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We hear about a lot of things that you should do with your money: Budget! Invest! Negotiate!
But there are also some sneaky things that you should avoid doing. Things that are easy mistakes to make, or easy things to let slide, but can really add up over time. Don’t worry, this isn’t the standard list of don’t spend more than you make (but really, don’t spend more than you make).
Here are 5 things you should just say no to, and what you should do instead.
Shopping deals and discounts
I’m starting out with this one because it’s my Achilles heel. Aren’t sales and discounts great because you can get more and spend less?
Nope. Research shows that discounts make us do dumb things.
Take JC Penney’s as a great example. When Ron Johnson was hired to be the CEO in 2011, he came in with a radical idea: institute fair and square pricing. Rather than having items on a nearly perpetual sale, he decreased prices across the board by almost 40%. That sweater that costs $100 but was on sale for $60? Its normal price was now just $60. No coupons needed.
While it sounds great, here’s the problem: we like sales.
They encourage us to buy things or spend money that we don’t necessarily need to, but we feel great doing it. Without a sale, suddenly, that sweater isn’t an attractive purchase anymore.
A year after JC Penney’s fair and square pricing strategy started, the experiment was deemed a failure and the CEO was out. JC Penney’s went back to inflated prices with constant sales and coupons. And consumers went back to happily spending money on things they might not really want or need.
If you’re someone who is too tempted by sales (like me) unsubscribe from stores emails that advertise sales and steer clear of the sale rack when you’re out shopping. And if you see a sale that still seems too good to pass up, ask yourself if you’d really pay full price for that item, or are you just buying it because it’s now down to a bargain-basement price?
I once heard the terrible advice to be ok with paying bank fees because “that’s just how they have to make money.”
Yes, if we pay banks fees they will make money on that. But the primary way banks make money is by taking our deposits and making loans with them. If you deposit $1,000 into a bank, they’re going to turn around and lend that to someone else. The first time I learned that my money didn’t just sit in the account, I was baffled.
Here’s how it works. You deposit money into your checking or savings account. The bank might pay you 1% in interest on your deposit. Then they turn around and take that money and lend it to someone else, but they charge the other borrower 5% on their loan. The difference between those two rates is where they make their money.
They paid you $100 in interest but charged the other person $500 in interest. Money earned = $400.
So let’s not feel overly charitable to banks and let them charge us fees as well. Fees that they normally charge include ATM fees, account fees, and penalty charges.
If you’re being charged these fees, look for a way to make it stop. Call your bank and ask how you can rid yourself of these fees. It might mean keeping a minimum balance in your account or setting up direct deposit.
Even better, switch to a bank that doesn’t charge these fees. It might mean a little more upfront work to move your money, but the savings can really add up. The average American spent $329 on bank fees in 2017. Just say no to bank fees.
High investment fees
When you invest, there will almost always be fees. But paying too high of fees will eat away at the return you make. (What are these fees, you ask? Read about the different types of fees here.)
Studies have shown that funds with lower fees generally outperform their higher fee counterparts (see: this study from Morningstar). And it’s not a stretch to understand why lower fee funds do better: the higher the fee, the better the fund needs to perform to make up for the additional costs.
We use Personal Capital’s tool to show is the fees I’m paying on my investments like our index funds, my IRA, and Henry’s 529 college savings. To get a view into the fees that Jordan is paying on his 401K, we use Blooom.
And while we’re talking about fees, be wary of products that pay sales people and advisors high commissions. These investments include annuities and whole life insurance. That’s not to say they should always be avoided, but they are expensive financial products that don’t make sense for everyone. Especially if you haven’t maxed out investments in your 401(k) and IRA.
If you’re being sold one of these make sure you understand exactly how and why it fits into your investment portfolio. And make sure that the person recommending it to you needs to act in your best interest, which brings us to…
If you’re trusting someone to give you the best advice, make sure they’re actually giving you the best advice. A fiduciary has a legal duty to act in your best interest. That sounds pretty basic, but sadly, not all financial advisors are fiduciaries. This means there may be a conflict of interest in what they recommend you do with your money.
For example, they might recommend products or investments they receive a commission for, even though it might not be the most ideal thing for you. Or they might encourage additional trading because they receive a cut each time a trade is made.
How much does it really matter if you’re not working with a fiduciary? The Department of Labor estimates that conflicts of interest on individual retirement accounts (IRAs) cost investors $17 billion dollars per year.
How do you know if someone is acting in your best interest? Ask questions like:
“Are you a fiduciary?”
“How are you paid in this arrangement?”
“Can you tell me about any potential conflict of interests?”
And once they’ve recommended something to you, be sure to understand all of the fees associated and shop around. It’s important to not blindly pay fees.
Your bank’s estimation of how much house you can afford
When Jordan and I were buying our first house, we received an estimate from a bank for how much we could spend on a house. This amount was insane. Not only would it have kept us from our other goals, like paying off debt, but it would also would have completely stretched our budget.
Initially, when we saw the amount of a mortgage we could qualify for, we were tempted. I stalked Zillow using that as the upper limit to our price range. But soon after we realized exactly what that monthly mortgage amount would mean to our lifestyle, we adjusted our search to lower priced homes.
There’s a lot that goes into the bank calculation of how much house you can afford, but there’s one calculation that banks seem to rely on heavily: your debt to income ratio (DTI).
This is the percentage of monthly gross income (before tax) that can go toward paying your debt. A typical DTI ratio is 36%. That means that 36% of your monthly gross income can go to your monthly debt payments. If you make $60,000 per year, or $5,000 per month before taxes, a DTI ratio of 36% would mean that $1,800 per month could go to debt payments, including your mortgage.
For us, the DTI calculation didn’t make sense. We had goals other than paying for our mortgage and we didn’t want to feel chained to an expensive house that we could just barely afford.
Before starting the house hunting process, do the math yourself. How much do you want to spend monthly for your mortgage, taxes, insurance, and maintenance? Figure out what makes you comfortable and if the bank comes back offering you a bigger budget, ignore it.
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