There are many ways to go broke, and money expert Ramit Sethi knows exactly how we get there. He has spent his career advising people how to master their finances.
In a recent LinkedIn post, he outlined five money mistakes we need to immediately stop making.
Carrying a Balance on Your Credit Card(s)
Put simply: Carrying a balance is an expensive way to borrow money. The interest rates are sky high and can easily snowball, making it harder to pay off your debt.
“Most people don’t get into serious credit card debt overnight,” Sethi noted on his website. “Instead, things go wrong little by little until they realize they’ve got a serious problem.”
Nearly 20% of Americans are afraid to check their credit card statements.
“This shame means that those in debt often don’t educate themselves on how to stop the madness,” Sethi wrote.
Carrying a balance leads to a debt spiral, where your debt grows over time. If you make only the minimum payment, you’re probably not even covering the interest charges, causing your debt to increase. This cycle can be difficult to break, causing your financial situation to worsen over time.
Waiting To Invest
Fear, uncertainty and market volatility can make you hold off from investing. But as the finance expert explains, if you’re waiting to invest because you’re worried about losing money, you’re making a big mistake. Sethi advises young people to use compound interest to their advantage and start investing as soon as possible.
“Time is on your side,” he told Business Insider. “When you’re young, it feels like $100 a month wouldn’t add up to that much. But when you run the math, it’s quite powerful.”
Borrowing From Your 401(k)
In addressing this issue on LinkedIn, Sethi first recommended building a system where your back is never against the financial wall.
“That means having enough savings; so, even if something bad happens — like a job loss or emergency expense — you can cover it,” he said. “Not everyone can do that, and sometimes surprises happen, but that’s your goal.”
That said, many who find themselves in a crisis will often choose to borrow against their 401(k).
“This is almost always a mistake, since the very people who got into a financial bind tend to get into them over and over,” Sethi said. “I hear about it every single week, with people writing to me how they planned for it to just be a ‘short loan’ but then ‘life got in the way.’ They end up creating yet another debt for themselves that they’ll never pay back. DO NOT DO THIS.”
Instead, he urges people to see this money as untouchable.
“If you absolutely need money,” he said, “you have other options, including negotiating with your creditors and using the CEO Strategy (cutting costs, earning more and optimizing spending). But the best option of all is planning ahead so your back is never against the wall.”
Buying a House Without Running the Numbers
While many people are buying homes at lower interest rates than generations past, the personal finance guru says buying a home isn’t always the best investment you can make.
“Most people never factor in all the phantom costs, including taxes [and] maintenance,” Sethi said. “They don’t factor in inflation and how that erodes the value of money over time.”
Instead, he advocates looking into the stock market over real estate when it comes to growing your money. “In fact, data shows that the stock market typically trounces the performance of real estate as an investment.”
Depending on where you live, he said, it might make more sense to invest in stocks over real estate. More important: You should always run the numbers.
Not Using Your Money To Live Your Rich Life
In one of his most controversial tips, the money expert emphasizes the need to start looking at money as a tool, not a burden.
“We’ve gotta stop talking about it as if there is something wrong with money: ‘Oh God, I gotta pay this thing off. It sucks,'” he told Men’s Health. “How about ‘How can I use money to get that? And how can I stop worrying about money and even start feeling good about it?'”
He encourages people to not be discouraged by their money mistakes but to see them as part of their path to living rich. Ultimately, Sethi says, being more specific about your rich life goals will get you closer to achieving them.
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