There are certain financial lessons we all tend to learn in life, like the importance of saving money and staying out of debt. But sometimes, the best advice out there can lead us astray. The following money moves might seem wise at first glance, but in reality, they could wind up hurting you financially.
1. Buying a home
Buying a home might seem like a much smarter move than throwing money away on rent — at least at first. After all, as a homeowner, you get access to certain tax breaks that renters don’t, and you get an opportunity to build equity in your property over time. But if you’re buying a home because you think it makes for a good investment, that’s really a dangerous approach.
When you buy a home to live in, it’s really more of a hybrid investment/expense, with an emphasis on the latter. And if you go in unprepared, like so many buyers do, you could easily end up in way over your head.
Now if you save enough for a 20% down payment, take on a reasonable-sized mortgage given your income level, and amass a solid level of emergency savings prior to taking the leap, then homeownership could end up working out quite nicely for you. But if you stretch your budget to an uncomfortable degree and go in without much in the way of backup savings, you’re likely to encounter a scenario where a maintenance item or repair drives you into debt, thereby wrecking your credit and causing you to throw away more money than necessary. The point, therefore, is to proceed with caution when buying a home, and know that if that property is serving the purpose of putting a roof over your head, it’s an expense more so than an investment.
2. Attempting to time the stock market
You may have been told that it’s important to get your timing just right when putting money into stocks. After all, you want to make sure you’re buying low, selling high, and maximizing your returns.
The problem, however, is that even seasoned investors struggle to time the market, and numerous studies have shown that this approach to investing just doesn’t work. A much better one is to identify great companies, buy shares of their stock at regular intervals, and hold them for as many years as possible, all the while ignoring what the market does in between. It’s a concept known as dollar-cost averaging, and while it obviously won’t guarantee success, it’s been proven to work for investors over time.
Dollar cost averaging virtually takes market activity out of the equation so that upticks and downturns don’t influence your investment decisions. And if you’re willing to adopt that strategy and stick with it on a long-term basis, you’re likely to come out ahead — regardless of when you first get in.
3. Keeping all of your money in cash because it’s safe
You’ve probably heard that it’s wise to have a healthy level of cash in the bank for emergencies — but that doesn’t mean you should house all of your money in a savings account. Though locking your cash reserves away in the bank is a good way to ensure that you don’t lose out on any principal you accumulate, it’s also a good way to stunt your savings’ growth. A better bet, therefore, is to keep up to six months’ worth of living expenses in a savings account so that it’s accessible when you need it in a pinch, but invest the rest of your savings to fuel its growth.
Imagine you have $70,000 in savings that you don’t need as part of your emergency fund. If you keep it in the bank and earn 1% interest a year over a 20-year period, you’ll grow that sum into $85,400. But if you invest it in the stock market and generate an average annual 7% return instead (which is actually a few percentage points below the market’s average), you’ll end up with about $270,900. And clearly, that’s a sizable difference.
Sometimes, we do things with the best of intentions only to have them backfire. Before you buy a home, attempt to time the stock market, and dump all of your savings into the bank, think about whether these moves will really work out well for you in the long run. And then tweak them accordingly so that you don’t end up regretting them down the line.