Hey, guys.
It's Chelsea from The Financial Diet.
And this week's video is sponsored by Capitalize.
Rolling over a retirement account is something most of us
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And this week, we are doing something very,
very old-school, which is one of our basic quick-hit listicles
about money that I think are beneficial for everyone
and are just good refreshers to do every now and again.
These are 11 things that most people get wrong about money.
And since we have 11 of them, which
is a lot of anything to have, I'm
going to get right on into it.
Number 1 is that just putting money into a retirement account
doesn't mean you're investing.
Contributing to an employer-sponsored plan
like 401(k) or 403(b), an Individual Retirement Account,
also called an IRA, or another retirement vehicle
is a great start.
But something that many people don't understand
is that these are just the accounts that hold investments.
A 401(k) or an IRA is not itself an investment.
That means that you actually have
to invest the money you put into an account
in order to eventually earn interest, which is
the entire point of investing.
According to a poll from ValuePenguin in CNBC Make It,
nearly two thirds of Americans don't
understand how a 401(k) works.
Your company plan may already select investments for you,
but that doesn't necessarily mean that you're
locked into what they choose.
Just do some basic research.
Our resident investing expert Amanda Holden
has some great resources.
And you certainly don't have to be an investing expert
to make the most of 401(k) or IRA.
There are even robo advisors that can do the work for you.
But you have to make sure that the money that's in there
is actually being invested.
Number 2 is that you can be financially independent
even if you don't own a home.
So first of all, we did an entire video
on how renting can often be better than owning, so start
by watching that.
It's linked in the description.
But generally in America, homeownership
has been viewed as the only smart thing to do financially
and that renting is always, quote/unquote,
throwing your money away, which is a phrase I just hate.
Now, homes, on average, do tend to appreciate in value, which
means that generally speaking, if you stay in a home
long enough, you can expect it to sell it for more
than you bought it for.
But especially with the extra costs of homeownership
that come in addition to a mortgage,
renting is often much more financially feasible.
Many people have relied on selling their home
to finance things like retirement.
But your return on investment is not a given.
And real estate is hardly the only way that you can invest.
Financial independence means not needing income
and from employment in order to live.
And you can achieve this even as a renter.
As CNBC put it, historically, the stock market
has better returns than real estate.
Quote, from March 1992 through September of 2022,
home prices have logged average annual growth of 5.3%,
according to data from research firm CIC.
Over the same period, the S&P 500
posted an annualized total return of 9.5%.
In general, while buying homes on average
are in the longer term a good investment,
you need to make sure that it is the right investment for you
at the right time because buying into the wrong home
or at the wrong time can be financially devastating.
So again, I highly encourage you to check out our video
all about the differences between when
it's good to rent versus buy.
Number 3 is that savings should be something you do passively,
not actively.
So when people think of saving money,
they often picture the act of physically-- well, I guess,
not physically-- but actively taking money
from a checking account and putting it
into a savings account.
But that is actually the absolute wrong way
to do it for very real psychological reasons.
Studies show that people are much more
likely to save when it is a passive thing that happens
automatically from their paycheck,
and they don't have to think about where
that money is being allocated.
Not only are you liable to forget,
if you have to move the money, you're also
liable to look at that amount of money and be like, well, damn.
I don't want to put this into some boring savings account.
I want to do something fun with it.
Plus, you feel the punch of having
to see that money disappear.
Whereas if it's automatically deducted from a paycheck,
you never counted it in the first place.
And if you're a freelancer or otherwise
have inconsistent income, there are many online only banks that
work well for your situation.
Capital, for instance, will allow
you to create a rule to deposit a set
percentage of every deposit from your checking account
to go directly to savings.
Number 4, investing should not mean picking individual stock.
When many people think of investing in the stock market,
they think of owning individual stocks of big companies
that most of us have heard of.
But stock picking is only one way to invest,
and the rewards often don't outweigh the risks
because most investors just don't beat the market.
Here's some data collected by JPMorgan on average returns
from 2001 to 2020.
The S&P 500 had an average annual return of 7.5%.
A basic portfolio with 60% stocks and 40% bonds
had an average annual return of 6.4%.
And the average stock picking investor
had an average annual return of 2.9%.
Most of us are better off creating
a diversified portfolio-- i.e., spreading investments out
over multiple different vehicles,
so we don't put all our eggs in one basket.
A great way to do this is to invest in low-cost index funds,
which are a type of mutual fund or Exchange Traded Fund--
AKA ETF-- with a portfolio constructed to match or track
the components of a financial market index,
such as the Standard and Poor's 500 index, which you might hear
referred to as the S&P 500.
Basically there is a real human tendency
to think that the more involved we are in something,
the better the results will be.
But usually with investing, the exact opposite is the case.
What is most boring, and simple, and passive usually yields
the best results, literally.
Number 5 is that spending less is not
the same thing as saving.
So buying things on sale can be a great way
to spend less on an individual item,
but it's also just a marketing scam
to get you to spend more overall.
It can be very easy to feel like you have to take advantage
of certain sales.
And to be fair, if there is a specific item that you were
planning to buy regardless, waiting
to buy it at the best possible price is the best way to do it.
But buying things just because you
feel like you'll miss out on a great deal
is not saving money, especially if it's money
you were not planning to spend.
Stores also like to say, "buy more save more"
and to buy ropers into bundling more.
For instance, if you were just planning to buy one shirt,
but then there's a deal that says, "buy two get one free."
You didn't get a free shirt.
You just spent twice as much as you were originally
planning to spend.
The psychology of sales and how they're
used to market to people is not only a very well-known tactic,
it's also exploded with the advent of social media,
where basically everything is always on sale,
and everything is always being marketed to you.
Knowing the difference between getting a good deal on money
that you had already allocated and just
being tricked into spending money you didn't want to
is a crucial component of making much better consumer decisions.
And similarly, budgeting is not the opposite of spending.
So many people hear the term budget,
and they automatically think in terms of limitations
and restrictions, that if you're on a budget,
it's automatically going to feel like you're not
allowed to spend money.
But for me, one of the most liberating aspects
of getting control over your money
is that it's actually not at all about restriction.
It's about permission.
A budget is simply a plan for knowing
exactly where your money is going
and having a very clear picture of how much you can afford
to spend on any given thing without having
to worry about it.
Budgets also don't work if they're not realistic.
If you try to make a budget that cuts out all possible fun
spending, you'll ultimately not stick to it.
You'll get discouraged and maybe even give up
trying to budget altogether.
But more importantly, as someone who
used to be extremely avoidant with budgets
and now loves them, it's so important
to remember the incredible mental freedom and relief
that you're giving yourself by never again having
to worry about whether or not you can afford something.
To always know that you can afford
to buy what you're buying and that it doesn't come
at the expense of your other goals,
to not have to do that awkward dance at the checkout
because you're not sure how much money is in your account,
and to not have to feel guilt over the things
that you enjoy spending on because they're already planned
for is one of the most transformative things
you can do in your life.
But on that note, number 7 is that restricting your spending
will not allow you to build up wealth
nearly as effectively as bringing in more money.
So much of personal finance advice
is centered around limiting your spending
as much as possible so you can allocate more of it
to savings and investments.
But the reality is that you can only cut down expenses so much.
And in the long term, it's much easier to save more
when you earn more.
Unfortunately wage stagnation is the reality
that most Americans are faced with.
Quote, "wages in the US have stagnated
since the early 1970s." and "Between 1979 and 2020,
workers' wages grew by 17.5%, while productivity
grew over three times as fast at 61.8%."
But the sooner you start earning more, even just incrementally,
it will exponentially increase the total amount
that you could earn and thus save in your lifetime.
Just a $5,000 raise earlier in your career
could be worth over $600,000 in your lifetime.
And chances are, for most people,
if you've been at a single employer
for more than a few years, you are being underpaid
compared to your market value.
That could mean changing employers, which is usually
what people need to do to realize the bigger pay
increases in their career, or it could mean
renegotiating with your boss.
I'm going to link you guys in the description to some
of our best videos on the topic of negotiation.
But suffice to say, if you are not constantly
advocating for yourself, both at the time of hiring
and throughout your time at an employer,
you are totally shooting yourself in the foot,
not just today, but for the rest of your life.
Number 8 is that keeping a running credit card balance
is not good for your score.
So this is something that so many people get wrong because,
quite frankly, it's in the interest of credit card
companies to make you think that it's true.
Not only is keeping a running balance
on your credit card not necessary
and can work against what is called your credit utilization
ratio, which is a big factor in calculating credit scores.
It's basically the amount that you do spend versus the amount
that you can spend every month.
It also ensures that you're paying interest every month,
which you should never be doing if you can at all avoid it,
and puts you in high danger of credit card debt.
Now, aside from the fact that keeping
a balance on your credit score each month
will necessitate you paying interest on that amount,
to get back to the credit utilization ratio specifically,
credit bureaus want to see that you're keeping your usage
rate under 30% of your available credit,
although lower is better.
And not only should you not keep a running balance, paying off
your credit cards in full and on time
is a foolproof way to make sure that you're
maximizing that percentage.
If you routinely use more than 30% of your credit card maximum
because your limit's not very high,
consider calling your credit card company
and asking them to raise your maximum.
And then don't spend more on your card
than you're currently doing, which conveniently brings us
to the next point.
Number 9, almost everything is negotiable, including debt.
When we're presented with a number for something,
it is often our instinct.
And for many of us, a sense of politeness
obliges us to take it at face value.
But many things are much more negotiable
than we think-- things like our monthly bills, utilities,
our car payments, rent, and, yes, even
debt we might be carrying.
For the rent, for example, it is not just negotiable
when you're first signing a lease,
it's also negotiable every time your lease is up for renewal.
And it's important to remember how
valuable keeping a good tenant is rather
than having to find a new one.
I basically negotiate on every single thing in my life.
And one thing that I've always used to my advantage-- and this
is also something I experience in the opposite direction
as an employer-- is that keeping someone is almost always better
than having to replace them.
So when an employee negotiates for a higher raise,
I always keep in mind how valuable
it is to me to keep them happy rather than having
to find someone new, which has both literal and opportunity
costs.
Similarly for your landlord, replacing you as a tenant
would be very expensive.
For bills that you're paying every, month
things like your phone and internet,
it's very valuable to the company
to keep you as a customer rather than having
to find a new customer because you're
going to another service.
Continuity is leverage, and debt is also
something where you have a lot more leverage than you think,
especially if a debt has gone to collections, which I've
had debts due in the past and negotiated down the amount I
ultimately settled for.
I'm going to link you in the description
to a whole explainer on how to negotiate down
with debt collectors.
But just bear in mind that when it comes to money you owe,
everything is up for negotiation.
On the flip side, number 10 is that you shouldn't necessarily
aim to get a tax refund.
Getting a tax refund is something
that many people rely on every year
as it's a quick windfall to put into savings
or to cover expenses.
But a refund just means that you were overpaying taxes
from the previous year in the first place.
If you update your W-4 form, you can make sure
that the correct amount is withheld,
which means that you're less likely to get a refund.
But your regular paycheck should be slightly larger
and actually correct.
But on the other hand, many people
view a tax refund as having given the government
an interest-free loan.
At the end of the day, if, for mental health reasons
and for planning reasons, it's better for you
to aim for that refund rather than making sure
that you're not overpaying throughout the year,
I'm not going to tell you to stop doing it.
But it is important to remember that tax refund isn't
some magical bonus.
It's money that was already owed to you in the first place
and has just been withheld from you for about a year or so.
If you can get to a place where you're
able to manage your finances in a healthy way
without depending on that windfall every year,
that's a better way to go.
But ultimately, it's your decision.
Lastly, number 11 is even if you make a lot of money,
your spending still matters.
A lot of people operate under the misconception
that once you reach a certain level of wealth,
your spending no longer really matters.
And as I mentioned earlier, earning more
is usually the key to saving more.
But earning more doesn't mean anything
if you're spending habits are outpacing
your income, which is a very common problem
with high earners.
And it's usually because these high earners fall victim
to what is called lifestyle inflation, where essentially
everything in their life starts to become more
expensive as their tastes develop,
as they're able to afford nicer things,
and especially as the social groups around them
are also engaging in those very luxurious lifestyles.
Living below your means and tuning out
the noise of what people around you
either can themselves afford or expect you to be able to afford
is essential to staying financially healthy.
And you would be shocked at the number of high-earning
individuals who live paycheck to paycheck, especially once,
for example, they have children who have private schools,
and tutors, and classes, and all kinds of other things that,
for many of us-- for example, myself--
were simply not a part of childhood growing up,
but which once you get into higher earnings circles,
can become basically a social necessity.
If you fall victim to peer pressure
when it comes to your spending habits,
basically no amount of money will ever be enough,
and you'll be trapped in a cycle of spending and lifestyle
inflation, no matter how much you earn.
Those are just some of the things
that people generally get wrong about money
and what is actually the right answer.
But there are many more, and so we'll do another video
like this in the future.
And if I missed one, please go ahead and leave it
in the comments because I always love to hear what you guys
have to say about managing your money
in a way that is TFD-approved.
[CHIME]
And now it's time to get into our society member
questions of the day.
If you haven't already, make sure to join our society
by clicking the Join button or joining our Patreon
at the link in our description.
You get to ask me these questions every week and join
my office hours every month, get an exclusive
member's-only video once a month as well,
and tons of other perks and benefits that I don't have time
to list now but are really fabulous.
So let's get into our questions.
Today's first question from a member--
"If A Perfect Vintage was to get a movie adaptation, who do you
see playing the main characters?"
I don't have a ton of opinions on this.
I have some thoughts, but they're pretty up in the air,
except for my protagonist, Leah, my dream casting
for her would be Aubrey Plaza.
I love Aubrey Plaza, and I think she
would be perfect for that role.
And I will see to it that I teach her French.
"How do headhunters work?
I'm looking to make a change, and I
know that I have marketable skills,
but I don't know how to navigate switching to a new sector.
I need help figuring out what would be a good move."
So first of all, headhunters typically work for the company,
for the employer.
So they're going to be on the other side
of this equation looking for the right person for the job.
However, you can also engage people on your own end--
career coaches, you can work with different recruiters--
who can help you not only find the right job for you.
But also help optimize things like your LinkedIn,
your professional website, your portfolio, et cetera.
In general, when you're at this stage of the career
pivot, where you're clearly wanting to make some changes,
but maybe have to do some work on the back end
before you're necessarily ready to go up
for various positions that are open,
it might be time to do a session or two with a career coach
before you actually commit to looking
for a new job in earnest because there
may be easy things that you can do to help prepare yourself
so that you're not only able to find the right job,
but also may be able to pivot a bit into a slightly
different position.
Especially if you're looking to go to an entirely new sector,
that can often be something that takes quite a bit of work
in the lead up to make sure that you have checked all the boxes,
you have the skills, you have the certifications necessary,
your resume is optimized for that new sector, et cetera.
So I think this might be a good time
to start with a career coach.
As always, guys, thank you for watching.
And don't forget to hit the Subscribe button
and to back every Monday, Tuesday and Thursday
for new and awesome videos.
Goodbye.