In my last article, we discussed some useful ways for high school students to learn about building wealth, maintaining good credit, and managing money. However, it would also be useful to understand some of the dangers involved in making poor financial decisions.
To summarize my previous article, I recommended that all high schoolers open a bank account, get a job, invest, join parents on large purchase decisions, keep a log of their spending, practice financial asceticism, and get a credit card.
The credit card suggestion was the most contentious among my colleagues, of whom I asked for feedback before publishing that article, and that contention is what prompted this article. Yes, the credit card is a dangerous beast. However, there can also be many other financial mistakes made as well.
The most common financial errors I see are:
- Buying things you don’t need on credit, hoping that the money will appear later
- Not budgeting your money
- Buying things too quickly without thinking them through
- Not saving (the all too obvious result of overbuying)
- Not understanding financial markets
- Not understanding sunk costs
- Not working
- Being indifferent to your financial situation
Buying on Credit
Let’s start with the big bad danger: buying on credit. The basic rule for buying on credit is this: do not buy things on credit that you cannot afford to pay in full by the end of the month, unless they are a) a house, b) a car (when public transportation is not easily available), c) a great education that will benefit you for a lifetime and you can reasonably expect to pay off with future earnings, or d) something that you need to live, like basic food and life-saving medicine. Things that do not warrant using credit, unless you have the money in your bank account to pay it off at the end of the month are: everything else. Also keep in mind that you should never let the balance get above 30% of your credit limit, even if you can still pay it off at the end of the month; a high balance could negatively affect your credit score.
I use a credit card on a daily basis to buy groceries and gas, and l make sure to pay that card off at the end of the month. This allows me to build credit, so that when I need to buy a house or a car, I can do it as cheaply as possible by getting a lower interest rate.
A common problem that will relate to all the rest is not making a budget. If you make a budget, a whole bunch of good things will happen. First, you see clearly when your expenses are outweighing your income. Second, you can see where you might be putting too much money (say, eating out) and other places that don’t get enough money (saving for college, or your first house, or retirement).
Being Forced into a Quick Decision
Ever had a salesman tell you that you can get 50% off, but only if you buy it right now? This is one that I struggle with all the time; not wanting to miss out on an opportunity for a great deal. Companies know that we feel this way, and that is why they offer us “great deals,” but only if we pull the trigger right away. However, if it really is a good item to purchase today, it will still probably be a good item to purchase tomorrow, and you can usually still talk them into the discount. Most of the time when I don’t purchase it right away, I realize that I didn’t need the doohickey after all. And many times when I do buy it, I end up asking myself why I so needed a knife that can cut through a shoe– or why I needed two of them (the old “buy one, get one free” trick).
If you make a budget, you can find a way to save money. If you force yourself to save money, life will be better in so many ways. The mistake is when people try to save money by putting away the money that they haven’t spent at the end of each month, which in many cases is ZERO dollars (it’s hard not spending money in your wallet, isn’t it?). This is the wrong way to go about it. You should take out your savings as soon as you get that paycheck, squirrel it away, and then see if you have money left to go have fun.
I know a lot of people that save their money in a regular checking or savings account, perhaps getting 0.1% in interest on that money. When I ask them why they don’t put their money in places that can earn a higher interest rate, the two most common excuses boil down to either ignorance or fear, and usually both. Don’t be that guy; learn how the financial world works and how your money can work for you. If stock market risk isn’t your thing, at least put your money in a high yield savings account or buy a certificate of deposit. And if you don’t want or need more money, that’s great! Get it, and give it away to those who are in need.
Ignoring Sunken Costs
Ever been to a baseball game where it’s raining, your team is losing by fifteen, no one is having fun, but your dad insists that you are going to sit through that game and “get our money’s worth for the tickets”? Feel free to go ahead and teach your dad about sunk costs … Once the thing is paid for, you should do what gives you more satisfaction. If that means getting out of the rain and watching a movie at home instead, it is a better economic outcome than still sitting in the rain only to have your team disappoint you even more. There are examples of sunk costs — money already spent — all around you, like that tie that is too ugly to wear anywhere, but you still put it on because you remember spending your hard-earned money to buy it. Find the other tie — you know, the one that can match with a white button down shirt — and put that one on instead. Then go think about the other sunk costs in your life that you should let go of.
As St. Paul said “If anyone is unwilling to work, he shall not eat” (2 Thessalonians 3:10). Everybody above the age of sixteen, regardless of need, should work. It teaches invaluable lessons, including responsibility and the value of a dollar, and skills, like how to get along with people you don’t agree with all the time, in addition to the job-specific skills you pick up at work. Also, by working unskilled jobs at a younger age, you might also realize the value of going to college and getting a good education. Old enough to work and don’t need the money? That’s great! Go volunteer somewhere, or give away your earnings to those in need.
Some people just don’t care one way or the other. They make enough money, pay what their creditors tell them to, and go on with life. They don’t care if they pay a 5% rate on their mortgage as opposed to the 4.5% they could be paying, even though that half percent might cost them another $50,000 over the life of the loan.
At the end of Schindler’s List, a movie about a German man credited with spending all of his fortune to save the lives of about 1,200 Jews during the Holocaust, there is a scene where he breaks down, thinking that if he sold a few more items he owned, he might have saved a couple more people. Most people would have been happy knowing that they saved even a dozen lives, but Schindler saved over a thousand and yet couldn’t bear to think of a couple more people that he didn’t manage to save. He was not indifferent, and he did some great things with his money. You can do some great things with the money you save on that half a percent of interest, too. Indifference is not a virtue.
I hope this article helps you to make some good decisions about how you use your money, your time, and any other resources that you have at your disposal. Please feel free to reach out with any comments or questions.