These ‘smart’ Financial Moves Aren’t Actually Very Good

One of the most difficult relationships in our lives is the relationship with money. There’s so much money in the world – so much that it’s actually quite difficult to calculate the exact amount – and yet you probably don’t feel like you have enough. Even if you’re quite well off financially, you’re probably not one of the world’s 2,640 billionaires , and probably not even one of the world’s 87.5 million millionaires .

However, you are probably quite confident in your financial competence , since most people are confident of this, despite the fact that financial literacy has declined markedly . Even relatively wealthy people tend to overestimate their financial skills. Money is a tricky thing, and it’s easy to convince yourself that your state of relative wealth is due to your keen financial intelligence and business sense, rather than luck and turning down lottery tickets. This kind of overconfidence can lead to unforced errors—like those financial decisions that seem pretty smart but are actually a little, well, not very smart.

Receiving a discount

One good rule of thumb is to always be suspicious of merchants or lenders who give you offers under time pressure, such as when you’re paying at a store. It may seem like a great idea to get a discount on your purchase in exchange for opening a store credit card or line of credit—that’s free money!

Why it’s actually unwise: It’s only free money if you pay off the balance immediately. If the discount you receive is less than the interest rate on your new line of credit, and you don’t clear this page 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 of people who sign up for deferred interest loans fail to pay them off before the promotion period ends.

Life insurance for children

Insuring your children’s life insurance seems like a good idea – not so much because you plan to profit from their untimely death, but because it covers your children at a low rate and before they develop any pre-existing condition that could limit their lives. opportunity to be covered in the future. Additionally, many life insurance policies can grow to cash value, so they can be considered an investment vehicle for your children’s future.

Why it’s actually unwise: You’re essentially handing your kids bills for life: the benefits of getting insured from an early age only kick in if they stay insured on the same policy, essentially forever. More importantly, the coverage they will receive will be no different than what they would receive under a regular policy, although in fact they could benefit from life insurance. The cost of living will simply be much higher.

No credit cards

Credit cards are one of the most abused instruments in the financial world. They abstract money, making it easy to get into debt, and if you think about it for a second, the interest rates they charge are usurious— the average credit card interest rate is almost 30% . There are so many horror stories about mounting credit card debt that it’s easy to think that the only way to win this game is to not play.

Why it’s actually unwise: Credit cards are a necessary evil in many ways. They’re a key part of your credit score, so if you ever want to borrow money (say, to buy a car or a house), you could be giving yourself a knee by not having a credit card. They’re also practically necessary in the modern world – while you can exist without them, it’s a very good idea to have at least one credit card in your wallet, as long as you have a good understanding of which one and how you use it.

Austerity

If you’re struggling with your finances, trying to reduce debt and deal with a growing pile of bills, you’re probably budgeting pretty rigidly. And it may seem that you should increase your budget, eliminating everything that is not directly related to your survival and paying off debts. After all, eating dry toast and stealing your neighbor’s Wi-Fi for the next five years will be worth it when you emerge, pale and shaking, from your money cave!

Why It’s Actually Unwise: While careful budgeting and eliminating unnecessary expenses is always a good starting point when you’re trying to be financially healthy, cutting out every joy in life almost always backfires—and doesn’t actually help much. The old “make coffee at home” advice definitely won’t make you a millionaire : saving $5 a day is less than $2,000 a year, which isn’t anything , but it’s not a down payment on a house, and wouldn’t be even if you gave up the latte. over the next 20 years. Even worse, giving up any luxuries or treats pretty much guarantees that you’ll give up on budgeting sooner or later. The smartest thing to do is plan your spending on luxury items so that you don’t spend too much money on them, rather than cutting out all the joys from your life.

Borrowing from 401(k)s

There will always be times in your life when your retirement savings begin to look like the solution to your problems. Whether it’s paying off credit cards, putting together a down payment on a house, or paying off medical bills, many of us— up to 40% of us , in fact—treat our 401(k) as a savings account rather than a retirement account. At the end of the day, that money may benefit Future Us, but Now Us needs to pay for things.

Why it’s actually unwise: About 86% of people who take out a 401(k) loan default on their loan . Not only will this completely ruin all the benefits of having a 401(k), but you’ll also suddenly be on the hook for all the taxes you didn’t pay on that money. Future You will be extremely angry at You Right Now when they live in a van by the river.

Buying a house

Houses are expensive . However, we all need to sleep inside something , which is why buying a home remains a popular activity for those who can accumulate the mixture of cash and credit required to purchase it, and owning your own home is often seen as a smart investment. After all, home values ​​are fairly stable, so the $300,000 home you buy today could sell for a profit in a few years.

Why it’s actually unwise: Except you probably won’t make a profit. First, the stunning rise in house prices over the past few decades was largely an illusion due to falling interest rates – and the party appears to be over. Additionally, appreciation and mortgage payments are only part of the picture. Inflation plays a role in how valuable your biggest asset will be when you try to sell it, and the cost of maintaining a home can be significant, eating into any profit you think you’re making. There are many, many good reasons to buy a house – for housing; a place to take graduation photos and host birthday dinners; as an asset that you can use as collateral, but investments should not be one of them.

Having a savings account

Saving money is always a good idea, and it’s important to have an emergency fund that you can quickly access when you need it. So keeping some sort of savings account is always a good idea, and since these accounts do pay interest, many people put a lot of cash into them, feeling good about getting the interest paid, just to be prepared for the future.

Why it’s actually unwise: Savings accounts pay terrible interest rates – averaging around 0.59% (yes, that’s less than 1%). Some online banks offer much higher interest rates in the 4-5% range, which is better but still not quite a bonanza. Once you reach your emergency fund goals in your savings account, you should direct all that money you invest into investments. Even a simple investment strategy can provide an average return of 10% over the long term.