Financial Management Mistakes – Part I

I bend my ear toward financial planning gurus from time to time to help keep the business side of our household in good stead. The latest book to capture my attention is The Dumb Things Smart People Do With Their Money, by CBS News Business Analyst Jill Schlesinger. While it didn’t reveal any new earth-shattering insights, I nodded my head quite a bit as I read through her commentary.

In the next three posts, I’ll offer my two cents on her list of 13 dumb things that smart people do:

#1: Buying financial products that you don’t understand. Been there, done that. My husband and I were really, really busy pursuing our careers during the early years of our marriage. Long hours. Lots of weekends spent at the office. So the last thing we wanted to do during our down time was wade through all the fine print that comes with regulatory investment disclosures. We wanted the “professionals” to handle things for us. And we went with a friend’s recommendation on who those folks might be, never realizing that their due diligence was as suspect as ours! We wound up putting IRA contributions into limited partnerships that invested in real estate. Long story short: We had high administrative fees, low yield on our invested funds, and very limited means for getting our money out. At the end of the day, we lost nearly all of our initial stake. Fortunately, we got burned before we had any substantive capital to invest. Nowadays, I either force myself to read all the fine print (and ask questions!), or I stick with investments that I readily understand.

#2: Taking financial advice from the wrong people. This lesson goes along with the aforementioned debacle. Many of us fall prey to the notion that someone who sells financial products is a financial expert. In reality, an awful lot of them are just salespeople who make commissions off of the investments that they place. They aren’t trying to narrow down the wide range of available products to those that best suit our goals and risk tolerance. They’re trying to sell their products! Of course, they’d like us to do well and become repeat customers. But realize that it’s their financial security (and not ours) that drive the interactions. I still think it’s a good idea to take advice from qualified experts as they can lend their knowledge, skills, and experience to your money management. (They read all that fine print!) I simply prefer to deal with credentialed folks who earn their living by the fees I pay them, not the commissions they make off product sales.

#3: Making money more important than it is. Money is a means to an end – a roof over one’s head, food on the table, clothes on one’s back, and quality time with friends and family. When the pursuit of money impinges on health, happiness, and relationships, it’s time to change course. The author tells us that individuals feel happiest when making $60,000-75,000 and feel the best about their lives when making ~$95,000. They have “enough” to take care of their material needs… and then some. Surprisingly, as wealth increases, issues and anxiety surrounding money also increase. Symptoms include: keeping secrets from spouses, losing sleep, obsessing about investments, over- or underspending, comparing one’s financial standing with others incessantly. Both my husband and I are predisposed toward thrift based on our upbringing and life experiences. So, I’ll take to heart the call to loosen up the purse strings a bit and make sure we’re enjoying life!

#4: Taking on too much college debt. This issue is heartbreaking for me given the number of friends and family members who have soul-crushing college debt. With the cost of higher education spiraling out of control, we do a grave disservice to college-bound students by making student debt so readily available. As neuroscience tells us, our brains are not fully formed until we reach our mid-twenties. Executive functioning is the last to develop – i.e., that part of the brain that recognizes the long-term consequences of our short-term decisions and actions. So, it’s up to the older, wiser generation to inject some reality into a young person’s college dreams so that their financial future does not become a nightmare. I’m a fan of the junior college system to satisfy lower division educational requirements. (Living at home a couple of extra years beats a lifetime of debt!) I’m also a fan of having straight talk about career options to guide one’s academic choices… including the option of deferring (or taking a pass on) college education altogether.