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?
I would add on as a sixth: Pulling money out of the stock market during down times. For those who pulled out at 6,500, look where they are now.
While I agree with your assessment of an MBA being not always worth it, I would also like to point out that not all Masters degrees are created equal.
Especially if you are an engineer, an MS is not nearly as expensive as an MBA (again, depends on the school) and will certainly give you a boost without throwing you into a “long hours, high stress” job situation.
The reason being, that the boost in income is because you are now a better engineer (9 times out of 10) and are able to handle more complex tasks than someone with only a BE/BS and same amount of experience.
Also, more importantly, in a good university, you are much more likely to land an assistantship, which will pretty much waive your tuition fees, AND give you a decent monthly pay for working within the department.
On the down side, you become eligible for a Darwin Award, for voluntarily taking yourself out of the gene pool.
Deciding whether an MBA is worth it or not is something I am going through right now in my mid 20’s. It’s hard to decide it it’s worth it although the advanced education is hard to beat.
I like this because so many people do this in hopes of being financially free when whats really going on is that they are actually ruining their financial future with this thinking. and the credit card point.ouch so many people bury themselves in debt with those little demons
Great list. I especially liked number 5. Young people especially tend to think they are invincible so they apply that mindset to their finances. Financial plans are typically made from the perspective of a best case scenario. A better plan is to assume the worst and plan accordingly.
To the guy who said MS makes you better, not necessarily… there is no magic you get from a MS if you have a decent undergrad degree.
For me, I think having an emergency fund is so very important. I can’t tell you about all the times I get an unexpected expense that puts my finances in a huge hole. My goal is to have 12 months of income put away.
@G.E. – I don’t know that I could write a better Top 5. Carrying a credit card balance is definitely #1. I especially agree with #4. Getting that graduate degree just for the promise of “earning power” is not a wise decision. Unfortunately, a lot of people still believe it’s smart.
You’d be much better off skipping the MBA and starting a part time business, especially a low overhead business such as an Internet startup or a Multi-Level Marketing (MLM) business. You’ll spend a lot less money, learn a whole lot more, and hopefully have a money making business at the end of the process! That sounds a lot better to me than $80,000 in debt to get the very stressful job…
Regarding advanced degrees, I haven’t paid a penny for my 3 Masters or the current PhD I’m working toward, and that’s because I work for a company who pays for 100% of educational expenses. I always recommend that those with undergraduate degrees work for such an employer, getting paid while going to college for free. Often times the employer will provide a stock award upon degree completion, and a raise or promotion is much more likely.
I would have to add borrowing against your 401k to this list. This has hurt many people and is being done more often these days.
How about adding don’t sign too many contracts?My biggest mistake so far being 23 is signing up for Directv.As much as I love them, it costs nearly $400 to exit that contract.So if you can’t make the payment every month what’s your choice? $60 or $70 a month or $400 in one shot?The other as much as I love my internet is that I’m tied to a two year contract which has $199 exit fee.I am insured to the teeth, with car,health,life, and short term disability.Statistically we are invincible.LOL That’s what life insurance and social security is based on.Statistically the older we get the more we get sick and die an the young pay for the older generation.When you don’t have parents,friends,or anyone for that matter to help you credit cards seem like the only way to go to pay for those new calipers or the drums you got in the junkyard but definitely a mistake.
To Barbara B.,
Not just DirecTV, but any contract (such as a cell phone contract or apartment lease)…Find out what it will cost to end it.
Another dumb thing to do: quit your job in this economy without another one lined up first. A friend of mine just did that; I think he will regret this in 3 months…we’ll see.
Hey, which articles would you recommend for getting some idea on insurances (e.g. not covering too little or too much)? Thanks!