5 disastrous financial moves and how to avoid them
Every week, our team of certified financial planners answers your questions and share their thoughts on relevant issues of the day like saving for retirement, college planning, budgeting, reducing debt, refinancing and more.
Ted Jenkin of oXYGen Financial
Today, planner Ted Jenkin from oXYGen Financial discusses five disaster financial moves consumers often make — and can avoid.
1) Buying More Home Than You Can Afford- This is my top one as it will truly cripple your long term financial plan. Years ago, I had heard of a very simple financial ratio called the primary obligation ratio. It said that your mortgage payment shouldn’t be much more than 28% to 34% of your total gross monthly income. Use that statistic in conjunction with putting 20% down on your home purchase and you will typically avoid this number one financial disaster.
It is impossible to squeeze into a home financially like you would a car or some other one-time purchase. Many people forget the cost of furnishing the house, which can run 5% to 15% of the home value depending on your taste. In addition, you should estimate that basic upkeep of your home will be 2% to 4% annually. This includes expenses ranging from landscaping, to a blown water heater, to just painting rooms again. For the newly married couple with two incomes, consider what will happen when you have your first child. In many cases, one spouse decides to stay home after the birth of a first child. Beyond the new kid expenditures, the budget takes a huge hit with one less income.
2) Private Equity Investments With Friends- You’ve probably heard a story of someone who invested in a start-up technology company, a newly developed building, or some fancy new gadget. The investor made a boatload of money. However, for the regular guys and gals who put money into a friend’s start up restaurant, a piece of land they never saw, or a few shares in a new company, it generally doesn’t work out in the long run.
Based on my personal experience and the experiences of my clients over the years, I believe the odds of cashing in on a private equity investment are very slim. Perhaps less than 5 percent of the time does money actually come out the back end of the investment; more often the result is a loss of all of the money. Here is my simple rule: If you aren’t going to be actively involved in the business as an owner, stay away.
3) Carrying Credit Card Debt- Besides a reasonable home mortgage, most debt just isn’t good for you. Carrying ongoing credit card debt is a killer. Sometimes credit card debt occurs because of some one-time emergency or catastrophe, but more often than not it is just simply created by living beyond your financial means. You spend more money than you make and do it for a sustained period time and you end up owing the wrong people. Getting tracked down by a loan shark with the Soprano’s won’t end up feeling good, and neither does watching your debt compound at a 18% to 24% interest rate with the credit card company. At an 18% interest rate, your debt will double almost every four years. The sooner you get a budget and a financial plan, the sooner you will pay off the debt.
4) New Automobiles- I’m thinking of selling the new car smell air fresheners right on our website to get people to stop buying new automobiles. Make whatever argument you like, buying a new car is just about the worst investment you can make. I don’t mean trading in an older car for a newer “used” car. I’m talking about buying a new car, period. If your financial advisor had an investment that you knew would go down in value 40% over the first two years, there’s no way you would make that investment. With body styles changing less frequently in cars today, you can settle for getting a car with almost all the new technology for 40% less price. This financial move over 20 years can save you huge money which you can apply toward your financial goals.
5) Not Saving Enough- It’s true that the markets and economy have been shaky, and could be for many years to come. When you look at a goal like retirement, most of us do not want to retire later nor do we want to live on less after working for 30 or 40 years. If you cannot control the markets or your overall rate of return, the one thing you can do to tip the odds in your favor is save more. Use my simple tip of saving 33% of every raise you get, and you will learn to live within your means vs. spending your raises and bonuses. Over time the money will be out of mind and out of sight putting you in a position of refusal come retirement time.
Avoid these disasters and put yourself on track for financial independence, purpose, and freedom.
Have you successfully avoided these pitfalls? What other missteps lead to financial disaster?
Planners answering your questions:
Refinancing when your home has lost value
If you have a question for any of our certified financial planners, email rcash@ajc.com.
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30 comments Add your comment
Leary
August 11th, 2010
8:09 am
We have paid off our home and cars and keep our credit cards paid off every month, but with the cost of taxes, insurance, and maintenance we are still only able to save about half of the old house note. It takes a higher percentage of the paycheck to live these days. I really don’t know how young people make it with a mortgage, car note, and kids…
Tinytam
August 11th, 2010
9:28 am
Leary – that’s amazing to have no debt! You are an inspiration! I’m in my mid-30s and hope to be debt free as soon as possible.
Leary
August 11th, 2010
9:31 am
Well, I am 61, so the payoff did not happen over night. Be patient and consistant and you can do it… and the sooner the better!
Randy Abbott
August 11th, 2010
10:36 am
A good investment I have made was to buy a 1998 Jeep Wrangler new. I’ve taken care of it over the years and it still runs and looks good, plus the taxes and insurance are low.
David
August 11th, 2010
11:26 am
So what if the value of a new car goes down 40% in two years? Who buys a new car with the idea of selling it for a profit? Whatever happened to buying a new car and holding on to it for ten years?
AWJ
August 11th, 2010
11:33 am
I agree Randy…I think buying a NEW car is fine assuming you plan to drive it for 10+ years and can pay it off in 4 years or less vs. buying a 2 or 3 year old car with 60K miles on it….
Plus finance rates for new cars are always much less than rates for a used auto through a bank, credit union, AAA, etc. Add in the dealer incentives and discounts and you the gap of buying a new car vs. used becomes much less….
Lori
August 11th, 2010
11:52 am
Ok, here’s a question…. He stated what % of your income you should spend on a mortgage payment, but what in general is a good % of your income to put into savings. And for that matter, what are the best savings plans to choose for long term retirement/college funds, etc. I can manage my day to day money, but I have no clue where to start long term.
Tech Student
August 11th, 2010
12:08 pm
Read Dave Ramsey’s book and apply his principles of being frugal…. Personal Finance is 90 percent behavior, 10 percent math…
Jack Booted Thug
August 11th, 2010
12:08 pm
Long term for yourself would be 401K. I think you can borrow against your 401k for college and not be penalized. There is no magic number to put into savings, however, many 401K’s will match 40 to 60 cents for every dollar up to 6% of your salary. Be sure to check this out howvever as many 401K’s have stopped contributing.
The earlier you begin the better off you will be.
Ted Jenkin
August 11th, 2010
12:16 pm
David- You hit the nail on the head. People don’t have the patience to buy a new car and hold it for 10 years. Thus, every 4 to 5 years they trade it in for a new one. If you run the math, a 2 to 3 year old used car is your best value. Both you and AWJ are assuming people drive their cars for 10 years which your Generation X and Y consumers just don’t do today.
Ted Jenkin
August 11th, 2010
12:17 pm
Lori,
10% is a good start for savings, but get to 20% if you want to really build wealth. Then build the rest of your lifestyle around the rest of your net income. It isn’t easy, but I think 20% of income is the real magic number for financial freedom.
Penny
August 11th, 2010
12:35 pm
I bought a new car in 1984 and kept it until 1996 with 216K miles on it. I wouldn’t do it again. Buying a car that is only one or two years old will save a lot of money. My hubby bought his vehicle with 3K miles on it and it saved him a bunch of money, all because someone decided they wanted leather seats instead of cloth. He drove it for 10 years.
FYI: We are debt free as of January, having paid off the mortgage. We always pay off our credit cards every month. They became a source of income in and of themselves by using reward cards, we make about $250 a year.
New Car Better
August 11th, 2010
12:46 pm
Disagree with your point about new cars. First off — new cars are better buys initially because you have a better grasp on what to pay — invoice and profit margins are all over the web so you get the best value to price buy on a new car. Second, with companies offering 5 to 10 year warranty coverage now you lessen the likelihood of expensive repairs – drigin a used car with 60K on it means somebody else got the “non-expensive” maintenance years out of a car and you’ll be the one with no warranty taking the risk. Once you factor in those expenses the marginal value is just about even in my book.
Plus, some of us younger folks DO actually buy a car, take care of it and drive it till the wheels fall off. My Chevy Truck has over 165,000 miles in 10 years and in now my oldest sons to drive. Well – won’t last with a teenager driving it but in my opinion that gives me DOUBLE value for it. To me — buying a used car is way more risky than buying new.
Salley
August 11th, 2010
12:47 pm
I am 69 and have always paid cash for my cars–new or otherwise, and have held those cars for 10 or more years. There are people whose egos are tied up in their cars. I am not one. But I do own an SLK and a workhorse station wagon. Always pay off credit cards immediately. Paid off my home in 13 years–never bought a home that was more than twice my annual salary. But am still having trouble keeping up with the property tax increases, the increases in insurance/food–and you name it. I figure I will have to keep cash in a shoe box to avoid the death taxes after this year as I am not ready to shoot myself in December. I wonder if the media will report on how many commit suicide to avoid the 55% death taxes after Dec. 31.
Lee
August 11th, 2010
1:08 pm
RE: new car vs used car. I think you have to look at the total cost over the lifespan of the vehicle and not just how much the new car depreciates over the first couple of years.
For example, let’s say you are considering two vehicles, a new car at $25k and a used car with 60,000 miles at $18k. Let’s also assume that you plan to drive the vehicle until it “wears out” (200,000 miles). Based on purchase price alone, both vehicles will cost you $0.13 per mile to own.
That’s the type of analysis you should conduct before buying a vehicle. You’ve also got to consider finance rates, insurance costs, and other economics such as fuel cost, how long you plan to own the car, etc.
BTW, the last three vehicles I purchased were used and the last one was a certified vehicle.
Finally, 0% financing does not necessarily mean 0%. There are four basic areas a dealer can make money off you – purchase price, trade in, financing, and back room add-ons. They figure out where your soft spot is, give a little there, and make it up somewhere else in the deal.
Ole Guy
August 12th, 2010
5:24 pm
Buying a new ride is your best bet. The best used car is simply someone else’s bucket of problems, particularly those “low milage cream puffs”. If some one wants to ditch a relatively new car for a newer car, something’s got to be remiss somewhere. Given that a new car depreciates at speeds faster than sound, the primary objective of any new car buyer is to know how to negotiate. I know, when you’re young, wide-eyed, and rarin to go, that overweight balding suit better known as the (shhh, quiet…he’s a busy man and can’t be bothered with nonesense) manager can be somewhat intimidating. Do your homework, plan accordingly, and don’t take no shux, which is exactly what they (salesfolks and managers) are trained to deliver.
Ole Guy
August 15th, 2010
12:20 pm
OK, you’ve contributed to your IRA/401k for umpteen years; it’s time to cash out.
DO NOT satisfy your tax obligation with monies from the fund…these are revenue-generating monies. Pay the taxes from a “liquid source”, ie easily converted tools, or simply cash. Same concept applys when converting to ROTH status.
Grumpy
August 16th, 2010
3:59 pm
I just buy lots of scratch off tickets.
The Aristocrat
August 16th, 2010
4:30 pm
Sadly, even if you do these things well, the State will punish your fiscal responsibility by redistributing it to the East Point Section 8 rioters.
save up
August 16th, 2010
4:51 pm
Save everything you can, health ins. will take it. It’s the largest single expense we have.
mom in lawrenceville
August 16th, 2010
5:14 pm
Ted – I’m curious. Has anyone broken out the credit card debt for those with 0% interest. I used one supplier’s offer of ‘one year no interest’ to do a home improvement. I thought that was better than going for a home equity loan. Yes, I plan to pay off this debt in one year.
Ellen
August 16th, 2010
5:49 pm
Financing a car is always a bad idea. Pay cash for a gently used car. Or pay cash for a new car–but only if you are already rich.
RH
August 16th, 2010
5:53 pm
# 5 is the biggest hurdle people will have. IMHO, the example given is grossly inadequate. If you are in your early 40’s, you should have atleast $250K in Savings alone, in addition to a 401K you been contributing to since you started to work. Save for savings AND save for spending, like furniture, autos, etc.
The biggest problem is people don’t start planning for their future and retirement years from the first job.
RH
August 16th, 2010
5:55 pm
Also, if you start off right and #5 is your top priority at all times – you’ll never have problems 1-4!
Hang onto it and don’t let anyone take it, be greedy with YOUR money!
Lappy
August 16th, 2010
6:02 pm
Bought a ‘96 Subaru Outback new in late ‘95. Paid cash.
150,000 miles and 15 years later…still own it—-priceless!!!
Ole Guy
August 16th, 2010
8:01 pm
Ellen:
1) There are NO “gently” used cars. The only used cars are those which disguise others’ problems. If you’re going to buy used, be prepared to inspect/have someone trusted inspect the entire vehicle THOROUGHLY.
2) One needn’t be “rich” in order to pay cash on the purchase of a vehicle. One needs only to know how/be able to acquire the necessary paper. Hint…the cost of acquiring these funds should be offset by the monies saved through a cash purchase. Remember, in any negotiation, kash is king.
3) Learn to play poker, or, at best, learn to acquire a “poker face”.
Good luck!
Ted Jenkin
August 17th, 2010
12:46 pm
Mom In Lawrenceville,
Congratulations on finding a deal that had 0% interest even if it was for six months or a year. Not a bad idea at all as long as you plan to pay off the debt before you get hit with any fees, interest, or finance charges from the credit card company.
Ted Jenkin
August 17th, 2010
12:50 pm
I love this debate about used car vs. new car. Nobody has mentioned it yet, but you should also factor in the personal property tax you’ll be assessed every year as your own special birthday gift. It is just another factor when doing a truly thorough analysis of used vs. new that many people don’t consider.
Ole Guy
August 17th, 2010
7:31 pm
Right on, Ted. All the cost variations associated with purchasing a ride…new or used…can be lumped into one common “end game”, known as ROI. At what point will the return on “investment” (in terms of the added costs…property/ad velorum tax, insurance on new VS older car, etc, etc) make financial sense. You’re absolutely correct, Ted…too many people fail to consider these issues.
On more than a few occasions, I have been (jokingly) refered to as too anal and nit picky on seemingly minor issues relative to major purchases. Too many people are a sales manager’s dream, a source of “easy money”. Sales personnel are trained to “wave glittering trinkets” in terms of psuedo inducements, and, you know, like the Indians who sold what is now Manhatten for a few beads, people will jump at whatever salves their “bruised self esteem”…whatever satiates their selfish desires to have something that the other guy don’t have.
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