn’t help you in any way. You can buy alternatives with no up-front fees, and lower ongoing expenses.
10. Buying whole life insurance
Don’t buy whole life insurance from someone you knew in college to “jump-start your financial future”, even if you have no dependents. You do not even need life insurance until you have responsibilities after your death. If and when you do have them, term life insurance is much more cost-effective. Politely decline the invitation to a free financial planning session from your old fraternity brother.