When it comes to the end of the year, we can all be thankful for a few things: our family, our health, and the great deals we can get on Black Friday, all the way through the end of the holiday season.
It can be tempting to spend - and overspend - when everything looks like such a good offer, and that can bust your budget. But we have to be mindful of the money choices we make throughout the year. We asked some of our favorite personal finance experts to share their biggest money don'ts that you can keep in mind when you're debating your money habits on Black Friday - or on any other day of the year!
Avoid bad real estate investments
In 2006 many of my friends were buying properties with little to no money down and I decided to get in on the action. I was in my early twenties, had bought two properties, and thought things could only go up from there. Man was I mistaken. Within a couple of years both properties were about 50% under the value I paid for them. It was frightening. Not only that, but I lost a renter and was negative almost $1800 per month on one property. Although it was a scary time, it was a great learning experience that taught me to make smarter financial decisions in all aspects of my life.
It’s important to start investing early. Thanks to the magic/math of compound interest, the sooner your start saving, the more money you’ll have by the time you reach retirement. And if you start saving early, you won’t have to play catch up later in life, so you can focus on things like paying for life insurance and saving for your kid’s college fund.
The "problem" with any investing is that it can take a long time to really pay off. It’s not like winning the lottery; instead, you have to wait years or even decades before you reach your goal. That’s why it’s hard to fault Well Kept Wallet’s Deacon Hayes for looking to investment rental properties; they can be a good complement to investing in something like mutual funds, but there’s a bigger risk.
Our advice? Only jump into property as an investment if you have taken the time to research it as an investment vehicle and ensure that it’s the best fit for your financial plan. If you have any questions, find a financial advisor you trust. You can ask friends and family you trust who they turn to, or use a platform like Guidevine to search for advisors. There’s a reason why advisors are the professionals in their field, and there’s no shame in admitting you don’t know what the right path is as long as you’re willing to do something about it.
Don't drown in credit card debt
A few years back we were looking to learn more about how to become real estate investors as a means to build wealth. There was a highly touted seminar that was being held in our local area so we decided to attend. They laid out all of the pros and cons of investing in real estate and even thoroughly explained how to get started. The scary advice came when they were outlining strategies on how to get your first deal done. They proceeded to give all of the attendees a list of credit card providers and contact information of these providers and told us that if we want to be successful we could start out by calling all the credit card companies and get approved for as many cards as possible, and use those credit lines to purchase our first property. Essentially the message was to create lines of debt so that we could use debt to purchase other debt. The real estate market ending tanking not too long after that. Very spooky strategy to say the least.
If you’re sensing a theme of "investment properties are kinda risky"...well, yeah, that’s what we said after the first property horror story.
But this story from Talaat and Tai McNeely of His and Her Money has an interesting twist: it’s not necessarily about property as much as it is about the danger of credit cards. While Tai and Tallat were financially savvy enough to realize this debt building strategy was the wrong way to go about investing, others haven't been as lucky.
Don’t get us wrong: credit cards can be great. They help build credit, which is crucial for getting loans that you need. Some of them come with great rewards and bonuses like travel miles. But you have to be careful with how you use them. It’s tempting to just charge everything and treat money like an "out of sight, out of mind" issue. Of course, that tends to come back and bite you when you actually need to pay the bill, and failing to do so hurts your credit score.
If you do use credit cards – and not just for an infinite debt loop, Tallat and Tai shared in their story – make sure you have a budget in place, and stick to it. If you do that, you’ll always know how much you’ve spent, and you won’t regret using your credit cards.
Stop ignoring financial notices
I hear a lot of financial horror stories on my podcast Spent. But the ones that truly strike terror into the depth of my soul are the ones where people ignore notices from the IRS, credit cards and collection agencies and let letters pile up. I can relate to wanting to ignore stacks of letters and bills where people want things from you -- especially money that you may not have! The fastest way to make the shame ghouls go away is to face the music and open your mail. Once you start to deal with it, you can get control fast.
There’s nothing scarier than finding mail that comes from a bill collector. Whether it’s an audit, a credit card bill, or a student loan payment, most people just want to hide under their covers – or flee the country.
But Lindsay Goldwert of the Spent podcast is right, facing your financial fears is the best course of action. The last thing you want to do is to ignore money troubles and find out that they’ve become a big problem down the line. Taking steps sooner helps you avoid this problem. Fix your budget and look into balance transfers if you find yourself with too many overdue credit card bills. Refinance or consolidate your student loans if you’re getting behind on loan payments. Pull your credit score and fix any incorrect information. Take steps to avoid medical debt before you can even get the notices in the mail.
Parting wisdom: the only thing that might be worse than getting a legitimate notice in the mail is getting a scam one. Here are 5 scams to watch out for.
Don't be fooled by whole life insurance
"Whole life insurance is the best buy you will ever make."
Chris Peach from Money Peach said that the above piece of advice is the worst he's ever gotten, and this one about investing in life insurance is close to our hearts.
While whole life insurance works for some people with complicated financial needs, for 80-90% of people, term life insurance is what they need. Whole life insurance offers an insurance policy along with an cash value component that’s meant to grow over time.
Unfortunately, the fees that come along with that make it up to four times as expensive as a term life insurance policy. What you’re left with is an insurance product that’s more expensive than alternatives and an investment product that won’t give you as good of returns as alternatives (namely, just investing the money through a robo-advisor platform).
Whole life insurance is often presented as a forced savings vehicle: people are bad at saving, so if you roll it up into something they’re buying anyway (life insurance) they don’t have a choice. In reality, the better decision is to buy a cheaper term life policy and invest the difference that you’re saving.