Top Ten Most “Foolish” Financial Decisions
April 06, 2011It was only after my son Ethan got home from school and played an April Fools’ Day joke on me that I even realized it was April. In the spirit of laughing at ourselves, I thought it would be fun to do my best David Letterman impression by offering what I consider to be the top ten most “foolish” financial decisions we make:
#10 – Buying lottery tickets
You don’t have to have a degree in statistics to know this is a poor investment decision. If you really want to support the education in your state join the PTO or become a booster.
#9 – Paying retail for kids sporting equipment
My son Jacob is playing T-ball this year. Half the kids on his team have brand new equipment. Why on earth would you pay full price for a piece of equipment they will probably outgrow by next season? Go to Play It Again Sports and benefit off of someone else’s dream that their 5 year old will be the next Derek Jeter.
#8 – Buying “permanent” life insurance when “term” life is appropriate
Insurance protects you against risk. If you are young, have a job, are married, and have dependents, you NEED life insurance to replace your income if you die. Term life insurance gives you LOTS of protection for LITTLE money and is most often the appropriate choice when simple income replacement is your greatest need. Is there a time when permanent life insurance is appropriate? Absolutely, but sadly I see it used inappropriately way too often.
#7 – Buying a new vehicle
I could remind you that it loses 20-40% of its value when you drive it off the lot, or explain why you should never finance a depreciating asset, but I’d rather let my friend and colleague Michael Smith share his thoughts with you in his blog Car Buying: A Way to Save a Fortune.
#6 – Not having a will or durable financial power of attorney
It’s bad enough having assets transfer through probate, but not having a will is just going to make it that much more expensive. Not having a durable power of attorney may cut your loved ones off from assets that may be needed in your time of incapacitation.
#5 – Buying non-appreciating assets on credit
Clue #1: If you don’t have the money to pay for it you probably shouldn’t be buying it in the first place. Clue #2: Continuing to pay for an item that continues to lose value doesn’t make economic sense. Clue #3: People who shop on credit often spend 20-40% more than they would if they shopped with cash. Now you know why your local retail store “Proudly accepts Visa.”
#4 – Deferring income taxes when we should be contributing to a Roth account
Historically speaking, we are in a favorable income-tax environment. If your taxable income after exemptions and deductions falls into a tax bracket at or below 25%, or if you believe your income tax rates in retirement will be higher than they are today, you should be utilizing a Roth 401(k) or Roth IRA.
#3 – Making investment decisions based on past performance
You wouldn’t drive while looking in the rearview mirror, so why do so many investors choose a mutual fund based on what it did 3, 5, or even 10 years ago? Performance history can give you an indication of how a fund performs in different market conditions, but it should not be the sole reason why you choose to invest.
#2 – Not contributing enough to get the full company match
If your company is willing to help subsidize your retirement by contributing matching funds to your retirement plan, you should take full advantage. You wouldn’t say ‘No’ if your company offered you a raise, but that’s exactly what you are doing when you don’t contribute enough to get the full match.
And the #1 foolish financial decision we make is…
Not having an emergency fund
Having an emergency fund can help get you out of debt, and it can help keep you out of debt. It can save you from having to make unwanted financial decisions, and give you flexibility to make better ones. No one has ever regretted having an emergency fund when something unexpected happens, and it’s never too late to start one. An emergency fund is one of the most simple, yet most overlooked financial decisions you can make, so don’t be fooled — start setting aside $20 a week and you’ll have $1,000 in your emergency fund by this time next year.