Category Archives: Financial Literacy

Ten Bad Habits of Personal Finance

The following list is in no particular order! It was written by me during three sessions on 2016-01-03, 2016-01-14, and 2016-01-16. These are issues salient to me. There are certainly other and perhaps more important issues such as salary negotiation, failing to itemize deductions, and poor estate planning. However, such issues are not my areas of expertise, nor are they current areas of interest for me.

Not getting what you deserve

I have met community-college students who literally did not know about the FAFSA. Their parents were low-income and they could have been getting over $2500 in federal Pell grant money per semester, but were instead getting nothing because they didn’t even apply.

This habit can be related to not researching or trying hard enough. For example, many consumers think they have no recourse when a price goes down after they purchase an item, while in fact, even if the lower price is being offered at another retailer, their credit card probably offers price protection if they would just take the time and effort to file a claim. Unfortunately, such individuals probably didn’t even read about their card benefits or think of this possibility.

This habit can also be related to being a push-over. I always choose the performance goal-orientation when it comes to matters of customer service or contract breakage: what are OTHER customers getting that I’m not, because they are standing up for themselves and demanding results? A VERY common example of this is bank fees. The typical consumer incurs bank fees without a whimper, yet these fees may not even be legitimate—or if they are, will probably be waived as a one-time courtesy if you ask nicely.

Not getting what you deserve is a HUGE problem. It relates to education, mindset, self-esteem, and many other issues. Most of us do not have an advocate when it comes to personal finance; we must do our own Google searches and take action to save ourselves money. Unfortunately, too many Americans would choose to put in extra hours at a low-paying job over using this time to become financially literate and earn or save many more dollars per hour.

Finally, consider that money saved is typically NOT taxable income. Pell grants, price-protection refunds, and courtesy waiver of bank fees are not subjected to payroll deductions or income taxes, yet if you DON’T pursue them, you have to earn anywhere from 15 to 50% more income to compensate for the opportunities you missed.

Paying for poison

When you buy alcoholic drinks, tobacco products, candy, soft drinks, or energy drinks you are literally PAYING to poison yourself. Not only do these products have no nutritional value; they actively damage your liver, lungs, and other organs, reduce your quality of life, and if chronically consumed, make you feel powerless and unhappy.

While soft drinks are expensive in 20-oz. bottles from the retail cooler, often running upward of $1.50, they are even more expensive at sit-down restaurants, often costing over $3.00 with tax and 20% tip. Just say no. If anyone judges you negatively for ordering water, you should probably find better dates or friends.

Financial needs expanding to match or exceed the amount of money available to you

Like many bad financial habits, this is more common with people who have achieved less formal education, e.g., high-school dropouts. If you have $10.00 in your pocket, this does NOT mean you need to spend $9.92 at the gas station on a 20-oz. bottle of Sprite, Monster energy drink, candy bar, and pack of cigarettes. YES, spending the $10.00 does prevent it from being stolen, and relieves you of the threat of it being “borrowed” (through peer pressure or coercion) by family or friends. However, it cuts off all future opportunities for the money and leaves you with no degrees of freedom to adapt to circumstances or opportunities.

Earning more money does not mean your lifestyle should immediately become more costly. In the Millionaire Next Door, people who invest wisely and increase their income, while continuing to drive an older car and live in a modest home, are called “prodigious wealth accumulators.” While this predilection for accumulation may seem empty if the wealth is never “enjoyed,” consider that these millionaires often enjoy the process of wealth accumulation itself, and the freedom it affords them. They typically are not preoccupied with spending. While “you only live once” is a comforting saying for the financially obtuse, heavy saving rather than heavy spending may lead to greater satisfaction and happiness, particularly when you have dependents to care for.

Obviously, this habit gets much worse when debt is involved. It is most certainly NOT in your best interests to pay 25.24% annual interest on these frivolous purchases.

Picking the wrong partners and friends

If you are dating or become married to someone who spends frivolously, it is very possible that they will not change. In fact, nagging and complaining may push them to become even more decadent and foolish in their financial habits. An analogous example is the devoutly religious family who raises a child who immediately announces his or her atheism at 18. Instead of seeing your partner as who you wish they would become in the future, a more realistic outlook may involve projecting their past behavior into the future; that is, assuming their financially unsound habits will only continue or become proportionally worse as they have access to increased income and lines of credit. If you accept these low expectations, you will probably have a truer understanding of the financial handicap (or even financial ruination) that being committed to this person will entail. In many cases this can be a deal-breaking issue.

Similarly, your choice of friends can hurt your finances quite a bit. Friends may use peer pressure to get you to buy things or go to events that are costly and not among your desires or in your best interests. Also, their bad financial habits can influence you, and they may become dismissive or jealous when you start working to improve your financial situation. Albeit, choosing good friends is a general issue that impacts many other areas of life. It may not seem that you have many choices in friends, but assuming you are an intro- or “ambi”-vert, consider that jettisoning toxic friends from your life may be a good choice, if they have proved unwilling to change.

Having or raising children

We often see the figure of $250,000 being bandied about as the cost of raising a child from birth to 18 years of age. While this may seem astronomical to some, to any middle-class American, the idea of a child costing $14,000 a year should seem quite modest. Of course, there are economies of scale to be considered when having multiple children, as well as many incentives and subsidies from the State. However, when considering how child-rearing transforms your life, it clearly costs far more than $250,000 per child in opportunity cost (particularly for mothers), and more importantly, time. Having a bigger house with additional bedrooms and bathrooms is very expensive. There is also so much time and energy to be sacrificed, and American children are prone to rebellion against even the best of parents. For example, at a young age, your child could take up drinking or some other dangerous pastime and wind up dead, completely destroying your investment.

One of the prime reasons people have children is to pass their genes on. When you die without having children, particularly if you are an only child, your lineage terminates. While raising the children of others (whether through adoption or committing to a single parent) is better for limiting the rate of increase of the human population, it does nothing for continuing your bloodline. When considering the astronomical toll that having or raising children imposes on your life, both financially and temporally, you should consciously consider how valuable continuing your bloodline is to you, particularly if you believe you are special and that your specialness is heritable.

Of course, it is well known that having children at an early age is predictive of poverty, and less formal education is predictive of, or at least correlated with, both. This cycle is perpetuated among children who grow up with low socioeconomic status (SES). Given that picking a financially reckless partner can have profound negative impacts on your SES, such a choice may function as a generational curse against your bloodline, especially if such recklessness is inherited, whether genetically or environmentally.

Obliviousness to basic arithmetic

With the recent Powerball lottery drawing on 2016-01-13, we saw that Americans are incapable of understanding odds. See, even with a $1.5 billion jackpot, your odds of winning still require a $584 million net payoff to be in your favor. The $2.00 you spend to buy the ticket are certainly net funds, since you have already paid FICA taxes, income taxes, etc. on them. Therefore, it is completely incorrect to focus on the gross amount of the jackpot. Further, the $2.00 spent on each ticket are funds spent now. Money is always more valuable in the present (among modern fiat currencies). The jackpot amount is based on a 30-year annuity, and is a figure based on the total gross amount you will receive without any downward adjustments for projected future inflation. The after-tax lump some payment was somewhere around $584 million, but with so much fascination with the jackpot, it ended up being split 3 ways. Therefore, the actual odds-based ticket value was probably somewhere around 80¢, after figuring in consolation prizes. That’s as good as it gets for the Powerball. An immediate 60% loss. Typically, jackpots are far lower, and even considering the recent 67% increase in odds from 1 in 175 million to 1 in 292 million, we see that this was still the best cost–benefit ratio for Powerball; the 2nd largest jackpot was much less than half the 2016-01-13 jackpot. Obviously, your (averaged) odds of dying in a car accident today are better than 1 in 292 million.

Insurance is arguably the inverse of lotteries; you pay a relatively small premium to avoid rare yet potentially catastrophic costs. With lotteries, you play a small entrance fee for a minuscule chance at a fantastic upside. While no competent financial planner advocates reckless lottery spending, being well-insured is something that experts and empirical evidence supports. However, without understanding of arithmetic, fractions, percentages, interest, compounding, odds, risk, insurance laws and procedures, etc., you could easily get suckered. This education is sorely lacking from K–12 schooling and many people find it tedious and uninteresting to acquire, despite its importance.

Obliviousness to basic arithmetic leads to being screwed over. You’ll buy the wrong things, be fooled by psychological tricks, and misunderstand every financial decision you make.

Eating out and throwing away food

I understand that some people do not have the appetite for large portion sizes that I have. Nevertheless, excluding salads, ice cream, and frozen yogurt, you can easily take home most foods to be eaten as leftovers. I can’t understand throwing away food prepared at home or purchased while dining. Even at a buffet, I rarely through out food. As someone who has worked in restaurants and in the stockroom of a grocery store, I know that conservation often seems pointless after seeing firsthand how much these businesses waste. However, it typically reduces your costs, improving your financial situation. Instead of getting a soda for $2.99 and eating part of your plate, drink water and eat all of (the food on) your plate. The calorie count will probably be the same, and you’ll be getting better nutrients.

Failing to understand the cost–time relationship

If time is money, money is time. You can buy other, foolish people’s time with your money! Therefore, while money cannot increase the amount of time you have (except with respect to extended lifespan due to better diet, medicine, etc.), it can allow you to accomplish more by using other people’s time, without slavery or duress. This is an amazing characteristic of money.

One example of where people vastly overvalue cost (and undervalue time) is in selecting a gas station. Basically, going out of your way at all to save a few cents per gallon is not worth the time, inconvenience, or effort, because you are probably only buying fewer than 20 gallons of gas anyway and would be saving less than a dollar or two. Yet, people often driver further, plan their routes, and devote considerable mental energy to such tiny savings on gas prices, while overlooking other huge financial blunders such as $100+ monthly cell phone bills.

Your time is valuable, and becomes obviously more valuable as you age. However, realizing the value of your time in youth is preferable; you are not likely not burdened by failing health and waning energy in your youth. Of course, the value of your time in dollars is probably related to your income and accumulated wealth; if you have no savings, you are going to have to make some very time-inefficient decisions just to survive. Becoming financially literate will help you avoid being homeless or without savings in the future, however.

If you live to 80, you have 62 adult years, or 22,645 days. How many of these days will be spent dying, sick, or in the service of others? Perhaps 5000? If you work in an awful career or live with a toxic spouse long enough, perhaps 10,000? You might only have 15,000 or fewer good days. Even a long human life is very short in many respects. You should not only value and guard your time, but you should also actively and thoughtfully evaluate its use and optimization. Since money is a vector for time, allowing you to free up time or employ the time of others, it should likewise be guarded.

Using credit cards really badly

There have been so many articles written about responsible credit card use that it is difficult to broach this subject without being trite. I will simply present this short vignette I typed up:

SMART:
Racking up charges on items that are cash-equivalents or are essential to earning money, on a credit card with a 12- to 24-month 0.00% promotional APR rate, while you have savings or low-risk investments that earn a solid return during this period. While the level of risk of your investments should always be such that it is very unlikely you would have to pay credit card interest rates, the potential for profit here is large: consider that if you max out a credit card with a $20,000 credit line for 12 months and invest the money in something such as an S&P 500 index fund, which earned about 8% annually on average over the past 10 years, you could make over $1500 gross in just one year. The savvy credit user also knows that the negative impact of high credit utilization effectively vanishes in less than a month after paying off the balance; as long as you aren’t taking out a mortgage or car loan during the 12-month period, it will be of no practical significance. (Caveat: Credit scores are being used for more things and I am not sure how detrimental this may be to your car insurance rates, health insurance rates, seeking an apartment, or seeking a job. If your overall utilization is below 30% across all your credit cards, the negative impact to your credit score will be lessened).

NOT SMART:
Racking up tuition charges on the above credit card at a 2% convenience fee, because you believe you “probably” can pay them back at the end of the year and avoid student loan fees and interest. Then, “probably” becomes “no way in hell” and you end up paying 22.99% APR on debt you could have been paying 3.4% APR on.

REALLY NOT SMART:
Racking up charges on the above credit card without understanding that the 0.00% APR does NOT mean no payment is due each month. Then, missing the monthly minimum payment and being immediately subject to the 29.99% penalty APR, with no way to pay off the debt.

Buying a house

Buying a house used to be a completely sane decision. As of January 2016, however, American housing prices are quite high; they are above historical averages when compared to wages, and perhaps entering another bubble. Very few people even think of making the standard 20% down payment on a house, let alone buying one entirely with accumulated savings. While cash sales are on the rise, these buyers are part of an elusive rentier class that epitomizes the startling stratification of wealth in America; many are banks themselves, and others are foreigners (try buying real estate in Mexico or another country as a foreigner, and you will see that America is unusual). While housing is historically an appreciating investment, and interest rates are quite low with good credit, maintaining a house costs a boatload of money, which may approach or even exceed the costs of renting or leasing. While accumulated equity is a salient rallying cry, a house can also be an albatross; it can tie you to a geographic area, preventing nationwide or even statewide job searches.

I have no fewer than three friends in their early to mid-twenties who are looking to buy houses, but without (in my opinion) any compelling reasons to do so. Paying rent every month is hard, and having a house is the holy grail of the American dream because it allows you to accumulate lots of stuff, but by renting and keeping your belongings to a reasonable minimum, you are much more flexible and mobile.

Picturing a fairytale future

I am amazed by how many women who are otherwise progressive feminists, yet still yearn for the “rich husband” who will wipe out their student loans and finance their unsustainable lifestyles. This is a profoundly demeaning and patriarchal idea, and yet, for many, it remains more appealing than self-discipline and personal responsibility!

Of course, it would not be fair to criticize young women without also criticizing young men who are aimless and adrift, not working toward a prosperous career nor even pursuits that provide meaningful personal fulfillment. In either case, descending into “magical thinking,” where one relies for hope on some black swan, external event such as winning the lottery or receiving an incredible job offer, becomes far too common. Self-discipline is a bitter pill to swallow, and is something that probably must come about by an internal impetus for meaningful change, rather than external pressures. It may also be disconcerting to recognize that self-discipline is a cumulative process, because it requires admitting that years or decades have basically been frittered away. However, our mortality coupled with the unidirectional nature of time indicts the present day as perennially the best and soonest feasible time to initiate meaningful change. While you may have to lower your fairytale expectations if advanced age, a criminal record, or enormous debts or obligations are present in your life, this does not mean you should give up. Further, the process of applying self-discipline may be enjoyable in itself (indeed, if it is not, persistence is difficult).

Conclusion

In encouraging personal financial literacy, as with any other educational ambition, criticizing and denigrating people for their ignorance, bad choices, and ridiculous beliefs often pushes them away. “Sneaking in” belief change in small, measured quantities, without labeling it as such, may be more efficacious. Moreover, maintaining an encouraging, forward-looking attitude that recognizes individual needs and individual levels of understanding is almost unarguably superior to belittlement. It is my hope that my online course on the Udemy platform, Introduction to American Personal Financial Literacy, currently under development and slated for completion in April 2016, partially fulfilling the requirements of my Master of Arts degree in Applied Learning & Instruction at University of Central Florida, will recognize these individual needs and encourage meaningful learning and change, without overwhelming or belittling students, encouraging a growth mindset throughout.