Personal Finance for Dummy Investors – Four Missteps to Avoid

There was a time when the word “dummy” had negative connotations. But with the advent of the “Dummy” book craze, I felt a title containing the phrase, “personal finance for dummy investors,” to be sort of endearing. It is certainly not meant to be insulting, but rather to point out certain financial blunders we all make at some point in our lives even though we may know better. See if any of these financial missteps sounds familiar.

1. Buying a Car Based on Our Ability to Make the Payments – It always seems when I’m car shopping, the salesman pulls the same stunt every time. After we find the car I’m looking for, he asks how much I can afford each month. If I am dumb enough to tell him, he will tell me how many years the terms can be extended to make that payment come true, without dropping the sales price, of course. The moral of this is to never tell the salesman how much you can afford. It is none of his business. Instead, go into the dealership with acceptable loan terms already in mind. If you don’t, you will get conned into buying too much car every time.
2. Waiting too Long to Start Saving for Retirement – Upon entering the workforce, most of us see retirement as being a long way off. As a result, we put off our investing program for a long time. By the time we decide to start investing, normally in our 40’s or 50’s, we have already lost our greatest advantage – time. Although retirement is decades away when you are in your 20’s, starting at this point will only require a small monthly sacrifice to reach your retirement goals. As an example, someone who begins investing right out of college at 22 years old will only need to invest $141 per month compounded at 10% annually to accumulate a million dollar nest egg by 65. Compare that to someone starting at 50 years old, who will require a monthly investment of $2,623 to achieve the same results. Quite a difference!
3. Placing too Large a Bet on Our Own Company’s Stock – Ever since the Enron fiasco, this mistake is probably not nearly as prevalent as it used to be. However, in the past, employees would routinely place all of their retirement savings in company stock. Heck, within some 401k plans, company stock was the only choice. During the dot com era, this move made many employees extremely rich. Hats off to them. At the same time, lottery winners are selected every week too, but I wouldn’t bet my entire retirement on that either. When dealing with retirement, you should not be trying to hit home runs, but instead singles and doubles. If you want to swing for the fences with company stock, go for it, with, at most, 10% of your total portfolio. But don’t bet everything on one company. All it takes is one idiot at the top to tell a few lies for a few years and your retirement is gone!
4. Wasting too Large a Percentage of Our Income on Consumables – If you had to add up the money you spend each month on eating out, Starbucks, alcohol, and bottled water, it would probably total a large amount. That is, if you are anything like I used to be in my 20’s. Now, I believe in enjoying life, so I certainly don’t recommend eliminating or even drastically reducing the above items. However, a little self discipline goes a long way. From example #2 above, a 22 year old stashing $141 per month at a 10% rate of return will build a million dollar nest egg by 65 years old. Do you think you can find $141 per month between your dining out, Starbucks, alcohol, and bottled water? In a word – EASILY! Cut your eating out in half, replace Starbucks items with home brew, drop alcohol selections down a notch on the quality scale, and begin filtering tap water to replace the bottled water. You’ll end up with many times the $141 without even breaking a sweat!

In summary, certain financial mistakes seem to occur more frequently than others. However, if we understand the impact that these poor decisions have on our lives, we have a much better chance of making the correct choices. Don’t allow the poor decisions our society tends to make to cloud your own good judgment. At the end of the day, the numbers don’t lie!n