A lot of us have made some pretty horrific decisions in the past. Making mistakes is generally thought to be a part of the learning curve; when people make bad decisions, they get a first-hand experience of where they could have acted a bit more prudently. For example, we often find ourselves subscribing for a gym membership when the treadmill at home has been gathering dust for a long time.
That impulsive purchase of the new smartphone with your credit card when you are already struggling to pay the minimum is another example of a bad financial decision. In fact, a relatively new branch of study known as Behavioral Economics is looking at how humans, who in classical economics are termed as rational, end up making such irrational decisions! Well, the good thing about any bad decision is that you can learn from it and vow to not repeat it in future.
Despite burning their hands by making poor financial decisions, some people still end up making one bad decision after another as if their brain has somehow been hardwired to function this way only.
On the other hand, there are a number of novices – college-goers, people at first jobs, people who have suddenly become rich, etc., who are at the initial phase of their financial journey. It is important that we know which financial decisions we should not make. In the following paragraphs, we will take a look at 3 financial decisions that you should avoid.
1. Charging everything on the Credit Card
The reason we have put credit card at the first position is because it is one of the most easily accumulated debts. All you got to do is to spend some hours at a shopping mall on a Sunday evening! A credit card gives you a false sense of your ability to buy things.
Looking at a nice watch with a price tag of $1,000, a lot of people might say, “Oh, I have $3,000 in my credit card, even after buying it, I will still be left with $2,000.” However, what these people fail to understand is that the $3,000 that they have in their credit card is not their money. It is an amount that has been loaned to you on the condition that you return it quickly to the bank, or otherwise keep on paying interest until you clear the debt.
Buying on credit should be kept to a bare minimum. I would have advised you to shun credit cards altogether hadn’t it been for the important role they play in building a good credit score. Therefore, my advice to you is to do an assessment on where you stand financially. It will give you an idea about how much you can actually save, invest, and spend every month.
Keep the credit cards out of the equation, and use it once in a couple of months for small expenses such as gas, or eating out. This way you will keep yourself out of the vicious cycle of credit card debt.
2. Investing in Stocks without doing Thorough Research
So John, who lives next door, put the downpayment on that new car from the gains he made from the stock market. Impressive, isn’t it? So what are you waiting for? Shouldn’t you too funnel your savings into the stock market and make a hefty profit from it? Well, if you put money at stake in the stock market without doing any thorough research on your financial state, and on the fundamentals of investing, you might be in for some trouble.
First and foremost, you need to have a rainy day fund which will see you through the downs of life, such as the economic crisis of 2007-08. It is usually advised that you should have three months of living expenses in a rainy day fund. After securing an emergency fund you should think about investing in stock market. Before you take the plunge, grasp as much knowledge about stocks as you can. Don’t try to look for a short-term gain when you are taking your first steps.
Day trading is highly speculative, and even traders who have decades of experience in the stock market don’t get it right consistently. Form a long-term strategy and try to diversify your investment across different sectors. It is important that you don’t panic when you see your stocks tanking.
There are a lot of important points on stock trading that you should understand before actually putting your money in it.
3. Trying to Keep Up with the Joneses
From personal experience, I can tell you that one of the basic and common reasons why most people make a bad financial decision is because they want to impress others around them. The urge to be accepted in a social circle can make many people to accumulate debt quickly.
Often, we buy not because of the perceived value of the product, but because of how it will enhance our image in the eyes of others. The modern-day social structure puts a lot of value on the materialistic possession of people, and this is one of the prime reasons why most of us probably will never be out of this rat race.
The desire to own McMansions, expensive cars, latest gadgets, etc. so that we are not left out in this fiercely competitive world puts a lot of pressure on us to stay one step ahead of others. However, it should be remembered that most bad financial decisions are a result of this constant comparison with others.
We need to realize that the people we are trying to impress won’t be impressed anyway; instead they may find a fault with everything we do. Therefore, it is important that we spend our hard-earned dollars prudently and avoid spending on products that we can really do without.
This will go a long way in ensuring that we stay debt-free and do not regret while we are about to retire.
About the author: William is a finance blogger, freelancer and copyright editor from NY. He blogs at Daily Gains Letter