9 Things Idiots Do With Money. Don’t Do This.

We’re looking at 9 things idiots do with money. By avoiding these blunders, you will be more financially comfortable, in control of your financial life, and dare we say it – happier.

Please don’t hate on us if you’re doing many of these yourself. We’re obviously using the word idiot in a light-hearted sense, and rest assured that we ourselves have done some of these foolish things with our own money.

There’s a wide range of silly things that people do with their money and in this post we’ve got many different angles covered – from terrible spending habits, saving and investing fails, general finance mistakes, and property mishaps. Let’s check it out…

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#1 – All-In On Bitcoin, Tech Or A Single Stock

Although diversification must be one of the most talked about investing concepts, it amazes us just how few people actually diversify properly. Our guess is it’s because diversification is totally misunderstood.

These people tend to throw way too much of their money into Bitcoin, Tesla, or the tech industry, or whatever else has done well recently and give no second thought to a properly diversified portfolio. We know people that are 100% invested in Bitcoin – which is utter madness.

FYI, we’re not hating on Bitcoin. But this seems to be the one asset that even your typical “average” person seems to be investing in, with no knowledge of portfolio diversification, nor of investing generally. The same can be said for anyone who is only invested in a handful of stocks.

Many people hate on diversification believing it lowers returns. Do diversification incorrectly and yes, you will get a worse return – often called diworsifcation!

Diworsification occurs from investing in too many assets with similar correlations that add unnecessary risk to a portfolio without the benefit of higher returns. However, diversifying properly has been said to be “the only free lunch in investing” because an investor can potentially achieve greater risk-adjusted returns.

#2 – Paying Off Their Student Loans (UK Only)

This point only relates to UK student loans as the student loan system here is very unique in that what you pay on a monthly basis is determined by your earnings, not the amount of debt you have. Only in a few specific circumstances is it worth paying off your student loans early.

Most student loans get written off after 25 or 30 years depending on the plan, and most graduates who started uni in or after 2012 will never pay off the debt before it gets written off, so paying off early could be a costly mistake.

Secondly, most people borrow money throughout the course of their lives. They might borrow with a mortgage to buy a house, a loan to buy a car, a business loan to start working on their dreams, and in too many cases they carry very expensive credit card, store card and overdraft debt. It doesn’t make sense to overpay cheap student loan debt, to then have to take out other debt on normal commercial terms later.

#3 – Overpaying Their Mortgage

A mortgage is amongst the best type of debt you can ever have, as it has a relatively low interest rate, and is super long-term (meaning your monthly capital repayments are small compared to the size of the debt). When you overpay your mortgage, you can’t easily get that money back.

Paying down the mortgage early might knock some time off the length of your mortgage-term and the total spent on interest but that’s money that could have been invested and making even more money. For instance, it could be invested in the stock market at an 8% average annual return. You can always overpay your mortgage in later life, if you really wanted to, after you’ve built up some sizeable wealth first.

Ben once whacked £1,000 into his mortgage as an overpayment when he was 27. He’d just bought his first home, and thought it was the right thing to do. Luckily, he soon realised the error of his ways before he sunk any more cash into what is effectively a glorified no-withdrawal savings account.

#4 – Fail To Insure Their Biggest Asset

Insurance always feels like a waste of money when you don’t ever claim on the policy but when the unthinkable happens, you’ll be glad that you were pro-active with your emergency planning.

Financial idiots think that it will never happen to them. They will never get a debilitating illness leaving them unable to work. They will never die at a relatively young age leaving their loved ones unable to cope financially.

Risk statistics - Income Protection Insurance

Here are the risk statistics for a 25-year-old male during their working life. Effectively 1 in 2 people will face a disaster!

We don’t think it’s smart to insure low ticket items like mobile phones but for the big stuff that would shatter your finances if they were to occur, it’s only logical to take out a policy. Everyone rightly does this with house insurance and car insurance. But why not insure your biggest asset? You!

We both have income protection insurance – with Ben’s costing just £17 per month – and he also has life insurance to help his wife and child in case he was to die prematurely.

A while back we did an entire video on income protection insurance specifically aimed at those who want to lock-in their financial freedom today, linked to here – it’s definitely worth checking out!

We also have a little more info on lifestyle insurance here, and you can get a quote from the same company we use ourselves, here.

#5 – Unintentional Saving

A fairly new saving technique that is popular with younger people and many innovative finance apps have introduced is a feature known as round-ups. This is where every time you buy something, the app will round up the price to the nearest pound and automatically save or invest the change.

Savvy savers and investors do not use gimmicky services like this because they know exactly what they can save each month from day 1 as they have budgeted for it – their saving is planned for and intentional.

Secondly, the act of saving should not be linked to how much you spend. A service that encourages you to spend more is not good for your wallet.

And thirdly, from the round-up services we’ve seen, they don’t collect the spare change as and when the transaction happens. Instead, the money is collected weekly or every 2 weeks, so you will have random amounts of money leaving your account when you’re not expecting it – obviously not good for sensible budgeting.

If you are incapable of saving anything and this is the only way that you can put money aside, then don’t let us talk you out of it, but just know it’s far from a sensible saving plan.

#6 – Don’t Prioritise Spending Where It Matters Most

We’re probably all guilty of this at times – I know I certainly am. The fact of the matter is that for the majority of us money is a limited resource, so we need to allocate it to the parts of our life that is most important and where we get the most value. Essentially, don’t spend a lot of money on stuff that you will barely use.

People spend about 8 hours a day or a third of their life in bed, so it makes financial sense to spend money on a good mattress and a good pillow. Recently, I bought an expensive pillow made from Nordic Chill fabric. God knows what this is but now I’m more likely to get frost bite than I am to get hot and bothered in the night. That’s a good thing by the way: I was previously always flipping the pillow over looking for the cold side!

Conversely, Ben may as well have thrown money down the drain when he bought some expensive outdoor furniture, that he almost never uses. Foolishly (his words), he spent more on this than he did on his sofa which he probably sits on every day, compared with the outdoor furniture that he sits on just a handful of times a year in the UK’s glorious weather.

A common money saving tip is to cancel your gym membership, but for some people this could be some of their most worthwhile spending. A gym membership allows them to stay fit and healthy, and for some is a great way to socialise with likeminded people.

How many people are working from home and still sitting on that backbreaking kitchen chair? For them it would probably be a good idea to open the wallet and buy a comfortable office chair. This is somewhere you’re sitting for 8-hour days after all – you only live once, and you may as well be comfortable.

Generally, you want to spend good money on stuff you will use extensively except when cheaper alternatives will offer a similar experience like a used car, rather than a brand new one. And don’t spend much on the stuff that doesn’t matter to you. Sounds obvious but everyone seems to be spending in the wrong places.

#7 – Buy The Biggest House They Can “Afford”

Financial idiots buy the most expensive house they can afford, and to be clear we’re not talking about someone who earns an average salary or less and is forced to buy an expensive house. For low earners they may have little choice – it’s either an expensive slum (as is the state of the sorry UK housing market) or it’s never getting on the housing ladder.

We’re saying that higher earners who chose to cripple themselves with mortgage debt in order to buy the most expensive house they can afford is idiotic. They believe (and are probably right to) that the housing market will continue to rise, and they will benefit from huge leveraged gains.

But your home is not really an asset like an investment is, as your home takes cash out of your pocket. It would make far more financial sense to buy the house they want that is comfortably within their means, and use what’s left of their cash to invest elsewhere.

For example, if these people want to benefit from the housing market, then with the extra money they now have they could invest in BTL property, which has the benefit of putting cash into your pocket and still benefiting from the same leveraged house price appreciation.

#8 – Long-Term Mortgage Fixes

It amazes us that nobody seems to be critical of long-term mortgage fixes such as 5 or 10 years except us. In some rare cases it might make sense, but we can’t think of any. Long-term mortgage deals are a bad idea because life is too unpredictable. These products usually come with higher interest rates than short-term fixes, and with early repayment charges of around 5%. For example, that’s a £15,000 fee on a £300,000 mortgage. Outrageous!

With a timeframe of 5 years anything could happen that forces you to sell the property and incur the wrath of the Early Repayment Charge. You might break up with your partner, you might lose your high paying job, you might want to move up the property ladder, you might want to relocate, you might want to release equity… it could be any reason.

It might seem like locking in the interest rate is a good idea right now but that’s only true if somehow you’re immune to all of life’s curve balls.

If you’re concerned about sudden interest rate hikes, we don’t think this is likely. The Bank of England, who sets the base rate, knows that any sudden large increase would destroy the economy as millions of homeowners would be in deep water. We expect interest rates to rise slowly, giving homeowners chance to circumnavigate any problems.

#9 – Don’t Save Enough For Retirement

The UK’s private retirement savings are in crisis. A few years back the government did a great service and introduced auto-enrolment for pensions. Many good companies were already offering pension plans to their staff, but many weren’t, so auto-enrolment forced these disgraceful companies to do the same.

The problem is auto-enrolment is extremely misleading and even on the government’s own site we didn’t find the truth. Everyone believes that they pay in 4% of their earnings but the hidden truth is that only 4% of qualifying earnings is paid into a pension. This is topped up to 5% with tax relief.

Qualifying earnings is the name given to a band of earnings that are used to calculate contributions for auto-enrolment. For the 2021/22 tax year this is between £6,240 and £50,270 a year. This means on a £25,000 salary you only make pension contributions based on £18,760.

Earning £25k, you would only save £62 a month with a 4% contribution, your employer would only pay in £47, and you get less than £16 tax-relief, giving a total of just £125 per month. According to uktaxcalculators.co.uk that would give an inflation adjusted pension pot of just £100k after 47 years.

That’s better than nothing but not much for a lifetime when you thought you had been saving diligently. You would burn through £100,000 in no time. Most studies suggest you need closer to £400,000 to live a £25,000 per year lifestyle in retirement, and that is assuming the state pension still exists to top it up, which is a big if!

Things get far worse when we consider other savings. According to Raisin.co.uk, the current average savings pot of someone in the UK is £9,633. Those in the younger age brackets have considerably less savings. One shocking figure is that 42% of those aged between 25-34 have stored away less than £1,000. This is financially irresponsible and a ticking time-bomb.

What else do financial idiots do with their money? And be honest – which of these have you done? Join the conversation in the comments below.

Written by Andy

 

Featured image credit: photoschmidt/Shutterstock.com

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