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Financial Mistakes to Avoid

Published: April 2nd, 2023 by Chris McGrath
Last Updated: Nov 6th, 2023

Personal Finance Mistakes to Avoid​

The number one personal finance mistake you can make is living above your means. Since it's intuitive, I won't elaborate on it. Instead, I'll focus on life lessons that you're better off being warned about ahead of time.

Slowly Paying Off High Interest Debts​

High Interest Debts: any loans with an interest rate above 10%
(Note: this 10% rule of thumb is based on average stock market ROI).

High interest debts should be paid off as fast as possible.

Common examples of high interest debt are:
Credit Cards, Unsecured Personal Lines of Credit, and Payday Loans.

Failing to quickly pay off high interest debt puts you at risk of falling into a debt trap, where compound interest works against you. In the worst case scenario, it'd be impossible to pay off your loans.


Two good options for escaping the debt trap are:

  1. Consolidating multiple high interest debts, by taking out a low interest loan large enough to pay off all the high interest debts.
  2. Considering bankruptcy.

Not Investing ASAP AMAP​

If you opened an investment account when you were 18 and put $200/month ($2.4k/year) into it. Then by age 60, your initial investment of $100k (2.4k • 42 years) would have turned into $1.3m. Once you learn how to invest correctly, you should start investing ASAP (as soon as possible) and invest AMAP (as much as possible).

Avoidable Money Pits​

A money pit is slang for a liability that creates substantial ongoing expenses. They're often seen as a waste of money, to the extent of metaphorically throwing money into a pit.

Drugs and Alcohol​

I've never been interested in Drugs or Alcohol, thanks to my dad teaching me DARE: Drugs Are Really Expensive! I once did some rough napkin math and determined he was spending $10k/year on smokes and drinks. If he swapped his drug habit for an investment habit, he could have retired at age 45. 20 extra years of freedom compared to the normal retirement age of 65. If you're not willing to avoid drugs for your health, do it for your freedom. Do it for your health too he died at 53.

Gambling​

I've always treated gambling like hard drugs. There's no good reasons to ever try either. Both are known to ruin lives, and some people are genetically predisposed to develop an addiction after trying things once. If you have access to investing, there's no sane reason to gamble. The longer you gamble, the higher your probability of going broke gets. The longer you invest, the higher your probably of getting rich gets. Why bother with something statistically guaranteed to make you miserable when a surefire bet exists?

Boats, RVs, Luxury Cars, and Timeshares​

In the majority of cases, these are money pits that are best avoided altogether. Even if you don't use them, just owning them alone constantly drains money down into the pit.

Boats, RVs, and Luxury Cars would be expensive even in the best case scenario:
Where you get one for free. Between gas, repairs, maintenance, taxes, and insurance costs, owning one that's legally drivable is a hefty sum.

In the worst case scenario: where you purchase one of these for a large sum of money. The more you paid for it, the higher your insurance and tax costs will be. You'll also lose that much more as the resale value immediately nose dives. That's all before you think of the opportunity costs of what you lost by not investing the money.


Timeshares are worse than you think: John Oliver explains why.
Here are some highlights of the linked video:

  • 85% of people regret buying them.
  • There's a legal clause that gives sales agents "license to lie."
    • People often can't use them despite paying tens of thousands of dollars.
    • Their contracts often have a "non-cancellable lifetime obligation."
  • Their contracts can have clauses where they get passed down to your next of kin upon death, and it's hard to prevent this, especially if you don't know it exists.
  • Timeshare exit companies exist, of which 99% are also scams.

Predatory Lenders​

College and University​

Higher Education in the US is both a scam and one of the most common examples of predatory lending.

How Higher Education is a scam:

  • The cost of going to college has gone up 5x the rate of inflation over the last 50 years.
  • Due to advancements in technology that make things automated and self-service, the cost of delivering education should be going down:
    • There's been no reason for physical text books to exist for a long time.
    • Self-paced video courses can remove the need for lectures.
    • Self-paced lab and field experience simulators have existed for a while.
    • Digital practice questions, quizzes, and exams automate grading.
    • Some subjects like entry level math and science are timeless in that there's no valid reason to re-create text books and lesson plans year over year.
    • Computers and cloud hosting services get faster and cheaper over time.
  • Cheaper community colleges exist. There's no reason why their associate degrees and credits shouldn't have 1:1 mappings with university offerings; however, it's very common for universities to not accept credits from other colleges and make you retake courses to graduate.
  • Universities love to sell expensive worthless degrees:
    • Bachelor of Arts in Fashion Design, English, Theatre, etc:
      No jobs exist that require these degrees, they won't increase your chances of getting a job. The high school graduate with 6 months of experience will usually be hired first.
    • Bachelor of Computer Science:
      Only US Government Jobs care about this, high school drop-outs can get hired no problem (PS: Jorge Armando Navarro, made a huge impact on my life. I highly recommend https://networkengineeracademy.com for anyone interested in IT.)
  • Do you remember being taught these beliefs growing up?:
    • "Parents should help put their kids through college."
      Who taught you that? Was it the Education System scammers?
      (Were you brainwashed from a young age to accept the scam without questioning it?)
    • "College contributes to workforce success?"
      Who published those articles? Was it the Education System scammers?
      (Most employers I've dealt with say experience trumps all. In the IT field, 6 months of relevant experience and a certification trumps a 4-year degree lacking relevant experience. The only times I've heard of a degree mattering are work visa sponsorships, working a job in another country, and government regulated jobs.)
What would happen if instead of spending 80k on putting your kid through college, you just gave them 80k and taught them how to invest it:
  • After 4 years, the 80k would turn into $117k, and they could buy a house. Not having to pay a mortgage would mean they'd probably have spare money to invest.
  • Alternatively, they could work enough to pay rent and have a balanced budget. Then leave the 80k invested in the stock market for 32 years. Then they'd have $1.7m when they turn 50.

Most Universities engage in predatory lending:

  • Normally, a bank won't let you borrow money without having confidence that you can pay it back in a timely manner.
  • That's why things like credit scores and employment verification exist. (Those are guardrails that prevent people from metaphorically shooting themselves in the foot financially.)
  • Universities help you take out huge loans with zero concern about your ability to pay off the loan:
    • Most will encourage you to buy a 4-year bachelors degree, for ~$40-200k. Usually they're trying to scam you into buying an overpriced worthless degree.
    • Since no one can afford that, Colleges will go out of their way to help you qualify for loans to buy the poison they're selling.
    • You can get a loan regardless of if the degree will increase your odds at getting a high-paying job. Universities regularly post fake statistics about their graduates being employed, some even hire their own graduates for "3-month trial periods" to help fudge data against external verification.
    • Since banks would never approve this, the Education System lobbies congress to ensure people have the right to become educated crippled by debt. (I highly recommend watching this video about how lobbyists control the US government.)
      • This forced the government to offer student loans. (Since banks would never do this.)
      • Paying back the loan becomes non-optional. There's something called wage garnishment, where up to 15% of your paycheck can go directly towards repayment of loans.
      • Since 1976, student loans became nondischargeable in bankruptcy proceedings.

Real Estate Agents​

These are professionals who help buy and sell homes. Usually they're paid based on a commission of ~5.5% of the transaction's value.

If you buy a home worth $100k, they earn 5.5k. If you buy a home worth $400k, they earn $22k. In other words, it's in their best interest to influence you to buy an expensive home. Many will push you towards the most expensive home, regardless of if you can afford it or not. Banks are also paid on percentage, so they're also happy to give you as large of a loan as regulations allow. In fact, predatory private mortgage lending caused the housing market to crash in 2008.
(Basically, enough people defaulted on their mortgage to crash the market, and they defaulted because they were offered more house than they could afford.)

Pay Day Loans​

John Oliver explains them best, but basically, like colleges, they skip credit checks and employment verification. The difference is they offer smaller loans, but at interest rates of 500%. (For reference, credit cards charge 18-30% interest.) So if you borrow $1000 for 1 year, you might need to pay back $5000.

Don't Trust People​

Never trust what people say, verify everything anyone tells you. Pretend you live in a corrupt world where no one can be trusted, and most people won't think twice about screwing you over. Assume that even good people will do things that are good for you, but not quite in your best interest. Like an advisor who skims off the top, sure they're helping you, but they're also simultaneously helping themselves, instead of altruistically doing what's in your best interest. Realize that even your friends and family, who are trustworthy people, still might repeat incorrect information they heard.

You should verify information whenever you can, because the only person you can trust to consistently do what's in your best interest is yourself. Try to check what you're told against your own research, your own walk through of the math, raw data, and seek out multiple options as often as practical. Good advice to follow in general, but doubly true for anything to do with money.

Real Estate Agent Story​

When I was a Middle School Math Teacher with a Bachelor's in Math with Teacher Prep, I started off making $37k/year back in 2014. A co-worker encouraged me to talk to a realtor who they felt "took good care of them", I told the real estate agent I want the cheapest house I can possibly get. They told me I could easily be approved for a $400k house, strongly encouraged me to get an expensive house, and completely refused to even show me any houses worth less than $200k.

I didn't call them back and decided to do my own research. Thanks to a habit of budgeting, I actually had accurate data that said I could barely afford a $650/month mortgage. I then looked up the formula for how that was calculated and used Algebra to determine that if I got a house for $80k, then the mortgage would work out to $650/month. So $80k was the most I could afford to spend on a house. Also, when I did my own research, I found out there were 33 houses in my area selling for 80k or less. 30/33 were in Ghetto Neighborhoods with weekly reports of shootings, but the other three were just older small houses in safe neighborhoods, so I bought one of those three.

Financial Advisors​

John Oliver once again has a great video on this topic.
To save you time, here's a summary:

  • Fiduciary: A financial advisor who is both ethically and legally bound to act in your best interest.
  • Financial Advisor: A generic job title that's also meaningless, since it requires no credentials and it's legal for Financial Advisors to advise you against your best interests.
  • Financial Advisors often point out investments that can make you money, but:
    • They normally take a 1-2% commission fee for their service.
    • The advice they give you often under performs total stock market index funds.
    • So instead of putting your money in a stock market index fund and getting 10% interest with a near 0% fee, you might be in an investment that averages 7% and has a 2% fee. So your money goes up by 5% when it should have been going up 10%. Compound interest can make this more than you'd think, the video gives an example where 2/3rds of what you would have got ended up robbed from you as a result of blindly trusting a Financial Advisor.
    • They can have conflicts of interest. Perfectly legal versions of embezzlement do exist in the form of financial kick backs offered for pushing scams that are against your best interest. (Annuities and life insurance investment accounts are common examples.)

University Advisor Story​

The entire reason I picked my university was because one of my high school teachers graduated from there under a grant program. My high school teacher told me I should easily qualify for the same grant program, which fully paid for their 5.5-year master's degree and gave a $25k bonus upon completion. When I got to the university, I was assigned an advisor as part of their onboarding process. I brought up the grant program to the advisor, they said they never heard of it. I kept being insistent about looking into it over a course of multiple mandatory scheduled sessions. Eventually they told me they got around to looking into it and the program no longer existed as it stopped last year.

The advisor suggested I switch programs from a Math Bachelors to a Bachelor's in Math with Teacher Prep.

I blindly trusted them to what was in my best interest, but in my last year I discovered they screwed me:

  • The Bachelors in Math Program was a 4-year Bachelors Degree, the Bachelors in Math with Teacher prep was a 5.5-year Bachelors Degree (I'd only ever heard of 4-year bachelors degrees, and it never occurred to me that such an insidious thing could exist, so I never thought to check. I later found out I could have taught with the 4-year version just fine. The extra classes were completely useless as well.)
  • The advisor straight up lied: The grant program existed the entire time and I qualified for it; unfortunately, I didn't find out until I had 1 semester left. By then I was told, switching to it would have added another 1.5 years.

Fake Debt Collectors​

For about 5 years, I'd occasionally get calls from debt collectors calling to collect fake debt. I used to check my credit score and get one of those once a year free credit reports to verify that the fake debt didn't show up on my credit history. Now I just keep my credit frozen. Then temporary unfreeze it as needed.

Online Reviews and Health Supplements​

Fake Online Reviews:
Fake product reviews are a problem that exists on the internet as a whole. Although fake reviews always go against a website's Terms of Service, the reality is they're difficult and to police against, and any sufficiently popular product marketplace will find themselves plagued by them. Amazon's product marketplace is a prime example of the phenomenon of too many fake reviews to the degree that 5-star reviews stop being meaningful. If real reviews result in a product going below 4 stars, shady businesses can simply google services to buy enough 5-star reviews to mask their product's true ratings.

Luckily, free Chrome add-ons like Fakespot exist that can help differentiate between 5-star products with real reviews vs 5-star products full of fake reviews.

Fake Dietary Supplements:
The Health Supplements Market has always been full of fake products, so naturally, the problem of fake reviews is even worse for the dietary supplement industry. There are tons of fake supplements sold on Amazon and the rest of the internet, chromadex.com tested 22 supplements and found 2/3rds were 100% fake (containing 0-1% of the advertised ingredient.) Snake oil merchants that don't care to use real ingredients, are also unlikely to care about avoiding dangerous filler ingredients. There's also cases like Turmeric where the ingredient can be real, but if it's sourced from lead rich soil, can be dangerous. So it's sensible to test ingredients for contamination, but who can you trust to do that?

If you ever buy health supplements, a good technique you can use to lessen the probability of getting suckered is to look for the following labels printed on the supplement bottle:

Note: The GMP label isn't foolproof, as the chromadex.com report showed a few products with a GMP label had fake ingredients. Fakespot and looking for the above labels both work great as an initial filter to quickly eliminate questionable options. After narrowing down, it's a good idea to research further and consult with a doctor, as supplements can interact with medications and are often offered in excess of MRTD (maximum recommended therapeutic dose.) Many vitamins you can actually overdose on, where they'll do more harm than good, and many supplements offer overdose amounts.