One of the most complicated relationships in our lives is the one we have with money. There’s so much money out there in the world—so much that it’s actually pretty difficult to figure out an exact total—and yet you probably don’t feel like you have enough of it. Even if you’re pretty comfortable financially, you’re likely not one of the world’s 2,640 billionaires, and probably not even one of the world’s 87.5 million millionaires.
Still, you’re probably pretty confident about your financial competence—because most people are, despite the fact that financial literacy has measurably declined. Even people who are relatively wealthy tend to overestimate their money skills. Money is tricky stuff, and it’s easy to convince yourself that your state of relative affluence is due to your keen financial mind and smart business sense instead of a dash of luck and an avoidance of lottery tickets. That kind of overconfidence can lead to unforced errors—like these financial decisions that seem pretty smart but are actually a little, well, less-than-smart.
Getting a discount
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One good rule of thumb is to always be suspicious of merchants or lenders who spring offers on you during time-pressure scenarios—like when you’re checking out at a store. It can seem like a great idea to snag a discount on your purchase in exchange for opening up a store credit card or credit line—it’s free money!
Why it’s actually not smart: It’s only free money if you pay off the balance immediately. If the discount you get is less than the interest rate on the new credit line and you don’t wipe that slate clean immediately, you’ll actually lose money. Even if you get a promotional 0% interest rate, chances are you’ll still pay interest on it, because up to half the folks who sign up for deferred interest loans fail to pay them off before the promotional period ends.
Life insurance for kids
Life insurance for your children seems like a good idea—not so much because you plan to profit from their untimely demise but because it covers your kids at a low rate and before they can develop any sort of pre-existing medical condition that might limit their ability to get covered in the future. Plus, many life insurance policies can grow to have a cash value, so they can be viewed as investment vehicles for your children’s future.
Why it’s actually not smart: You’re essentially handing your kids a lifetime of bills: The benefits of being insured from a young age only work out if they remain insured under the same policy, basically forever. More importantly, the coverage they get won’t be different from what they could get from a regular policy when they might actually benefit from life insurance. It will just have a much higher lifetime cost.
Having no credit cards
Credit cards are one of the most abused tools in the financial world. They abstract money, making it easy to fall into debt, and if you stop to think about it for a second the interest rates they charge are usurious—the average credit card interest rate is nearly 30%. There are so many nightmare stories about spiraling credit card debt it’s easy to think that the only way to win this game is not to play.
Why it’s actually not smart: Credit cards are necessary evils in a lot of ways. They’re a key part of your credit score, so if you ever wish to borrow money (say, to finance a car or a house) you can kneecap yourself by not having a credit card. They’re also nearly necessities in the modern world—while you can exist without one, it’s a very good idea to have at least one credit card in your wallet, as long as you’re smart about which one and how you use it.
If you’re struggling with your finances, trying to reduce debt and tackle a growing pile of bills, you’re probably budgeting pretty hard. And it might seem like you should budget harder, cutting out anything that isn’t directly related to your bare-bones survival and debt clearance. After all, eating dry toast and stealing your neighbor’s wifi for the next five years will be worth it when you emerge, pale and shivering, from your money cave!
Why it’s actually not smart: While careful budgeting and eliminating unnecessary expenses is always a good starting point when you’re trying to be financially healthy, giving up every single joy in life almost always backfires—and doesn’t actually help much. The old “make coffee at home” advice certainly won’t make you a millionaire—saving $5 a day is less than $2,000 a year, which is not nothing, but also isn’t a down payment on a house, and won’t be even if you skip the lattes for the next 20 years. Worse, denying yourself every luxury and treat will pretty much guarantee that you give up on your budgeting sooner rather than later. The smarter play is to budget for your luxuries so you don’t overspend on them—not eliminate all joy from your life.
Borrowing from 401(k)s
There are always going to be moments in your life when any retirement savings you’ve accrued starts to look like the solution to your problems. Whether it’s paying off credit cards, gathering a down payment for a house, or taking care of medical bills, many of us—as many as 40% of us, in fact—regard our 401(k) as a savings account instead of a retirement account. After all, that money might benefit Future Us, but Right-Now Us needs to pay for stuff.
Why it’s actually not smart: About 86% of folks who borrow from their 401(k) default on the loan. Not only will this absolutely wreck all the advantages of having a 401(k) in the first place, but you’ll also suddenly find yourself on the hook for all the taxes you haven’t paid on that money. Future You will be extremely pissed off at Right-Now You when they’re living in a van down by the river.
Buying a house
Houses are expensive. We all need to sleep inside something, though, so buying a house remains a popular activity for those who can scrape together the mixture of cash and credit needed to acquire one—and owning your home is often perceived as a smart investment. After all, homes appreciate pretty steadily, so that $300,000 house you buy today can be sold for a profit in a few years.
Why it’s actually not smart: Except, no, you probably won’t make a profit. For one thing, the astounding appreciation of home prices over the last few decades was largely an illusion due to falling interest rates—and the party appears to be over. Plus, appreciation and mortgage payments are just part of the picture. Inflation plays a role in how valuable your biggest asset will actually be when you try to sell it, and the carrying costs of a house can be considerable, eating into any profit you think you’re making. There are many, many good reasons to buy a house—for shelter; for a place to take prom photos and host holiday dinners; as an asset you can use as collateral—but an investment shouldn’t be one of them.
Having a savings account
Saving money is always a good idea, and having an emergency fund you can access quickly when you need to is important. So maintaining a savings account of some sort will always be a good idea—and since these accounts do pay interest, many people shovel a lot of cash into them, feeling good about getting paid interest just to be prepared for the future.
Why it’s actually not smart: Savings accounts pay abysmal interest rates—about 0.59% on average (yes, that is less than 1%). Some online banks offer much higher interest in the 4-5% range, which is better, but still not exactly a bonanza. Once you hit your emergency fund goals in your savings account, you should shift all that money you’re shoveling into investments. Even a simple investment strategy can produce an average return of 10% over the long haul.