Over the years, you’ve probably made a number of unwise money decisions and blunders you’re not particularly proud of.
Let’s take a look at some of the silliest money mistakes we’ve all done or seen and see what useful life lessons we can take from those.
Buying A Timeshare
For those who like to travel frequently and also have the budget to support that lifestyle, vacation time shares might be a reasonable move. However, at certain points in life– young, early career, modest incomes – you’re not the ideal candidate.
You must also pay attention to the ongoing additional fees often tied to timeshare ownership and how illiquid these “investments” are. As anyone who has ever tried to sell a timeshare to someone else can tell you, the supply greatly outstrips demand. In other words, selling your timeshare is close to impossible. If you do find a buyer, expect to sell at a very deep discount to what you likely paid for the property.
What is the financial lesson? Never make a major financial commitment driven primarily by emotion. On a vacation in a beautiful location, you’re all too agreeable to an opportunity to repeat that experience. Marketers, of course, are very aware of this.
It is much better to first say no and then take plenty of time (days, weeks, or even months) to think things over before committing thousands of dollars to purchase something you may or may not use or continue to enjoy as much as you originally thought. As a result, you can avoid the purchase of numerous boats, campers, and vacation homes.
When you want to vacation in a fun location, plenty of economical rental choices are available through sites like Airbnb.com or VRBO.com without the long-term commitment or expensive maintenance fees.
Student Loans (sometimes)
Student loans can be a good investment. For a relatively modest interest rate, in today’s environment at least, you can leverage other people’s money into an education that boosts your future income significantly, making the comparatively small amount of interest you pay in the short run well worth it in the long run. However, like any financial tool, student loan debt can also be abused or misused.
For example, at one point in a career, you may decide earning an MBA might be a good move and apply for student loans to help finance the venture. Along the way, however,your career ambitions may take a different track. Although you abandoned the MBA pursuits, the student loan debt used to finance that pursuit remains and still has to be paid.
The financial lesson here is to carefully consider the commitment of time, effort, money, and ongoing personal motivation needed to make a particular career choice work. If a substantial amount of student loan debt will be necessary to obtain a degree, you need to be prepared to remain committed to that career choice, at least until you can repay the student loan debt. Otherwise, you will very likely be stuck with paying for a decision error over many, many years with zero return on your investment. Another consideration is whether or not the degree you are pursuing really has the future income potential to justify taking on large amounts of debt to finance it.
To Err Is Human
Here are a few of the more common silly money mistakes that can provide helpful lessons:
- Carrying Long-Term Credit Card Debt – The insidious evil of carrying credit debt month after month is the reverse compounding effect. Just as positive compounding helps us become wealthy by earning interest on interest, the reverse is true of debt. The negative compounding begins to make our credit purchases exponentially more expensive over time. Transferring balances to a 0% balance transfer card or otherwise refinancing to a lower interest rate is a good start to reducing our debt risk.
- Lending Money To Family – Money decisions driven by emotion rarely turn out well, and what gets more emotional than a plea for money from a family member? If you do lend money to family, most planners recommend formalizing the loan with a written agreement that includes at least a modest amount of interest. Practically, however, treat it the same way you would treat giving money as a gift. Make sure your family loan won’t negatively impact your own cash flow if your family member borrower cannot or does not pay you back. These arrangements work best if you don’t expect to receive the money back in the first place.
- Borrowing From Your Retirement Plan – On the surface, borrowing from your traditional 401(k) or 403(b) savings plan at work might seem harmless, but it has some obvious and not-so-obvious risks. On the positive side, you are borrowing your own money and paying yourself back with interest. Furthermore, doing this will not affect your credit score one way or the other. However, you will be paying your retirement plan loan interest with after-tax dollars. The not-so-obvious downside to this strategy is that these same after-tax dollars you used to pay the interest will be taxed again when you eventually spend this money in retirement.
Although our individual “silly money mistakes” may have been expensive, they do not need to be permanent, and we can always learn from them.