1. Falling in Love … With Your Investments
It can be great to fall in love with a person, but stocks can get you into deep trouble. No one should have more than 10 percent of his or her wealth locked in one stock. Just ask the former employees of Enron, who lost both their jobs and their retirement savings when the company filed for bankruptcy 10 years ago.
2. Chasing a Fantasy
You’ve read it 100 times: “Past performance is not an indication of future returns.” But no one appears to believe it. One extensive study that looked at 19 years of market data found that investors consistently poured money into “hot” investments just as they were about to turn cold. That left the average investor with returns that fell way below the market as a whole and didn’t even keep up with inflation.
3. Equating “On Sale” With “Good Deal”
Consider two television sets: Both are $500, but one is marked down from $800. Which one do you buy? If you’re being reasonable, you buy the one that got the better rating in Consumer Reports. But most people buy the one that’s on sale, says Matt Wallaert, a consultant for LendingTree, which owns the money management Web site Thrive. In fact, even people who would never have spent $500 on a television often will when it’s discounted — simply because it’s so cheap!
4. Retaliatory Spending
You don’t need it. You don’t want it. But, dang it, no one is going to tell you that you can’t have it. New York psychologist Bonnie Eaker Weil calls it “POP” spending — for “pissed-off purchases.” She did a survey before publishing her latest book, Financial Infidelity, and estimated from the results that POP spending accounts for about $424 billion in purchases each year.
One of Weil’s Brooklyn-based clients, for example, went on a retaliatory $500 shopping spree when her husband gave one of her beat-up old jackets to charity without asking her first. When she got home, she informed him that since he didn’t like her old jacket, she had gotten a new one from Saks Fifth Avenue. Such purchases can also result from a fight with your boss, mother, or best friend, according to Weil.
But as good as retaliatory spending may feel, it can do real damage to your financial health. Tarbox says a better approach is to talk out the anger, hurt, or disappointment — or just your bad day — with a friend, or even a professional counselor. If you have to spend money on a psychologist, it’s probably still cheaper than the golf clubs or designer shoes you put on your credit card after that last argument with the boss.
5. Hanging On to Debt
The number of people who have money in savings accounts, earning less than 2 percent, while carrying debt on credit cards that charge more than 14 percent is “shocking,” Wallaert says. Of Thrive’s customers who have more than $500 in credit card debt, almost 40 percent have more than enough in savings to pay it off, he says.
You might argue that you need those savings for emergencies. And you do need some emergency savings, allows Frank C. Presson III, a financial planner in Tucson, Ariz. But if you’ve got considerably more savings than debt, there’s no excuse. Keep one month’s worth of living expenses in the bank, even at those sorry returns, Presson advises. Use the rest to pay off the high-cost debt. Then rebuild the emergency savings, not the debt. Worst-case scenario: You still have the credit cards (now with zero balances), and you can tap them in an emergency.
6. Parental Martyrdom
An emerging problem involves parents who spend themselves to the edge of insolvency bailing out their children. “It starts from a good place, basically from wanting to be a good parent,” Klontz says. “They’ll say that Johnny is going through a rough patch and needs some help. But it becomes financial enabling.”
7. Cyber Insecurity
Roughly half the world has signed on for free online banking, which makes money management easier and saves the typical consumer about $50 annually in postage stamps. Among the people who don’t use online banking, 41 percent say they’ve held back because of security concerns, according to a recent survey by Gartner Research.
What do banks typically do to secure online customer accounts? They put up multiple firewalls, which are the equivalent of brick enclosures around your house, and they have techno-security teams attempting to find the weak spots and shore them up. They also patrol the firewalls 24/7, looking for climbers.
Now, let’s look at your mailbox. It’s probably unlocked and unguarded — just what a thief needs to steal your credit cards. In reality, the chance of becoming a victim of identity theft or financial fraud as the result of low-tech crime — whether it’s somebody stealing cards or “spoofing” you into providing private information via e-mail — is a lot greater than the chance that somebody will breach your bank’s online vault.
So sign up already and save the stamps. And if you’re worried about security, check your account regularly to make sure there’s no suspicious activity.
8. State of Denial
Remember when you were 2 years old and you thought you could hide by closing your eyes? When the stock market plunged last winter and spring, that’s just what investors did, leaving their quarterly statements sitting unopened on the counter.
If watching too closely would make you abandon a reasoned investment strategy, go ahead and ignore a statement or two. But losses don’t go away just because you don’t look at them, Tarbox points out. At some point, particularly if you’re nearing retirement or need the dough for some other reason, you need to take a look, assess where you are, and figure out what to do about it.
9. Hoarding Money
Children of the Depression did a lot of this — stuffing $20 bills in their bibles or balling up tinfoil and rubber bands so they wouldn’t have to buy more. But planners say that this is often a problem with wealthy and responsible older folks today: They’re so afraid of running out of money that they don’t enjoy the money that they have.
“When people deny themselves things that they could clearly afford, you have to ask them what they’re saving that money for,” Tarbox says. “We have to tell them that they’re not spending enough.”
If you’re worried about running out of money, sit down with a financial planner and work out the math. Make sure you consider worst-case investment scenarios, not just the averages. That will make you more comfortable about weathering a bad patch like the one we just muddled through. Then, if you still have more than enough, make a plan that will allow you to enjoy your wealth by either spending the excess or giving it away.
Money, after all, is a means to an end — not the end itself. You save it to make you, and the people you love, calm and comfortable. And it’s a lot more fun to take the kids and grandkids on vacation — or provide them with college money or other gifts while you’re around to get the hugs and kisses — than to know that they’ll inherit a fortune after you die.