It’s not easy managing money. I know this first-hand because I used to struggle with my finances. Despite how embarrassing it is, as I admit it now, I racked up nearly $30,000 in debt and made poor financial decisions after poor financial decisions. At the time, I didn’t realize how much my choices were limiting me. Now, looking back, I wonder, What was I thinking?
The good news? It is never too late to escape this money trap. In other words, if you’re feeling stuck financially, you might make some of the same choices. These ten financial decisions can keep you broke, and what you should do about them instead.
1. Not investing in yourself.
We’ve all been there: a constant sense of financial stress, constant worry about money, and the elusive dream of financial freedom. But it was early in my journey to financial freedom that I realized something vital: the most significant investment is in yourself.
Often, we make poor financial decisions because we lack financial literacy and practical tools. As a result, you may end up in a cycle of debt, stress, and a lack of direction. However, learning about budgeting, establishing good credit, and building an emergency fund can help us take control of our finances.
Key areas where self-investment pays dividends;
- Budgeting. The purpose of a budget isn’t only to restrict spending; it’s to maximize your money’s value. With the help of a budget and financial priorities, I have gained a sense of control over my finances.
- Emergency fund. An emergency fund is your lifeline if you find yourself in a financial bind. By regularly saving a portion of my income, I have built a safety net that protects me from unforeseen expenses.
- Credit building. A good credit score can lead to better financial opportunities. By making timely payments and keeping low balances, I’ve improved my creditworthiness and saved money on interest rates.
Financial literacy has allowed me to gain control over my finances and make informed decisions. Again, it’s never too late to start. No matter your investment level, investing in yourself can be one of your most rewarding investments.
2. Selecting Indexed Universal Life (IUL) Insurance over a 401(k).
Insurance agents often market Indexed Universal Life (IUL) policies as safe investments that offer market stability without volatility. In reality, IULs have high insurance costs that eat away at your returns, and their market caps limit how much you can earn. In other words, even if the market rises by 35%, you might only see a 9-12% return. As for the the rest? It will be going to the insurance company.
But, to save for retirement, you should prioritize a 401(k) or a Roth IRA. In contrast to IUL policies, these options often offer more significant long-term growth potential.
3. Watching Netflix over reading.
While it’s easy to unwind with Netflix or scroll through TikTok for hours, those behaviors can accumulate. I’ve heard that on Netflix alone, the average person spends over 1,000 hours a year! In any case, Statista reports that adults in the US spend an average of 52 minutes per day on TikTok and 62 minutes per day on Netflix.
You will notice a difference when you compare that to the time spent reading. Generally, reading increases cognitive function and critical thinking, leading to greater personal and professional achievement than Netflix could provide.
It has been shown, for example, that reading increases a person’s vocabulary, which is related to intelligence. In addition, reading can also prevent cognitive decline (reduced memory, reasoning, learning, and paying attention). Moreover, a 2016 study from Yale University School of Public Health demonstrated that reading books reduces mortality by up to 20%.
So, spend some time reading each day. No matter how small your shift here is, you can boost your knowledge base and improve your mindset.
4. Buying a new BMW over a used car.
Almost everyone dreams of driving a luxury car. However, how much will it cost? The average monthly payment for a new car in the United States is $734, and some people pay upwards of $1,500. However, new cars lose about 20% of their value after the first year, which makes them an expensive choice for those on a budget.
If you want to buy a used vehicle rather than a new one, consider purchasing a reliable used car. In addition to saving thousands of dollars every year, you can invest those savings in long-term investments.
5. Choosing whole life insurance over term life insurance.
Term life insurance generally costs less than whole life insurance — sometimes by as much as ten or twelve times more. Further, you probably don’t need whole-life insurance if you don’t have children or are already in debt.
In most cases, term life insurance is the better choice. This coverage is more affordable and offers coverage when you really need it, such as supporting a family. If you choose term insurance, you will save yourself the high cost and complexity.
6. Ordering DoorDash over cooking at home.
There is a cost associated with convenience. When ordering from DoorDash, for example, the cost can easily double that of dining at the restaurant itself. I have seen this firsthand—a $10 meal in a restaurant might come to $22 when it is delivered.
You can usually save money by cooking at home, regardless of how busy your family is. In fact, eating out costs $20.37 on average as opposed to $4.31 for home-cooked meals. By avoiding food delivery apps, you can save money on meal costs and avoid extra fees, charges, and tips.
7. Staying in cash.
When market conditions are turbulent, staying in cash may seem like a haven, notes the folks at Charles Schwab. Although cautious, this approach could hinder your wealth-building efforts. For those with a long-term perspective, especially for retirement, relying solely on cash might not be the most effective solution.
Additionally, the stock market is especially advantageous for young investors who want to accumulate long-term wealth. Even retirees can benefit from some stock allocation to combat inflation and grow their nest egg.
If you want to invest without overwhelming risk, consider dollar-cost averaging. With this method, you consistently invest a fixed amount each month, buying more shares when prices are low and fewer shares when prices are high. By using this strategy, investors can minimize the impact of market volatility and take control of their investments.
8. Favoring day trading over dividend stocks.
The idea of day trading sounds exciting. Who wouldn’t want to pick the following extensive tech stock? Despite this, studies show that 90% of day traders lose money. There are successful day traders, but most professionals devote full-time attention to market analysis.
But, to achieve long-term financial growth, consider investing in blue-chip, dividend-paying stocks. With these companies, you can build wealth slowly without dealing with the daily volatility of day trading.
9. Opting for a high mortgage over renting.
Mortgages are usually the best option for home buyers but are not always ideal. For those uncertain about their long-term plans, renting might be a better choice at this time of historically high mortgage rates and housing prices. What’s more, taxes, maintenance, repairs, and other costs of owning a home can add up quickly.
Overall, renting may make sense in today’s market, depending on your career, living situation, or need for flexibility.
10. Deciding to work overtime over a side hustle.
You shouldn’t rely exclusively on one source of income. Let’s say that you lose your job. Finding a replacement could take months, leaving you financially vulnerable. Although overtime pay is excellent, side hustles could be a more sustainable way to earn additional income.
To start, explore any skills and hobbies you possess that can be turned into side income. Over time, this can provide extra financial security and become your main source of income. As a side hustle, I eventually grew an online business with more income than my main job.
Taking Control of Your Finances
If you want to control your finances and break free from these money traps, start making intentional choices. My mistakes have taught me a lot, and you can learn from them as well. I suggest starting small, educating yourself, and building habits that will serve you for a long time.
Always remember: it’s your life, it’s your money. You are the only one who can make it awesome.
FAQs
What are some common poor financial choices?
- Living beyond your means. When you consistently spend more than you earn, you may fall into debt and have financial instability.
- Not saving for emergencies. If you don’t have an emergency fund, you’ll be forced to use credit cards or loans to cover unexpected expenses.
- Ignoring debt. Failure to pay off high-interest debt can lead to snowballing interest charges and damage to your credit rating.
- Not budgeting. It can be difficult to manage your finances effectively when you don’t keep track of your income and expenses.
- Not investing. When you don’t invest, your wealth will not grow as it should.
How can I avoid making poor financial choices?
- Create a budget. Track your income and expenses to know what you’re spending and where you can save money.
- Build an emergency fund. Aim to save at least 3-6 months’ living expenses to cover unexpected costs.
- Pay off high-interest debt. To save money on interest charges, pay off credit card debt and other high-interest loans as soon as possible.
- Start investing. With compound interest, even small investments can grow over time.
- Educate yourself. Become familiar with topics related to personal finance, such as budgeting, saving, investing, and debt management.
What are the consequences of making poor financial choices?
- Debt. When you accumulate debt, you may have difficulty paying your bills, and your credit score can suffer.
- Missed opportunities. If you have poor financial habits, you may not be able to reach your financial goals, such as purchasing a home, saving for retirement, or starting a business.
- Reduced financial security. When you make poor financial choices, you leave yourself vulnerable to financial shocks and may not be able to weather economic downturns well.
How can I improve my financial situation?
- Seek professional advice. For personalized guidance on your financial situation, consider consulting a financial advisor.
- Set realistic financial goals. Break down your long-term goals into smaller, more manageable steps to make them more achievable.
- Track your progress. Keep track of your financial progress regularly and make adjustments as necessary.
- Be patient. Improving your financial situation takes time and discipline. If you have a setback, don’t let it discourage you.
Image Credit: Dovis; Pexels
