Hey, guys. 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
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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
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Tuesday and Thursday for new and awesome videos. Goodbye.
