Dumb Things Smart People Do With Money
It’s the summer of 2004, I’m 23 years old and I’m driving down an empty El Paso highway. I’m driving to my new apartment that I can for the first time in my life, call my own. I’m excited because up to this point in my life, I had never lived on my own. In the moment of blind excitement, I had signed a lease contract I didn’t thoroughly read. I purchased a bunch of brand new furniture, and because I didn't have the cash, I maxed out all my credit cards to make these purchases. As you can see, this wasn’t a very smart financial move for a 23 year old Tae. I ended up spending the next 3 years paying back that credit card debt with some hefty interest rate.
We all like to think of ourselves as smart, logical people. I sure thought I was when I made my purchases. But when it comes to money, even the smartest among us can make some pretty dumb mistakes. So in this post, I want to review with you what I’ve seen as the five most common dumbs things smart people do with their money so you can avoid making them yourself.
1 - Take Money Advice From The Wrong People
From my observation, the most common dumb thing smart people do with their money is to take money advice from the wrong people, the most common place being the financial media. When we go to the bookstore, we see rows of magazines dedicated to money. When we turn on the news, we see very smart sounding individuals talking about money constantly.
When I was just getting started in my personal finance journey, I thought this was the place to go to get myself financially smarter. I thought that really well educated people read newspapers and watch the news, so this is where I should be getting information about money right? Boy was I wrong. What we don’t see on the surface is that many of these publications and financial news media are actually Wall Street’s billion-dollar marketing machines. Wall Street makes money when there are continual trading activities. More people buy and sell financial products, more money Wall Street and big banks make. So in order to stimulate more and more trading activities, what these banks will do is they feed millions of dollars to the financial media and publications.
The financial media and Wall Street have a very tightly knit symbiotic relationship. The media wants readers, viewers and listeners because that way they can get more advertising dollars from Wall Street. How do they get more readers and viewers? They write sensational, eye-catching contents: top performing mutual funds this month, best stocks to buy now, best trading platforms this year, etc.
Wall Street is more than happy to pay advertising dollars because it drives more customers to stimulate more trading activities. With the help of the media, Wall Street has been very successful at getting individual investors to chase after last year’s winning funds and market time. Or even using gloom-and-doom forecasters to play on investors fears and getting them to buy safer securities. Wall Street wins either way.
Be careful of where you get your financial information. Today, the problem isn’t lack of information, it is too much information. It’s hard to filter out what is good information vs. the bad. So, as a smart individual, practice good judgment when you give your attention. Smart, sound advice can make you millions, but bad advice can cost you millions.
2 - Too Much Student Debt
Number two dumb mistake smart people do with their money is near and dear to my heart. Too many smart and successful people take on too much student debt. In 2009, after 6 amazing years in the US Army, I decided to transition to the civilian world. It was an amazing experience, but I wanted to see what else the world had to offer. So I enrolled in a MBA program at UCLA. I definitely learned tons about the business world from my education and it helped me to transition successfully to the corporate world, but one thing I wasn’t very smart about was how I funded it. The program was quite expensive and I came out of it with $87K in student loans afterwards.
The gravity of the amount didn’t really hit me until I started paying it down with my wife after we got married. Education is important and smart individuals like you understand that principle. However, not all education is the same. It’s important to think hard about the value of the education that you are willing to pay for. If you have kids that are about to enter college and they are looking at expensive private colleges because they have a beautiful campus and offer 5 course meals at student dining, ask yourself, is it worth the $50,000 price tag?
Oftentimes, there are many great state funded schools that can provide just as good or even better education than what these private colleges can provide. Both my wife and I are both proud products of our state’s higher education system; the University of California and California State University system. When it comes to paying for higher education there are so many different ways to offset the cost if you are willing to do your homework. I was able to get my undergraduate paid for through the US Army ROTC program. Though you ow the military 4 years afterwards, if you want to serve your country and get paid to do it at the same time, the ROTC program is a great option.
My wife was also able to get her Masters in Nurse Practitioner paid for by her employer. She did owe 3 additional years working at the hospital afterwards, but she was able to get a $50,000 education completely paid for. When it came to my MBA, I had much smarter classmates who seeked employers who were willing to pay down their student debt as part of their signing bonus. Excessive student debt, I can tell you from a personal experience, can take a terrible toll. We have to delay purchasing homes or starting a family. We can’t invest for our retirement. We can’t take healthy risks in our career because we feel too financially vulnerable. Don’t put yourself in this position. Be wise and think twice before you take on too much student debt.
3 - Make Really Risky Bets
The third dumb things smart people do with their money is making really risky bets and really smart people are especially prone to doing this. There is a behavioral finance term called ‘Recency Bias.’ We overemphasize the most recent event and subconsciously project it towards the future. In the late 2000’s everyone thought that the housing market would continue to rise because they saw it rise the past several years. Smart individuals thought they could bank on this rise and would buy homes, refinance it when the price rose and buy more homes with the proceeds. But as history has shown, nothing in life stays the same indefinitely.
Many superpowers of the past, the Romans, the Mongolians, the British Empire all seemed invincible in their days. However, with time, they all either crumbled or lost their powers. To make wise financial decisions, we must look beyond the recent patterns and consider that the future could be very different from today. I mean who could have predicted COVID-19 to have had the impact that it did or inflation going as high as it is right now. The key is to make sure that you don’t stake your financial future on the success or failure of a single crazy bet.
After having watched the market constantly and reading countless articles from so-called financial professionals, you might feel tempted to jump in on the latest tip to get a piece of the action. However, practice prudence. The best path to take when investing is oftentimes the simple and slow. Accepting only as much risk as necessary to reach your goals and sticking with your investing plan through both up and down markets. For individual investors like you and I, I firmly believe that low-cost index funds provide the wisest investing options.
4 - Try Timing The Market
Number four dumb thing smart people do with their money is to try ‘timing’ the market, and smart people especially persist in this activity of timing the market, because we think we are so smart. Many of us who have successful professional careers are accustomed to having others see us as being “smart.” Our clients and colleagues see us as experts, so why shouldn’t we be able to predict short-term market movements? It’s obvious isn’t it?
When I talk to people about the economy, market timing is probably one of the most common statements people make without even realizing they are doing it, and I’m the ultimate culprit. We say statements like, ‘the market is up right now, so I’m going to wait until it dies down before I buy.’ ‘My Tesla stock is down right now, but it should jump back up again soon.’
When we point out that they are timing the market, they often acknowledge that timing is not a smart move, but they also present all sorts of reasons why it makes sense in their specific situation. The bottom line is that if we are waiting to buy or sell until some point in the future, then we are timing the market.
I get into this wrinkle constantly. Though we have set up automatic regular investments, at times I can’t help myself but look at the market and consider the idea of delaying the purchase or making it sooner because I think the market is either overvalued or undervalued. Then my wife who is much wiser than I would need to kick some sense into me. Experts have long cautioned against trying to time the market.
“The market timer’s Hall of Fame is an empty room.” - Jane Bryant Quinn
The sobering truth is that nobody is smarter than the market. When we try to time the market, we are making investment decisions based on emotion, not logic. Be ok being lazy when it comes to investing. This is a hard pill to swallow for smart individuals because many of you have achieved your professional success through hard work and smart decision making. But when it comes to investing, the only smart decision you need to make is to set up your low-cost index fund once and forget about it. The Nobel Prize winning economist Richard Thaler had said that his “...lazy strategy of doing very little, buying mostly stocks and then not paying attention has served him well.” I feel if it worked for him, it will work for you too.
5 - Not To Plan For Your Aging Parents
Number five dumb thing smart people do with their money is not to plan for your aging parents. You might be a superstar when it comes to all the items we talked about so far; you don’t watch the financial news, have no student debt, don’t take unnecessary risks and don’t even think about trying to time the market. However, this fifth one gets a lot of people because it's beyond our specific area of control.
I know, we don’t like to think about our aging parents more than we like to think about ourselves dying or our home crumbling under an earthquake. Because talking about aging is so difficult, we fail to discuss our parents’ needs and desires. The consequence is that we fail to research what those needs and desires might cost and come up with a plan for the future. Before we know it, the future arrives and we suffer unnecessary financial and emotional pain because we are scrambling to figure out a solution on the fly.
I saw this way too closely when my wife’s grandmother was going through her final stages of life. She was over 90 years old, yet there was no plan for who, what and how things were going to be handled if something was to happen to her. Everyone in the family was just hoping that the time would come later, rather than sooner. But the time came sooner than everyone hoped for when she was diagnosed with Stage IV lung cancer and her health took a dive.
My responsibility was primarily just the driver for my wife and her grandmother, but I saw first hand how lack of preparation brought so much financial and emotional tension to the family. There wasn’t a healthcare directive to guide the family towards her wishes. People couldn’t agree on where to house her during the final stages of life. There wasn’t a plan for what would happen to her assets afterwards.
Afterwards, my wife and I vowed that we would never want to repeat that experience with our own parents if we could help it. I agree that no amount of planning and discussion can free us entirely from the burdens of caring for aging parents. Because, to be honest, when we study and analyze our options, we are likely to find most of them unattractive. But that doesn’t mean we shouldn’t plan because planning allows us to gain at least some semblance of control over an inherently emotional and unpredictable situation. We may not like our options, but if we plan, we at least will understand them in advance.
