6 Dumb Money Moves That Seem Smart
Have you ever tried to “time” the stock market? Did you buy a home before you were ready because home-ownership is a good investment? Do you keep a balance on your credit card to improve your credit score?
These are all common money moves, and if you made any of them, you might have thought you were following tried-and-true personal finance wisdom. But like much conventional wisdom, they’re not nearly as smart as they sound. Here are some dumb money moves you need to ditch from your arsenal, no matter how much it might seem to make sense.
- Not Having a Credit Card, Because It Will Lead to Debt: It’s been nearly eight years since the Great Recession, and more than two-thirds of people between the ages of 18 and 29 don’t have credit cards, according to a Bankrate survey. “It seems smart because you’re not at risk of debt, but it’s not smart, because you’re not building your credit,” says Sarah Newcomb, author of “Loaded: Money, Psychology, and How to Get Ahead without Leaving Your Values Behind.” Many of these millennials — as well as people in other generations who don’t have credit cards in their names — have what are called “thin credit files.” That’s credit-industry speak for having little to no credit history, and it can hold you back when you want to apply for a mortgage or car loan. It can also mean paying more than necessary for homeowners and auto insurance.
If you think you’re liable to be irresponsible with that first piece of plastic, ask the issuing bank to keep the credit limit artificially low. Then, put one or two automatic bills on the card and schedule automatic payments from your checking account to cover them. You’ll never be late, and your credit will improve. And if you were turned down for a card? A secured card — where you make a small deposit with the issuing bank — is the card with training wheels that can put you on the road to a strong credit history.
- Keeping a Balance on a Credit Card to Build Credit: One of the big contributors to your credit score is credit utilization. Your utilization is the percentage of your credit limit that you’re using, and it counts for about 30 percent of your score. If you have a limit of $1,000 and your bill is $550, you’re using 55 percent. That’s too high — it’s best for your score if you use no more than 30 percent of your credit limit at any time. And carrying a balance from month-to-month and paying interest doesn’t help your score at all, but it does hurt your wallet: The average credit card interest rate is about 15 percent. On a $3,000 balance, that would cost you $450 a year.
Ideally, you’ll pay off your credit cards in full every month, sparing you any interest payments. And if your typical usage has you overusing your limit, you can solve for the problem in two ways: You can ask for an increase in your credit limit and then not use the additional capacity, or you can pay your bill more than once a month.
- Prepaying student loans while skimping on retirement contributions You have student loans, and you want to pay them off as fast as possible, so any extra money you have at the end of the month is going towards paying above and beyond your monthly bills and chipping away at the principal. Your urgency is understandable; wouldn’t life be better if they were just gone? But prepaying student loans is not a wise move if it’s coming at a cost to your long-term savings, like contributing to your 401(k) (especially if you receive employer matching dollars) or paying down high rate credit card debt, says Newcomb.
Smart move: Pay off your student loans slowly and steadily while you build your future and take advantage of stock market returns. It may even be better to opt for income-based repayment plans (which lower your monthly payments), even though paying interest for more years means paying more interest in total. Look at the cost of your student loan debt, subtract the tax deduction, and compare that to the return you’d get by putting your money to work in other ways.
- Getting the Job First, and the Raise Later: Did you negotiate your salary for your current job? If not, you’re not alone. Some 41 percent of people didn’t, according to Salary.com. Many fear that haggling over the starting salary will take them out of the running for the job entirely. But not negotiating for a competitive salary at the start of a new job starts you off on the wrong financial footing, because every bonus and raise moving forward will likely be a percentage based off that starting figure.
Don’t take the first offer. You have the most leverage when they want you, but don’t have you yet — and it’s important to recognize and take advantage of that moment. “People think you have to ask for what’s acceptable, but you should ask yourself: “What do I need to earn so that I don’t have to worry about money? That’s what your time is worth,” says Newcomb. Also, understand that the expectation from the other side of the table is that you will ask for more. A study from CareerBuilder shows 45 percent of employers are willing to negotiate your initial job offer and expect you to do so. You’re only letting yourself down if you don’t.
- Buying a Home Because It's an "Investment.": Financial advisor Carl Richards, author of “The Behavior Gap,” recalls the times people have said to him of their homes: “It’s the best investment I’ve ever made!” His retort: “Is that because it’s the only investment you’ve ever held onto?’” He’s got a point. There was a long-held belief that property values never go down - Then came 2008 and housing market crash. In reality, home values historically keep pace with inflation. And the cost of ownership — not to mention moving in, furnishing, taxes, insurance and the maintenance that runs 1 to 2 percent of the value of the home per year, according to Harvard’s Joint Center for Housing Studies — is high.
Buy one you want to live in — or continue to rent for now. That laundry list of costs means it doesn’t make sense to buy one at all if you don’t expect to stay for at least five years.
If you do stay long-term, the equity you build by paying down (or off) your mortgage becomes supplemental savings you can use for retirement. But you should never stretch to buy a house that you can’t truly afford just because you think the property values are due to pop. If you do, you’re neither buying nor investing — you’re speculating. And unless you’re a professional real estate investor, that’s a bad idea.
- Trying to Time the Market: Market timing comes down to knowing two things: When to get out, and when to get back in. The first is difficult to nail, and the second is even tougher. While we’ve all heard stories of ordinary investors who got in at just the right time, Richards is skeptical. “Don’t believe the stories,” he says. “Believe the data.” And the data says you can’t win at this game.
Buy steadily, and for years. Richards says to tear a page from Warren Buffett’s playbook: “The best thing you can do is be lazy — and we should celebrate that fact.” And while you’re at it, don’t try too hard to beat the market. While the individual stocks and managed mutual funds are exciting, it’s regular investing in boring index funds and exchange-traded funds (that are also cheaper to buy and own) that are more likely to make you a multi-millionaire over the long run. If you’re lazy enough, that is.
With Kelly Hultgren