Book Review: “The Dumb Things Smart People Do with Their Money” – Part 2

Last week, I shared the first four points from Jill Schlesinger’s book, “The Dumb Things Smart People Do with Their Money: Thirteen Ways to Right Your Financial Wrongs.”  To recap, here were the first four points:

  1. Buying Products They Don’t Understand
  2. Taking Financial Advice from the Wrong People
  3. Making Money More Important than It Is
  4. Taking On Too Much College Debt

Let’s move on to the next four points:

5. You Buy A House When You Should Rent – Owning a home used to be part of the definition of the American dream.  Now, it’s not nearly as prevalent or even desired.  It is certainly not the best option for some.  If you are planning on moving in the near future, don’t invest in a mortgage.  It won’t be an investment if you are unable to sell it and have two mortgage payments or even a mortgage and a rent payment.  It’s also not a wise investment if you can’t afford or don’t want to pay for the maintenance.  Snow removal, lawn care, and home repairs add up in a hurry.  You should budget about 2% of your home’s value for maintenance and repairs EVERY YEAR!  If you can afford your mortgage payment but not the required maintenance, you’ll be better off continuing to rent.  It also makes sense to rent if you live in an area where there are very few homes for sale.  If the market is saturated, the buyer likely has a little more pull.  The opposite is true when there aren’t many homes for sale.  You may end up paying too much.  People assume the housing market will always rise, which just isn’t true.

Recently a coworker asked me for advice on home ownership as he and his wife were looking to buy their first home.  The first thing I told him: start building up your emergency savings fund!  In my two years of home ownership, I had to replace my water heater and was also required by my homeowner’s insurance company to put up a railing around my deck.  Fortunately, I had saved up a few thousand dollars to cover such contingencies, but if I hadn’t, it could have easily been a money crisis for me.

6. You Take On Too Much Risk – Jill advocates for a passive investment approach, where you only check in on your portfolio’s performance quarterly and you ride your plan through up and down markets.  She recommends this so you don’t react emotionally to your investment’s recent performance and either buy when shares are too high or sell in a panic when shares are too low.  We also tend to measure our own self-worth based on what others have, so we might make risky investment moves in a foolish attempt to measure up to others.  You will be much better off over the long term if you diversify your investments and savings and let them ride rather than become too involved with their management.

7. You Fail to Protect Your Identity – Using unsecured WiFi, not monitoring your credit score, and not changing passwords frequently are surefire ways to make your identity vulnerable to thieves.  Use two-factor authentication when possible and pay with a credit card rather than a debit card, because most credit card companies will forgive fraudulent purchases made on a credit card, whereas debit card companies are less likely to do so.  In addition to monitoring your credit report on at least an annual basis (which you can do for free), I would also encourage you to check your credit card statements every month, at a minimum.  I check mine several times per week to verify that the charges on my card match up with my receipts.  I have caught a couple of discrepancies before and every little bit adds up.  When you notice a mistake right away, it is easier to rectify.

8. You Indulge Yourself Too Much During Your Early Retirement Years – It is important to plan out your retirement and how much you will need.  Many people assume that in retirement their expenses will go down since they may move into a smaller home and will no longer need to allocate money towards saving for retirement.  While that may be accurate, they fail to account for the potential increase in healthcare costs, the potential for capital gains tax depending on the sale price v. purchase price of their original home, and budgeting for extra “fun” expenses, such as major trips.  Jill provided several examples of individuals who originally were in a good place with their retirement funds but ended up living beyond their means early on.  There are several online calculators that can help you determine how much you will need to retire to live comfortably without jeopardizing future years.

How do you feel about these four points from Jill?  Have you made any of these financial mistakes?  Let me know in the comments!  Next week I’m going to post my monthly financial recap, but the week after, I will post a review of the final five mistakes from Jill’s book.




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