The dumb things : Smart people do with their money

Many smart people make many costly financial mistakes

Randy worked as a senior loan officer at a big bank in the late 90s and early 2000s. His primary role was to receive applications from small businesses and determine the financial eligibility and feasibility of granting loans. By 2003, Randy decided to quit his job to open his consulting firm. His company prospered to the point that his income increased from $150,000 — $300,000 or more. This afforded him and his family a comfortable lifestyle.

Failing to purchase the right insurance or to invest wisely is just 2 of the many dumb mistakes that smart people make.

Randy was doing well financially with good plans, but he was reluctant to have disability insurance. Then, in 2006, Randy was diagnosed with multiple sclerosis. His health was deteriorating so much that at one point, he couldn't control his balance and would fall easily. Although Randy could still work, he couldn't attend to many clients, and he couldn't do much travelling for his job. This greatly affected his income; he started earning only $75,000 yearly. Randy's health issues were devastating to his family, especially the financial implications that came with it. If Randy had taken disability insurance very seriously, he would have received monthly payments that would be almost equal to his yearly amount. Without the insurance, he was in trouble. Randy's wife tried to bridge the gap, but her efforts weren't enough. So, as time went on, Randy had to make use of his $500,000 in non–retirement savings. But that meant that by the time Randy would be 65 years, his savings would be gone. He realized that he had made a big mistake, one that cost him big–time.

In this summary, Jill Schlesinger explores many surprising errors that smart people like Randy make with their money. She explains the underlying psychology that might be causing these mistakes, and she offers guidance on how to do better.

With more investment options available now, it’s easier for people to get confused and make bad decisions

In a bid to protect and build wealth, many people end up losing it. The financial product you purchase can ruin your finances. Hence, it is of utmost significance that you get a complete understanding of any product you want to purchase. Many smart people are enticingly drowned in products such as annuity, reverse mortgage, and gold trade.

For example, gold sounds like a reasonable investment which is undoubtedly true. However, gold isn’t nearly as safe as it seems. All commodities are volatile, which makes them vulnerable to losing value over time. For many reasons, gold is just the wrong financial product to purchase because it doesn’t create income by paying interest or dividends. Although a great way to build your finances with gold is to invest in a gold exchange–traded fund (ETF); it is a pooled investment, and it can be traded more like a stock.

Jill Schlesinger emphatically expresses her disbelief in reverse mortgages, especially when young adults involve themselves in such schemes. However, it may work for older people who have built significant equity in their homes but don’t have enough retirement income to draw on month to month.Before taking out a reverse mortgage, ensure that you do proper research on the mortgage plan, understand fully what you’re getting into, and why it makes sense or doesn’t.

Many intelligent people get lured into money–losing hedge funds, reverse mortgages or gold, because they are afraid of not achieving their financial dreams — fear sneaks under the surface when people begin to get bored by their finances. To avoid this, surmount your boredom and give quality time to reading the blueprints. Ask the provider of the financial product as many questions as you can. The Big 5 Questions — How much is the financial product? What are the alternatives to this product? How easy can I get my money out of this investment and the implication of withdrawing? What task can the product bear? What is the worst situation that may result from this financial product?

Never get drowned in fear of what may befall your finances; by doing this, you may eventually avert a dumb mistake of getting a financial product that would ruin your finances.

Taking advice from the wrong financial adviser can cost you money without giving you an added benefit

Before accepting anyone as your financial adviser, you should be able to provide adequate answers to these questions:

• Is your prospective adviser obliged to put your interests first at all times?

• What professional certifications does the adviser have?

• Has the adviser ever been sanctioned for unethical conduct, and is he/she licensed and registered?

• Would others gain from the advice he/she gives?

Everyone needs a professional adviser, especially if the following holds for you:

• You have consumer debt such as credit card debt, student loans, and auto loans.

• You are not maxing out of retirement contributions.

• You don’t have an emergency account with enough money in it to cover six to twelve months of expenses.

Jill Schlesinger thinks that you only need a financial adviser after tackling “The Big 3” criteria above. No matter your current financial status, you should endeavor to seek advice when encountering extraordinary and complex situations about which you have little or no knowledge.

Negative feelings can prevent us from getting the financial advice we need, so do not give in to your negative emotions. You can take a throwback thought and critically assess your daily routine and current financial state. This would help you come to a firm conclusion of getting an adviser. However, ensure that the adviser is a capable one.

It is a bad idea to give money an outsized significance because it leads to bad financial decisions

When we place so much value on money, we can easily get stuck and act obsessively, leading us to make wrong decisions in certain financial situations. The in–depth causes of our tendency to give an outsized significance to money are many complex and interwoven.

Parental influence has a lot to do with a child’s behavior toward money. Our parents have inculcated in us the notion that money is all that matters in life. Hence, as an adult with such a worldview, you might be overly concerned about your financial state while sacrificing the other joyful moments of life in the process. Also, previous life experiences, especially traumatic experiences, could trigger us to overvalue money. In essence, a sudden positive change in your financial state can also cause you to be intensely attached to money.

Suppose you have warning signs like keeping secrets about money from your spouse and losing sleep regularly because of money. In that case, your loved ones tell you of your excessive consciousness about money; you’re constantly unhelpful and always comparing your financial status with others. You might be giving money a higher place value in your life than it deserves.

Now, how do you help yourself out of these situations? You can get yourself unstuck by crafting a plan–this gives you a profound sense of control. Put the plan in place and implement it. Another way to get yourself unstuck is by taking baby steps–by being kind enough to yourself whenever you handle financial issues.

You can celebrate yourself for making smart financial decisions and push yourself to change when you make dumb financial decisions.

Smart people often make the mistake of having too much college debt and buying a house when they should rent

Many smart and successful people make the mistake of accruing too much college debt, which in most cases exacts a terrible toll on them. According to an article published by Consumer News and Business Channel (CNBC) in 2017, Americans owe about $1.4 trillion in outstanding student loans. Also, about 40% of people who borrowed through the government are behind in their payment. In recent times, the number of people with large loans has increased tremendously.

Huge debts take a terrible toll on an individual’s future because you have to pay back the loans before properly beginning a good life.

Take a more realistic look at college and make decisions based on your financial status and values obtained from specific educational options. This would help in maximizing value for your family. Another poor decision is to buy a house when you should rent. Many smart people make the mistake of buying houses when renting could have been a better option. Everyone should be cautious when it comes to real estate. Consider every other cost involved in owning a house before jumping into that decision.

When you tend to take on too much risk, you risk losing your business and even your family

Taking too much risk is one other dumb thing smart people do. When these risks strike beyond measure, it becomes overbearing and detrimental to your finances.

Risks like staking your financial future on the success of a single crazy gambit should be avoided, however lucrative they seem. It is not prudent or necessary to take such risks. Plying the middle path when investing is the best path to take. In this, you can set reasonable financial goals and accept only as much risk as needed to attain your goals and stick with the plan through the ups and downs of the market. This would enable you to move closer to your goals without falling into terrible risks that lead to poor decision – making.

To keep a stable success investment plan, take these steps:

• Mind the big 3 earlier discussed

• Create a financial plan

• Allocate your assets, stick to the plan

• Revisit your allocation every three years

• Sit back and enjoy

Sometimes, smart people fail to protect their identity; they ignore identity theft. They fail to take basic steps that might prevent it, like changing passwords frequently.

Our impatience and a nonchalant attitude leave us open to financial losses.

Smart people get hacked too, and in most cases, we fail to protect ourselves from technology — just like we do not understand that companies use our data, making our personal information very vulnerable. We love the convenience technology brings, but we fail to understand and avoid the damage it could cause if not properly handled. Prevent identity theft that could cause you a great deal of your finances by guarding your personal information like your life depends on it. Be less social on social media, warn the young children, use a difficult password, fortify your WiFi, read before paying, whip out the credit card, look, listen and learn, do a yearly checkup on your credit scores.

Overindulgence during early retirement years only means you saddle your kids with your financial issues

Just as it is important to plan and save, it is also important to consider how you will spend your retirement savings.

If you’re in your early retirement years, you must enjoy yourself and live for today because you deserve it, and you’ll be grateful you did in a decade or two later. This is because not everyone would have the opportunity to live that long to enjoy their golden years; hence, enjoy yourself but do not overindulge. If you are still 10 years or more from your retirement, to avoid a retirement freak–out, you can do this: have a 5 minutes conversation with yourself about your plans, rethink your retirement age, dream about retirement more, embrace the gray, and hire a financial planner.

You can help your kids build a happier life by behaving mindfully around money and putting the financial problems aside.

As earlier discussed, parents’ attitude toward money has a lot of influence on a child’s behavior toward money. Parents should understand that their generalized anxiety towards money affects their behavior around their kids. Hence, they should inculcate habits such as communicating transparently, keeping money problems personal, getting the kids jobs, being careful when helping the kids out, cultivating financial literacy, and nurturing feelings of appreciation. To give your children a healthy money attitude, Jill suggests you try to put the spotlight on all the family has rather than what the family lacks.

Many smart people do not plan to care for their aging parents; they buy the wrong kind of insurance and forget to write a will

Poor planning could cost you hundreds of thousands of dollars in unexpected costs for your aging parents. When you were young, your parents went miles to expand your horizon to ensure you get a better life than they have. Now is the payback time. Help your parents get a complete understanding of their situation and offer them ideas worth considering as they are aging. This might save you a lot of future problems.

Most smart people find insurance annoying; they see it as a platform where some overzealous salesperson could rip them off. But insurance is more than that. It gives you a sense of security, saves you from unexpected financial expenses, and offers you the chance to make a chaotic life more controlled.

You are not immortal, so if you don’t have a will and necessary documents in place before your death, you are leaving your loved ones vulnerable.

So many people fail to plan for their own death. Many smart people know intellectually that they should draw a will but don’t fully understand its need. Hence, they consider it unnecessary. A will would save your children from living a devastated life after your death. Plot an estate plan and get all the legal documents you need in addition to the will. This might be quite cumbersome, but it’s worth it because you’ll be giving your heirs a much better life. You can revisit the will periodically to know if it needs any adjustment. With this, you’ll get a tremendous sense of fulfillment.

Conclusion

Some smart people believe so much in their financial acumen that they think they can pick that precise moment when a market will fall or when they can maximize their profits on the sale of an individual stock or mutual fund. Sometimes their instincts prove correct, but more often than not, they sell either before or after a market has peaked. And even if they do time the market’s drop, they also have to know when to reenter a rising market — an equally tricky proposition. Nobody is smarter than the market. By trying to time the market, you’re potentially making investment decisions based on emotions, and that is colored by your individual biases and blind spots.

Every month, smart people need to review their bank account and credit card statement, think about their financial life, pending purchases of financial products, reflect on their behaviors around investments and their aging parents’ financial situation.

Quarterly, smart people should review their investment and retirement accounts and change all the passwords on their financial accounts. Yearly, smart people should review their investments, perform a tax audit, secure their identity, and check in on college planning for their kids. Every 3 years, smart people should review their homeowner and life insurance policies and review their estate plan.

You do not need a perfect way to get it right with money. All you need is to accept your mistakes and take the necessary steps to get back on track. Make real changes in your life by taking baby steps — plan, save, get organized, have those uncomfortable conversations with your kids and parents, and learn to have some fun. It works wonders.

Try this

You don’t need radical makeovers to get your financial stuff together. Here’s what you can do for starters:

• Rethink your attitude to your financial life and pending financial products.

• Review your bank statements, investment and retirement account as well as your estate plan.

• Secure your identity.