4 Financial Traps to Avoid
There will always be traps and myths associated with financial planning, and the more of them we can debunk and avoid over time, the better. Here are four ‘traps’ that readers and investors should keep in mind when making decisions.
1) “Consolidating” Student Loans and/or Credit Card Debt
The notion of “consolidating” student loan debt sounds appealing, as though doing so will somehow save you money. But in reality, it may do no such thing. When you consolidate student loans, it does not necessarily lower your interest rate – it just means all of your federal student loans are all organized in one place. You may still be paying the same – or even a bit higher – of an interest rate. And the interest rate is what matters most.
The action to take is not necessarily consolidation of loans, but a refinancing of them. Refinancing your loans can help you lower your interest rate which means owing less overall over time, and perhaps even lowering your monthly payment as well. In some cases, you can shave several percentage points off the interest over the life of the loan, which can equate to thousands of dollars over even just a few years.
2) Investing Money While You Have (High Interest) Debt
Let’s say for example that you have $10,000 in credit card debt at 11.75% interest, and that you receive a $10,000 bonus at work for all your hard work. You decide that you want to invest $5,000 in the stock market and use $5,000 to pay down your debt. You think you want to save some money for the future while also knocking down your debt load, and you feel good about your decision.
Wrong! In order for that decision to make economic sense, you would need to generate at least 11.75% out of your investment portfolio each year until you paid down your credit card debt. Anything less would mean you’re losing money to interest. Better to take the entire $10,000 and just pay down the debt to zero in one fell swoop.
3) Watching Too Much News
An hour in front of CNBC or Bloomberg news can be a dizzying experience. In the span of that hour, you might hear commentary from bulls, bears, cryptocurrency experts, hedge fund managers, trade hawks, globalists, and all variety of opinions on where the economy and the markets are headed. There is such a thing as too much information, and investors and viewers must remember that networks thrive on sowing a sense of chaos and uncertainty. Optimism doesn’t sell newspapers – fear does. Watching too much TV can mean being susceptible to making a critical investment decision in the heat of the moment or based on what you hear from one single commentary offering his/her point of view. Sometimes it’s better to focus on the big picture, which you rarely get in a 24-hour news cycle.
4) Buying a Home as an Investment
To be fair, buying a home as an investment is not a ‘trap’ in the purest sense. Homes can be great investments, especially if you live in a thriving market such as a booming city. The financial trap I’m trying to underscore here is the act of simply assuming that when you buy a house, you are making an investment. They are not necessarily one in the same. Buying a house means accepting all sorts of new costs, from a mortgage, to property taxes, to insurance, to real estate transaction fees, to house upkeep. Those costs combined could outpace the appreciation you see in a house, and it’s very possible to lose money. When you buy a house, make sure there is a life component before there is an investment component, and make sure you run all the numbers to see if it makes sense.
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