5 Best Ways to Absolutely Destroy your Personal Finances
Bad Personal Finances
Most of the advice you’ll find on this blog is geared towards best practices when it comes to your personal finances. Not this one, my friends. Through personal experience and witnessing worst practices from others, I’ve compiled a list of the 5 best ways to destroy your personal finances. Learn what to do through the avoidance of these practices.
1. Borrowing from the Credit Card Company (and Holding a Balance)
I’ve used credit cards to help establish a credit history and to gain from rewards. Used in these ways, credit cards can be part of a healthy financial picture. Used in just about any other way, they can wreck your financial house of cards. If you carry a balance from month to month, there’s a lot of things you can assume – first of which is that you aren’t saving any money. If you are saving money, you’re doing so foolishly. There are few places that you can get a return (and none without high risk) of over the typical 12%+ that credit card companies charge on balances.
2. Buying More House than you Can Afford
As a general rule of thumb, you should not spend more than 30% of your take home income on your housing. With both houses that I’ve owned, I’ve pushed to about 30%, and when my wife lost her job in January, we were definitely concerned about what a prolonged layoff might mean for our ability to make our house payments without significantly cutting into our savings. If you can, I’d recommend keeping your housing expenses to below 25% of your take home income.
3. Not Funding an Emergency Fund
Before paying off good debt, funding your IRA and/or 401k, or saving for other long-term goals, establishing an emergency fund is essential. If you lose your job, have a serious medical complication, have to fund replacement transportation in the event of major vehicle repair, or run into other unexpected financial hardship, you need to have some cash on hand to throw yourself a lifeline. Unfortunately, those who have not run into one of these situations often think it will never happen to them. This is especially true for twenty somethings. Don’t let this happen to you.
Unlike Dave Ramsey, I don’t think it’s realistic or wise to pay off ALL of your debt before saving more than $1,000. Focus on paying off high interest debt, but when it comes to school loans and mortgages, paying all of those off first before adding to your emergency savings is not a good idea. Once you’ve paid off high interest debt, then shoot for a minimum of six months of expenses, but preferably 8 months to a year’s worth.
4. Wasting your Money on School
Getting a solid BA or BS degree from a reputable university would be difficult to argue as a bad investment. Sadly, this can often lead people astray as they take this fact and convince themselves that additional degrees are going to be the ultimate path to financial riches. Convincing yourself that a second undergrad degree (unless you need it to completely change careers) or staying in school an extra year or two can be downright devestating for your financing.
But surely, MBA’s an other advanced degrees must be a good investment, right? After running the math, I’m not so sure. If I were to leave my job to pursue an MBA at the two most reputable public universities in my state of residence, I would shell out at least $80K for the degree. Additionally, I’d be giving up significantly more in salary over the two years. I figure that it would take me almost two decades to pay back my investment and make up for the lost salary, and that’s only if I were to find a higher paying, higher stress job. That entire time, I’d have the burden of that debt on my shoulders. I’m going to pass for now.
5. Rolling the Dice
No, I’m not referring to gambling, although that certainly would make a top 10 version of this list. I’m referring to not paying for your basic insurances: home, auto, medical, and life. This is another one of those ‘you don’t know how important it is until something bad happens’ necessities. We’ve all seen someone lose their homes, their vehicles, or their savings due to not having their basic insurances covered. ‘It’ CAN happen to you. Don’t roll the dice.
Bad Personal Finance Discussion:
- What have you learned from your financial mistakes?
- What would your top 5 be?