“Wise men learn by other men’s mistakes.”
We thought April Fools week is a good time to look at the “foolish” things we do with our money – and how to avoid financial mistakes! Here are ten mistakes that people commonly make with their money:
1. Putting assets at risk by chasing high yields
Too many people are trying to make up for a lack of savings – or a lack of time before retirement – by taking on high risk investments. The ultra-low interest rates on certificates of deposit have also been difficult for those who depend on income from their investments to live on.
A recent Wall Street Journal article lamented,
“What this country needs is a good 5% certificate of deposit. Instead the collapse in interest rates, and the Federal Reserve’s policy of keeping them down for as long as possible, is driving people crazy—especially people who need to generate income from their investments.
“In these circumstances, people start to do really foolish things in the desperate hunt for higher interest rates. That includes taking on crazy amounts of risk, or investing in complex products they don’t understand, in the hope of higher yields. The Fed is producing a bull market in scams, Ponzi schemes and associated rackets.”
The SEC and the WSJ have warned of such products as complex “reverse convertibles” and bogus high-yield “corporate promissory notes” being marketed to investors. The truth is that 4 or 5% with a guarantee of principle beats a high-earning time bomb every day of the week.
It is always wiser to reduce living expenses than chase risky returns. We do recommend some investment vehicles that can bring double-digit returns, such as bridge loan investing and life settlement investing for some of our clients, but they aren’t appropriate for everyone. We also recommend saving in cash value accounts that earn modestly, but still about four times greater what certificates of deposit are currently earning.
2. Not recognizing cost of “0% financing.”
Chances are that the interest COST is being added to the amount of the loan – for example, your $35,000 car bought on “0% interest” likely has a financing fee – perhaps a fee of thousands of dollars – added onto it. (And it might not show up as a “fee” on paper… it may be simply added onto the price of the vehicle.)
Additionally, since you pay the “financing fee” up front, even if the person pre-pays their loan or even sells the car, you can’t reduce it or get it back! 0% financing is rarely what it seems. Rather than a money-saving benefit, it is a marketing gimmick.
Car lots, furniture stores, doctors and dentists often use this strategy, but be on the watch for it whenever you see 0% (or even very low) interest rates. For more information on 0% financing that really isn’t, see this post at TruthConcepts.com.
We recommend that you negotiate best PRICE first, then use the best financing you can find, if needed. Ask “What is the cash price?” first. After the best price is negotiated, then discuss financing.
However, be aware that the advertised rebates won’t apply to financed vehicles. This is because most car companies make more from the financing division than from their manufacturing. So while the cash price may be reduced by a rebate, you’ll pay extra if you ask them to finance the car.
You’ll want to get yourself pre-approved for financing, if at all possible. For instance, if you have been pre-approved for a car loan through your credit union, then you can compare rates, fees, and payments.
Chances are, you can secure better financing on your own than through a dealership. You can also take advantage of a rebate if you are financing the car yourself, because the dealer will receive the cash from your financing source.
Many people also use their whole life cash value accounts to purchase vehicles. Just remember to pay yourself back, just like you would the bank! Otherwise you compromise your savings.
3. Raiding your retirement to send your kids (or yourself) to college.
The cost of tuition and fees at a private university has tripled over the last 40 years—after accounting for inflation. The cost of a public university has quadrupled. The average bachelors degree at a private institution now tops $100k, and you’ll pay more for an ivy league degree.
Financial planners strongly advise parents against plundering their own retirement savings, which they are likely to need, to pay for college expenses. But the real problem here is not simply the price of a college education, but the opportunity costs. (Ignore opportunity costs at your own peril!)
$25,000 for four years (cheap for most private colleges) equals $100,000. But the total cost of the college education is not $100k; it is $100k plus the interest you would have earned on the $100k.
Thus, the cost of paying for a $100k college education will add up to about a whopping $350,000, assuming that the money could have been invested at a 5% return for 25 more years.
Opportunity costs must be considered for the student taking student loans as well. Too many college grads will take decades paying off debt before they save anything more than a small emergency fund, if that.
Admittedly, degrees are needed for most jobs today, but they don’t have to cost a nest egg. Consider beginning a degree at a community college, graduating from a public university (where fees average less than $9k a year vs $30k for a private college), and teaching your student time management by having them work to pay for some of their own expenses.
4. Taking Social Security too early
If you can delay taking your Social Security retirement benefits at age 62, by all means delay. The short-term advantage of having additional income in your 60’s will be greatly diminished by attempts to live within your means later, when inflation will make the task more difficult.
Waiting until you are 70 can actually double your Social Security income. Yes, you’ll miss out on 8 years of payments, but with more and more people living into their 90’s and beyond, the benefits of taking SSI early rarely outweighs the cost. As the Wall Street Journal declared, “For many retirees, the big risk isn’t that they will run out of money before they turn 70, but after 85.”
Consider very carefully the consequences of taking Social Security too early. If you plan on retiring or cutting back on work, Social Security should be used a supplement to your savings, not as a substitute for assets.
If health and employment issues make delaying payments difficult, consider alternatives if possible. For instance, if debt is an issue, consider debt settlement or even bankruptcy before minimizing your future SSI payments. Even waiting until age 66 can mean a substantial increase in benefits for decades to come.
5. Procrastinating on purchasing life insurance.
It’s almost the first question asked when someone tells of a friend who passed away in an untimely manner, particularly when a family is left behind: “Did they have life insurance?”
But the possibility of death is only one good reason to not delay getting life insurance. Waiting ensures that your rates will rise, at least due to age, and possibly due to health issues that can crop up unexpectedly. (Try purchasing life insurance with cancer.) Even something as common as high blood pressure or high blood sugar can raise your rates.
If you purchase permanent insurance, not only can you lock in lower premiums, but you can start building cash value sooner rather than later. Cash value can be used for multiple purposes in any variety of financial needs, from starting a business to getting through a period of unemployment.
If permanent insurance in a desirable amount is not in your budget, you can at least buy term insurance, or supplement permanent insurance with term. But make sure that you are getting “convertible” insurance that can be converted to permanent later if desired.
What Financial Mistakes Are You Making? We’ve all made financial mistakes, and space doesn’t allow us to list all of the possible money mistakes here, but Kim Butler discussed some of these and other mistakes with Todd Strobel on our April 2 Guide to Financial Peace Radio show, “Got Dumb Money Moves?” Additionally, we started the topic on last week’s show about “Avoiding Wealth-Building Mistakes.”
Is it time for a new strategy? Contact us, http://partners4prosperity.com/contact we’d love to help you avoid money mistakes and find effective new strategies for sustainable wealth-building.