Avoid these 8 common financial mistakes

TL;DR – Avoid buying these things:

  1. cash value aka Whole/Universal Life insurance (buy term life instead),
  2. annuities
  3. credit card debt (pay it off now & set up autopay)
  4. car leases
  5. time-shares
  6. a new car before your old one is completely done for.
  7. Generally avoid buying vacation property or
  8. expensive remodeling your home, at least until you have $1+ million in the bank or are otherwise ready to retire comfortably and have extra money to burn.

Having advised a lot of people financially, I see the same mistakes holding them back over and over again. These bad decisions don’t seem to be bad moves to people at the time they make them, which is why they are so dangerous. The combination of friendly salespeople serving their wicked corporate overlords + our consumer culture makes wealth-destroying behavior seem ok and normal to us. It’s not ok, and it’s harmful, so let me help you recognize it so that you can avoid it and grow wealthy. Your future self will thank you.

Financial mistakes ordered from ‘Absolutely-Do-Not-Do’ (1 – 5) to ‘Be Careful’ (6 – 8)

  1. Buying ‘cash value’ life insurance like Whole or Universal Life insurance. 99.8% of people only need Term Life insurance, and that is what you should buy. If you think you’re in the 0.2% that could benefit from a cash value life insurance, you are almost certainly wrong, even more certainly if you’ve been convinced of this after talking to a salesperson who might be thinly, or thickly, disguised as an ‘advisor’ or some other financial person deserving of your trust. Most are absolutely not. Trust no one. Not your bank, not your credit union, not your mom, not your co-worker, and definitely not anyone who works for a financial institution or gets any type of payment from them. Trust no one. Except us, we’re the good guys.
  2. Buying an annuity. Life insurance companies are again the villains here. They push annuities to people who are afraid of ‘losing/running out of money’, which is… everybody. In reality, only 0.0001% of the population would probably ever truly need an annuity, and even this tiny fraction could find a better one than being offered by your particular salesperson. Pricey annual fees sneakily included so you don’t see what they cost you combined with all kinds of heinous other fees to prevent you from getting out of the product will steal a ton of your money over time. To illustrate, $100,000 invested in 0.1% fee stock index fund over 30 years will generate income of $508,000. In a typical 2%-per-year money-stealing annuity (it’s often even worse), you’ll only get $247,000 over the same 30 year period with the exact same investment risk, less than half as much! Where did the missing $261,000 go? Straight into the saleperson’s and the insurance company’s pockets. They’ll be quick to emphasize how wonderful it was that your gained $247,000, and if you hadn’t read this you would have never known that you actually lost $261,000 thanks to their evil machinations.
  3. Not paying off credit card debt when you have the cash on hand to do so, and not setting up autopay. This one baffles me a little since everyone ‘knows’ that credit card debt is ‘bad’, and yet even when they have cash in a checking account making nothing they sometimes don’t take it to pay off credit card debt costing them 12+%. This behavior is correlated with people who don’t enroll in autopay to always pay off their credit cards in full every month. The best way to avoid this problem is to log into your credit card account(s) RIGHT NOW, and turn on automatic payments for the full balance. Seriously, do it now. Here are the links for Chase, Capital One, Bank of America (instructions here), American Express, Discover, and CitiBank. If you’re carrying debt, transfer any cash you have on hand to pay off the balance right now (the same links above probably get you close to the right place to make a one-time payment. Do this now too!) With autopay, you’re not losing any control or risking a bounced payment because you’ll still get all the same notifications of a bill about to be paid and can always log back in later and turn off/reduce your autopay to a less-than-full amount if needed. You can still check your statement 20-something days prior to your bill being due in case there’s some charge you want to dispute, which there won’t be, because yes, it turns out that the suspicious SAM’S SUPER DUPER 1000 COMPANY charge for $38.93 that you don’t remember and are positive was fraud was just some gas station somewhere that you did indeed fill up at. One urban legend I’ve heard is that it’s “good for my credit score” if you run a ‘small’ balance. This is 100% false. On the contrary, paying your bills on time every time without fail is the best way to maintain a high credit score, so again, set up automatic payments for the full balance amount right now! There’s no danger, and much goodness, in scraping together all cash you have on hand to pay off an outstanding balance now. In the worst case scenario, if you need cash later, you can simply run up the debt again back to where it was.
  4. Buying a time-share. This is another ‘sold-not-bought’ product that you will almost certainly not get enough value from. They come with annual fees, are difficult to sell, especially for any kind of money close to what you paid for it, and make you feel forced to use them even if you’d rather do something else with your vacation time. Just rent a hotel/AirBnB like everyone else and you’ll enjoy more freedom, and almost definitely more wealth.
  5. Leasing a car. Unless you absolutely must have a new model all of the time, or can wangle some business tax deduction that your accountant has actually run the numbers on and assured you it’s worth it vs buying (it’s probably not even then), leasing a car is a wealth-destroying move. Instead, buy a reasonably priced, reliable car and drive it into the ground.
  6. Buying a new car before your old one is used up. Like leasing, buying another car before running your current one into the ground is a very costly thing to do, especially if you repeat this process many times during your life. Whether you choose to buy used cars as I recommend, or if you must have a new car, always drive your current vehicle into the ground before upgrading. This saves you a lot of money by driving your car long after you’ve paid it off. Switching cars every few years is a good way to burn through a lot of disposable income that you otherwise could have invested and become wealthy with. One simple rule to avoid temptation is always paying cash for your next car. This forces you to save for it in advance, and also to reckon with the true cost of upgrading as opposed to fooling yourself into thinking it’s not that financially painful by financing it in little bits each month. Rule of of thumb: Spend less than $10,000 for your next car, and only upgrade when your current vehicle has > 200,000 miles on it or would cost more than half its value to keep driving it.
  7. Buying vacation property. After time-shares, this is another popular way to sink money into something that you will never ever get enough value out of. Anytime you consider buying a vacation property, take the purchase price, and multiple by 5%. Write down that number, and decide if this annual ‘opportunity cost’ is close to the annual value you’d get out of your property. Consider a $300,000 remote lake-front cabin. Sounds nice and peaceful right? Well, 5% * $300 K = $15,000 per year, which is $1,250 per month. That’s roughly how much more you’d make over time on that money if you invested it in a low-fee stock index fund instead. Let’s say you spend a month per year at this resort of yours, which is pretty darn optimistic for most working people. 30 days divided into $15,000 = $500/day. For that price, you could rent a room in the Bellagio in Las Vegas and order champagne room service every day. You are not getting a good deal on your vacations spent at Lake Woebegone. Plus, if you buy a vacation place, you’re gonna feel obligated to ‘get your money’s’ worth and feel pressured to go there every time you have vacation. Maybe you’d rather go somewhere else instead! $15,000 per year can buy a lot of hotel or AirBnB stays, or an annual multi-week European vacation, or anything else you can think of, including a very nice lakefront resort property that you don’t have to own and can instead rent as you like! Vacation property is almost never worth it from a financial perspective. Even if you plan to rent it out part of the time to get some money back out of it, the math usually doesn’t work when you subtract the cost of the mortgage, taxes, insurance, property management and other fees, and maintenance from the revenue you expect (which always ends up being less than you think.) There’s also the headache associated with managing and maintaining property of any kind, which is even worse if you’re also a landlord. If you must buy vacation property, try to get it so cheap that even if you only use it a few weekends out of the year (the most likely scenario), your per-night/annual costs are still reasonable. For example, getting a few acres of raw wilderness land for $20,000 that you could camp on, or even erect a cheap tiny mobile home for another $20 K, might be worth it. 5% * $40,000 = $2,000 per year. 10 nights a year = $200/night, not bad, and the land might even someday increase in value if you buy it in a nice area that is experiencing population growth (but don’t hold your breath.) Rule of thumb: Spending less than $100,000 for vacation property, maybe it’s ok. More than $100,000, DON’T DO IT!
  8. Remodeling your home. People love to spend on their homes by telling themselves ‘it’s an investment’. Every single remodel/addition listed here shows that the value of your house will increase by less than the cost of the remodel. Think about that. As soon as you’ve spent $20,000 remodeling your bathroom to your unique tastes, maybe your home value when you finally sell the place has increased by $10,000, so you’ve instantly destroyed $10,000 in wealth. If that $10,000 loss was worth it to you because you love your new bathroom by that much over the life of the time you spend in the home, that’s fine, but don’t fool yourself into thinking you’re gonna recoup anywhere near the spending in a future home sale. Of course, there are some price-effective home improvements that you should do like adding insulation to save on energy costs, but these tend to be few-hundred dollar DIY projects that no one sees, vs $10,000+ projects that you pay other people to do and then show off at parties. Houses do not build wealth anywhere close to stocks, and the same goes for remodeling them. If you are skilled and can do a lot of the costly labor yourself and scrimp on materials costs, you might be able to add some ‘sweat equity’ to your property as well as enjoying the results of your labor. That said, even skilled people in my experience end up spending much more than the value they create. Rule of thumb: If your home improvement projects total less than less than $10,000, go ahead, otherwise DON’T DO IT!

Any other common financial mistakes that you’ve made, or seen other people make, that you think should be added to the list? Let me know in the comments.

Two big savings tips for homeowners: refinance, and use a smaller trash can

As I detailed in Part 1 of my 10 Savings tips, recurring expenses are a great place to save money. For homeowners, what could be a bigger expense than your mortgage? Interest rates are at an all-time low right now, so…

Tip #1 is to refinance your mortgage when rates are low

First, check rates by calling up or emailing the broker on your current mortgage and see what they can offer you. Next, check rates online and with another broker, especially through Costco. I highly recommend NBKC, the online bank we used for our mortgage. NBKC’s rate was better than the other 2 or 3 local + national banks I checked, and we got a great deal on closing costs (like, $1,200 off or something) just by getting a $120/year Costo Executive membership. (I just upgraded my current regular membership for $60 more.) So, if you go with NBKC make sure to ask about the Costco discount. 

Our NBKC broker Jeff, who I also recommend (I get nothing for this, BTW), reached out to us with an offer to refinance to cut our interest rate from 3.9% down to 3.4%.

Since we had just bought the place a year ago, the bank seemed to give us a good deal on the closing costs, which were only $600 net of a $1,200 ‘lender credit’ that they gave us. In exchange for that $600, the 0.5% rate cut lowered our monthly payments by about $100 per month.

Consider the change in your loan payment time period

We went with a 30-year fixed-rate mortgage for the refinance, so our loan payment period extended as a result from the 29 years we had left on the original mortgage to 30 years on the new one. Personally, I’m happy to extend the timeframe out into infinity because at 3.4%, even with expected 10-year inflation at an extreme low 1.2% as of April 2020, it’s really cheap money at a real interest rate of 2.2% ( = 3.4 minus 1.2.) Plus, if inflation exceeds expectations, it’s that much better for us. I’d much rather invest those mortgage proceeds in stocks over the ~10 – 30 year time period that we intend keep the house and mortgage. (The mortgage interest tax deduction really isn’t worth anything to us since the Trump tax cuts raised the standard deduction to $24,800 for married couples in 2020.)

Is refinancing worth it?

The three main factors that determine whether it makes sense to refinance or not are

1) the costs to refinance ($600 in our case),

2) the monthly savings, and

3) how long you’ll be in your home.

A refinance calculator like this one can help. Because I’m a big financial nerd I run some net present value comparisons in Excel to satisfy myself that the math makes sense, but I think you can probably get pretty close by just estimating your ‘break even’ date: i.e.: how many more months would you need to stay in your home to earn back the refinance costs?

For instance, if your refinance was gonna cost you $1,200, but it reduced your mortgage payment by $100 per month, then as long as you stay in your home over a year the deal makes financial sense. Add a little buffer on the timeframe to make sure. I.e.: if it was gonna take you 2 years to get paid back, make sure you’ll stay for at least 3.

When you’re figuring your closing costs, make sure to only include costs that are truly lost to you, which are things like the new title insurance policy, lender/broker fees, any new appraisal fees required, and any state & local filing fees. Ignore the shuffling around of escrow items like all your prepaid items such as escrow property taxes, home insurance (if you pay through your lender via escrow), and the payments to the principal and interest itself. (Avoid any ‘points’ aka pre-paid interest though. And of course, always come up with at least 20% down to avoid PMI, which stands for Private Mortgage Insurance, or Preventable Money Incineration.

Savings: $50 – $100s per month

Tip #2 – Use a smaller garbage can

If your city charges you different rates depending on which size trash can you use, then it definitely pays to use a smaller can.

In Seattle, we have 3 types of waste: recycle, which is free, yard waste, which is cheap ($7 – 13) and includes compost, aka food, and also food-soiled paper or other compostable products, and garbage, which is the most expensive ($25 for 12 gallon bin up to $119 for 96 gals.) For just the two of us, we can easily get away with the smallest sized 12 gallon bin each week. We do this by recycling everything we can (junk mail, all those boxes from Amazon, glass bottles & cleaned plastic food containers), and throwing all of our food + compostable food containers in the yard waste (except for fat/oil/grease, which you put in a sealable container and toss in the trash), or in our own compost pile. Non-recyclable, non-food waste garbage turns out to be pretty minimal for us, and as long as your author remembers to fill up our small bin each week, we never run out of room. (Worst-case, you can set out extra trash next to your small bin and pay the one-off fee once in a blue moon, or ask your neighbor’s to use their excess capacity on trash day. That’s far cheaper than paying for more than you need every week.)

Look up your city’s trash utility site online and find out what the rates are and how to switch sizes, and also how often you can switch sizes. Seattleites can go here to change trash cans (or yard waste bins) once every 12 months.

Savings: $5 – $90 per month in our neck of the woods.

Below: Seattle waste service pricing. Lotsa savings to be had!


Find out how your rent compares and then save on it!

As you may know from reading my articles on home-buying, I’m not a huge fan of buying real estate.  Instead, I prefer (and counsel others) to rent a reasonable home and use excess cash to max out my retirement accounts and other investments.  For most people, housing costs are usually the most expensive item on the monthly set of bills.  It really pays to scrutinize big bills because even small percentage savings equal high dollar values.

Find out what people in your neighborhood are paying for rent

When looking at rental rates when shopping for a new place to live or contemplating your current lease, use Rent-o-Meter to find out what a reasonable rent is in your area.  I just used this tool for the condo I’m renting and got a lot of nearby comparisons.  (My rent’s reasonable, but not dirt cheap 🙁 )

Slash your rental costs

Smart Money published a very good article with 5 ways to cut your rental expenses (read it!)  The most important thing you can do is be very picky when shopping for a new rental.  Look closely at many units and pay attention to prices at each one.  The best way to get a good deal is knowing how much your alternatives cost.  Set yourself a rough budget to stay inside of.

I recommend trying to keep your rental costs to a maximum of 10 – 20% of your gross salary.  Keep to the low side of the percentage if you’re on the high end of the income spectrum; use the higher side if your income is low.  So, if you make $30,000 a year, you might have to spend up to 20%, or $500/month.  If you make a heftier salary like $80,000, you should shoot for a max around 10%, which would about $1,300.  Obviously these amounts will differ depending on how expensive the city is that you live in.  Rural renters and those in the Midwest should spend much less than those in Manhattan or other major coastal cities.

Don’t forget to add or subtract amounts for utilities like water/sewer/gas that might be included in some rentals (typically apartments or condos) and not others (like houses.)  Also factor in any other savings like splitting cable costs with other tenants.

Get a roommate

If you’re living by yourself and having trouble staying within the guidelines I set above (or just want to have more money to spend/save), get a roommate.  Having a roommate is one of the easiest ways to live in a far nicer place than you could if you were by yourself.  I find that singles and studios are way more expensive than splitting the cost of a two-bedroom.  You’ll save a lot on utilities too by splitting internet, cable and heating costs.  Plus, it can be less lonely and more fun to have a friend just across the living room.  (Although ladies and metrosexual males might want to spring for a place with two bathrooms if possible.)

The savings from adding a roommate seem to decrease after you have 2 people, but adding a third might save a bit more per person as well.  (Even if you know your roommate well, asking your landlord to put you each on separate leases will make you less responsible if your roommate has to move out unexpectedly or gets behind on the rent.)

Ask your landlord for a discount

After doing your homework to see what rentals cost in your area, ask your landlord to reduce your rent.  Stress that ‘times are tough’ and the economy is down.  Emphasize how you’ve been a great tenant (assuming you have been) and how the rent’s been on time, the place is in fine shape, and the neighbors have never complained.  The worst your landlord can say is ‘no’, so it’s definitely worth a shot!  Even reducing your rent 5 – 10% can save you hundreds of dollars over the course of a year.


Rent is a big expense.  All big expenses (especially on-going ones) need careful evaluation.  Research rents in your area and search for a good deal.  Use a rough guide of 10 – 20% of your income as an absolute maximum for spending on rent.  Get a roommate to live larger on a smaller budget.  Negotiate an existing lease with your landlord to reduce your monthly rent payments.

Why I rent (even though I could buy) – Price-to-rent ratios

One rule of thumb in determining whether it’s better to buy or rent a home is the ratio of the price of the home to the cost of renting the home (actual or estimated.)  15 times annual rent  is one starting point.  (I’ve also read 150 – 200 times monthly rent, which equates to 12.5 – 16.7 times annual rent.)  For example, if a house was selling at $300,000 and it (or a very similar place) could be rented for $15,000 per year ($1250 per month), that house’s ratio would be 20, meaning it would be better to rent it than buy it.

I read an article on CNN Money that looked at 10 cities to either buy or rent in depending on the ’15 times annual rent’ rule for average home prices.  Seattle, my hometown, came in at 25 times rent, meaning it’s generally better to rent rather than buy (from a financial perspective.)  As the article shows, the general trend is that desirable coastal cities (Manhattan, San Francisco, Portland [Oregon]) tend to be overpriced using this metric, meaning it may be better to rent than buy in these cities.  Midwestern and Southern cities (Minneapolis, San Antonio) tend to be undervalued, meaning it may be better to buy than rent.  (There are other reasons why you might do one thing or the other, but I won’t get into them here.)

While useful, one problem with this simple ratio is that it doesn’t account for growth rates in real estate in these various markets.*  Presumably, home prices in markets with higher price-to-rent ratios like the coastal cities are likely to grow faster than sleepier midwestern cities.  Thus, some adjustment for growth should be made for a better evaluation.

Lastly, while knowing this average ratio for a whole city is a good starting point, one should always do the calculation for each property.  Even in a city where property is cheap relative to rents, it’s possible to overpay on an individual property.  Similarly, in a city where real estate is expensive compared to rents, you can still end up paying too much rent given the worth of the property.

Remember to account for homeowner’s dues if the property you’re considering is a condo or townhouse where such fees apply.  (As an arbitrary way to compare apples to apples, take the monthly dues and multiply by 60 and add that result to the purchase price of the condo.  Use that adjusted value as the ‘true’ cost of buying for the purposes of the above calculation.)

The graph below shows some housing data for various cities (circa April 2010.)  The skinnier bar at the bottom for each city corresponds to the price-to-annual rent scale at the bottom of the graph.  The fatter bar at the top for each city corresponds to the foreclosure rate scale at the top of the graph.

* For investing geeks, the Price-to-Rent ratio for homes is similar to Price-to-Earnings ratio for stocks.  The PE ratio also doesn’t account for the future growth of companies.  Hence, fairly valued high-growth technology stocks tend to have higher PE ratios than fairly valued, mature consumer goods companies.  Even so, the PE ratio is a useful starting place since the market often overvalues high-growth stocks under the false assumption that the steller growth rates will continue indefinitely, which they never can.  (Think of the tech boom when we saw PE ratios at astronomical levels of 100 – 200, suggesting that investors expected such companies to maintain absurd growth rates well into the future.)

The PE ratio can be adjusted to account for growth by dividing by historical/expected growth rates to get the PEG ratio.  Like all ratios, the PEG is fraught with its own problems as well.