A recent article in the Wall Street Journal listed five of the worst money moves you can make. Below I’v e listed each of the five items along with a few thoughts of my own.
Reaching for Yield
We all want to put our money to work for us so it can grow. But with interest rates at historic lows, finding a safe place to invest while earning a decent rate is easier said than done.
According to the WSJ, the desperate search for a better return leads many to take on added risk and invest in complex products they don’t understand. That leads them vulnerable to Ponzi schemes and other scams that will rob them of their retirement dreams.
If you don’t understand an investment well enough to explain it to a friend, you’re better off staying away.
Overspending on Your Children’s College
The cost of a college education has skyrocketed in recent decades, and the sad thing is that even an expensive college degree doesn’t guarantee a job after graduation.
I’m not arguing against college. Getting a good education is extremely important but when someone is paying $150,000 in student loans while flipping burgers at McDonald’s, something is wrong.
If you can afford to send your kids to an expensive private college, go for it. But if you have to sacrifice your retirement to foot the bill, there’s no shame in a less expensive public university.
Owning Stock in Your Employer
If you work for a solid company that investors love, it might seem like a good idea to load up on company stock. But keep in mind you’ll be saddling yourself with a lot of added risk.
Think about it. You already rely on the company to pay your salary (though if you’re a Wealthy Turtle fan you should also be building other income streams on the side). Do you really want to rely on them as an investment too?
If the worst were to happen and the company went under, you’d lose both your income and whatever percentage of your assets were invested in the company. It might seem worth the risk if you work for Google or Apple, but just remember the folks who worked for Enron thought the same thing.
Taking Social Security Too Early
Determining when to take Social Security is a tricky question. Let’s say you just turned 62 and your current earnings are $50,000 a year. According to the Social Security Administration’s online calculator, if you claim your benefits now you will receive a benefit of $1,011 a month.
Wait until age 66 and your monthly payment will be $1,420. If you can hold out to age 70 before claiming your benefits you’ll receive $1,972 each month.
Obviously, waiting those eight extra years greatly increases the amount of the benefit you’ll receive each month. In the example above the monthly benefit is almost doubled!
But is waiting always a good idea? It depends…
How badly do you need the money now? Can you live without it for a few years or are you desperate for cash right now?
Are you still working? Do you have other streams of income to live on?
Most importantly, how long are you going to live? If you live to age 95 you’ll definitely see more benefit if you wait until age 70 to take Social Security. But if you die at 72, you might as well have claimed your benefits early. Unfortunately, you’ll have to make the decision without knowing how many years you have left.
Buying Long-Term Bonds
When interest rates go up bond prices go down, and when interest rates go down bond prices go up. With rates already at historical lows, there isn’t much room for bond prices to rise.
Even with interest rates expected to stay low for the foreseeable future, you don’t want to get stuck with a bunch of bonds at current prices once interest rates start to rise.
At the same time, the current interest rate on US Treasury Securities is hovering about three percent. Even with a low inflation rate of around two percent there is precious little profit to be had. If inflation suddenly spikes up a few percentage point you’ll actually be losing money.