4 Decisions that Will Cost You a Fortune!

by Krantcents · 45 comments

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As I get old(er), I tend to reflect on my decisions more often.  It is one of the ways I learn to make better decisions and learn from my mistakes.  Yes, I make mistakes!  If you are making decisions, you make mistakes.  No one bats a thousand!  You cannot avoid making mistakes, but you should make more good decisions than bad ones.  Especially the big decisions!

If you think that you are avoiding a problem by not making a decision, you are wrong!  Whether you are managing a business, buying a home, thinking about college or marriage, you will make decisions that have significant consequences.  You should use these steps in order to make better decisions.

  • Define the problem – Ignoring the problem is classic denial.  I often see this syndrome in my students.  Maturity usually helps you overcome this syndrome, but not always.  Defining the problem is necessary to actually solve the problem.
  • Research the options – There is always more than one way to solve a problem.  What are the top best solutions?   There are pros and cons to all solutions, which one makes the best sense?  I order to find the best one; you need to go through the top three (3) choices for example.
  • Evaluation – All right, you came up with a dozen solutions.  What are the top three (3) best solutions?   Which are the best solutions?  Select the best solution (to make a decision).
  • Selection – Make a decision!  You have picked the top best solutions and you pick one.  Making a decision has consequences and this is why you have given it thought.  Decisions range from the trivial to something that has significant consequences.
  • Review – This may be the most important part of decision making!  It is a great way to improve your judgment and improve you problem solving skills.  Did your solution work?  If so, you made a great solution.  If not, changes would you make?  Was there a better alternative that you should consider?

We make decisions all the time from the trivial of what to have for lunch to something more weighty such as you r career choice.  Wouldn’t be great to make more right decisions than wrong ones?  If you learn from your mistakes, you will make better decisions.  Over time, your judgment improves!  It may be maturity or just the number of decisions you make.  Reflecting on your decisions is an important part of decision making.

Here are four (4) decisions I believe requires more reflection.

Paying off your mortgage – Many PF bloggers are paying off their mortgages early.  They look at the interest you pay over a thirty (30) year period and decide to pay off the mortgage early.  Looking at the facts, I agree there is a lot of interest.  A $100,000 mortgage at 3.5% for thirty (30) years will cost $161,656.  In other words, you are paying $61,656 in interest.  The home value over the same period will increase considerably more than your cost.  The average appreciation is approximately 5%.  Based on that calculation your home would be worth $432,194 in 30 years.

There are additional factors that determine future value, but this just one example.  Will you own the same home for the entire 30 year period?  Another choice may be a 15 year mortgage at 2.5% and your interest would be only $20,022.  Both mortgages have very low interest rates and you should be able to use the money more effectively elsewhere.  If you prepay your mortgage early, you will own the asset outright, but unable to access the equity.  Of course you can sell it, but you have to live somewhere.

Stock market timer – If you are new to investing, you are just seeing the market go up!  Hopefully, you did some research and learned that the market has gone up and down many times in its long history.  Wars, Great Depression, Black Monday and many recessions have affected the stock market returns, but over the entire history of the stock market, it averaged 8-10%,  If you invested in 2008, you saw your investment go down, but it came back and more if you stayed the course.  I am not a stock market timer because I just do not know enough to get in or out at the right time.  Long term investing trumps the volatility.

Student loans – Everyone hates debt and I include myself in that group.  If you have student loans at a low interest rate, you should treat it differently.  If you graduated from college with student loans, you should view that debt as buying an asset that will grow over time.  Education and training is supposed to enhance your earning capability.  If you have $50,000 in debt for an engineering, computer science or accounting degree, you have an asset that increased your earnings.  If you have a liberal arts degree, all is not lost!  Your degree will help you earn more, but it may not be apparent as quickly.

You went to college to prepare you for a better future and you have debt.  If the debt is at a low interest, you should invest in your future and repay the debt over time.  If the interest is at a higher interest rate, you still need to do both!  The difference is any excess cash should be used to repay the debt. Investing early is important because time is important in investing.  If you do not invest in your twenties, you will have to double your contribution in your thirties just to catch up.  The choice of paying off debt and not investing means you miss the benefit of investing in a 401K.

Excuses – Yes, excuses are a decision for a problem!  Many people blame things for their decisions.  I have read about various people blaming credit card debt on the credit card, watching TV for not doing enough or as a distraction.  I am not saying there are not legitimate reasons for not accomplishing your goals, but I often hear excuses vs. legitimate reasons.  First you really need to take a hard look at yourself to figure out why you failed.  Then reform your plan to accomplish your goals.  Successful people fail, but never make excuses.

Final thoughts

These are just some decisions that I think require more reflection than others!  We make decisions every day and sometimes it can cost you a great deal of money.  Important decisions such as investing, debt and how you handle failure can impact your fortune.  These decisions are usually handled routinely without thinking about your future until much later.  I am just suggesting you think more strategically!  Your decisions matter and they can cost you a fortune!

Photo by:  QuotesEverlasting 

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Michelle May 28, 2013 at 6:44 am

Great list! These are all things that are always on our minds. I wish my student loans were at a low rate. I know of some people who have 2% loans!

Krantcents May 28, 2013 at 6:55 am

Pay down the higher rates and just make payments on the lower ones.

Free Money Minute May 28, 2013 at 10:22 am

Or try to knock out the lowest loan so you can apply the payment to the next lowest loan. Snowball it.

Krantcents May 28, 2013 at 10:35 am

Student loans have different interest rates because they may be subsidized or unsubsidized. I would pay off the higher rates before I would pay any additional principal in the lower ones.

John S @ Frugal Rules May 28, 2013 at 6:52 am

I could not agree more. We all make mistakes and I think a big key is to learn from them. As we look at many of ours in the past a lot of them resulted from a lack in strategic thinking. This helps us as we make decisions now because we have things we can implement to help protect against making similar mistakes.

Krantcents May 28, 2013 at 6:57 am

Thanks, It is always good to reflect on your decisions and think about how to make better decisions.

KC @ genxfinance May 28, 2013 at 7:51 am

I think one solution in order to avoid making any financial mistakes is to be aware. Some of us make the wrong choice simply because we have no idea about what we are doing. But that’s the beauty of making mistakes, getting up and learning form them.

Krantcents May 28, 2013 at 9:56 am

It is only a mistake if you do not correct it. The beauty of life is we can keep trying and fix our mistakes.

Jenny @ Frugal Guru Guide May 28, 2013 at 10:14 am

That liberal arts degree may not actually be worth anything, much less what you paid for it. Signaling may get you your first job, but four years of good work might get you farther. The problem with “what’s a degree worth” comparisons is that they don’t study the same populations.

Historically, home appreciation has been much lower than 5%. The recent bubble distorted the figures. And to keep a home at the same “price,” you have to constantly do maintenance and occasionally do a remodel–the true ROI is pretty darned poor! The point to paying off a mortgage early is really to reduce risk rather than to have some other financial benefit. That’s why you should try to pay off the house you live in but NOT pay off a rental property, at today’s mortgage rates. One is an expense, the other an actual investment, so they should be treated differently.

Krantcents May 28, 2013 at 10:31 am

All degrees have value, but you may have to find a way to apply the value in the real world. In most cases it will be a training program for liberal arts degrees. When I was doing consulting work, the Director of programming had a Phys ed degree. Obviously he picked up some more skills. In most cases, the liberal arts degree is just general preparation for your career. I had a business degree and used accounting to forge my career.

With interest rates so low, I think I would rather use those funds elsewhere. Now, I will contradict myself since I want to be debt free in retirement. I will maintain a HELOC to access my equity though. California real estate generally outpaces inflation. Even if the growth rate is lower, you are subsidized through a tax deduction and you have to live somewhere.

Holly@ClubThrifty May 28, 2013 at 12:27 pm

Great list! However, I do feel that debt repayment can sometimes be the best move for people even if its at a low interest rate. We paid off my husband’s student loans as fast as possible even though they were at 3.75%. I’ve never regretted it!~

Krantcents May 28, 2013 at 12:56 pm

It is a personal choice, however the stock market has returned more than that for the last several years. I realize not everyone is comfortable with any debt, but you have to look at the opportunity costs. I would have made my payments, but invest any extra.

DC @ Young Adult Money May 28, 2013 at 12:46 pm

Great list! Paying down a mortgage early is always going to spark a debate. Some people simply do not care about interest rate but I definitely like to take it into consideration. Access to capital is very important, especially if you don’t have a massive pile of cash sitting in a savings account. I’d rather build up savings than pay down debt that has a low interest rate.

Krantcents May 28, 2013 at 12:59 pm

In most cases, the difference between rich and poor is access to capital. It is the ability to get a loan or access to cash. Interest rates and the IRS subsidy makes the effective rate negligible.

Mike@WeOnlyDoThisOnce May 28, 2013 at 12:55 pm

Student loans tend to have huge psychological impact–massive debt weighs on even the most carefree people.

Krantcents May 28, 2013 at 1:24 pm

I understand that everyone is different and debt will affect you differently. I would still pay down the highest interest loans first and any extra money would be invested. I wrote an article called “Why You Should Think Twice about Paying Off Debt” which goes into more details.

Greg @ Thriftgenuity.com May 28, 2013 at 6:22 pm

Definitely have to weigh options and what works best for you. We are opting for a combination of paying off debts and investing. I make sure to max out 401k, would like to get another rental before rates go up, and max out our Roth accounts before we are no longer eligible. The rest goes to debt repayment.

Krantcents May 28, 2013 at 8:34 pm

Sounds like a good plan!

KK @ Student Debt Survivor May 28, 2013 at 7:51 pm

Being a liberal arts major and a MSW I I guess I have the “worst” of both graduate and undergraduate degrees. Do I feel bad for myself or make excuses, absolutely not. I chose those degrees, I chose to pay off my student loans, and I make a pretty decent salary. I’m tired of people (including my peers and co-workers) who make excuses for why they can’t get ahead. You made your own decisions, nobody held a gun to your head. If you’re not happy with where you are in your life, make changes.

Krantcents May 28, 2013 at 8:41 pm

I agree with you. I chose to be a teacher at this stage of my life and I knew what I was getting into. I accepted the pay and I knew I would not get rich. I like what I do and that is what is important.

snarkfinance May 29, 2013 at 9:01 am

I entirely agree that paying down a mortgage that is at a sub-4% rate is ridiculous from a purely financial perspective. Student loans I take a little issue with, as those loans have repercussions for non-payment that no other form of debt does.

Krantcents May 29, 2013 at 10:26 am

I would never suggest not paying any debt, but paying off debt early that has a low interest rate is foolish.

Your Daily Finance May 29, 2013 at 2:47 pm

I really had the problem in the beginning keeping a mortgage instead of paying it off early. But as I started investing more and making better decisions I realized that some debt is okay. Heck if I am paying at 2.5% and making 10% then I’m doing better. Like you mentioned its more of a personal choice and many don’t even get in the stock market or rental properties. People seem to want to move too fast. Long term and take profits if you make it in the short the key to stocks is playing with the houses money.

Krantcents May 29, 2013 at 6:08 pm

Everyone seems to look at their home differently! Buying real estate and using a mortgage to leverage the purchase at a low interest (fixed) rate seems like a perfect situation. Then the government helps by subsidizing your interest in the form of a deduction. The only thing that is left is to save and invest for your future.

thepotatohead May 29, 2013 at 5:47 pm

Your home is probably the biggest single purchase you will ever make, so it definitely requires alot of thought before you make that decision. I should have made more thought before I got my mortage, as I’ve gone from a 30 yr to a 15 yr back to a 30 yr all within 4 yrs….definitely could have played that smarter lol

Krantcents May 29, 2013 at 6:11 pm

I bet the interest rate is much lower though.

Darwin's Money May 29, 2013 at 8:28 pm

Cars! I don’t get why people keep trading in for new cards every 3 years and pissing away that depreciation loss of 30% or more every 3 years. It’s nuts. They justify it with “my payment is the same!”; totally lame, always carrying a car payment for life. Now that costs a fortune!

Krantcents May 29, 2013 at 8:52 pm

The less expensive way to buy a car is for cash. Keeping it forever is the lowest cost of ownership.

Janice @ Whiz Silver June 2, 2013 at 1:53 am

Great points! I love to reflect on myself, especially the decisions I make because I hate to live in regrets. Agree on your 2 points on stock market timing and student debt. My investing strategy is simply to make sound investments with a longer time horizon and I just cleared my student debt!

Krantcents June 2, 2013 at 9:33 am

Thank you, investing is supposed to be long term. The trend seems to be daily or at least quarterly returns, but I measure returns in decades.

red June 2, 2013 at 6:37 am

beside those 4 decisions, opening a business is also important. We will get benefit from our business in future. We can pay all expenses and debt from it.

Krantcents June 2, 2013 at 9:42 am

Although the entrepreneurial spirit is alive and well, most people will not start a business. Along with real estate, a business is characteristic of building wealth.

Alexis Marlons June 2, 2013 at 6:45 pm

There are indeed a lot of temptations in this world. Sometimes, we tend to blame them when in fact we are the ones to be blamed anyway. We should change this habit first so we can be productive.

Krantcents June 3, 2013 at 6:54 am

Taking personal responsibility for your decisions is important! You must focus on your goals to be successful.

Anton Ivanov June 3, 2013 at 5:07 pm

Couldn’t agree more with you about trying to time the stock market. I’ve talked to countless people who think that’s the way to get rich, but guess what? I don’t see a lot of millionaire day traders walking around (are there any out there at all?)!

Krantcents June 3, 2013 at 5:38 pm

There are plenty of get rich quick schemes out there, but I prefer thinking long term. As I get older, I realize what I don’t know and timing the market is one of them.

Elmo Schwartz June 7, 2013 at 3:39 am

The other big difference is that student loans can’t be discharged in bankruptcy . In other lending markets, a drop in outstanding debt can reflect lenders writing off the debt rather than borrowers paying it down.

Krantcents June 7, 2013 at 7:32 am

That may be true, however I recommend paying down high interest loans first and find money to invest in a 401k as early as possible.

Megan D. Meyers June 16, 2013 at 5:40 am

Loonin says this treatment of private student loans, which doesn’t extend to any other kind of consumer debt, gives private lenders little incentive to negotiate with borrowers having trouble repaying their loans.

Krantcents June 16, 2013 at 7:35 am

Given a choice a federal loan is better, but sometimes you do not have options. When repaying, you will want to repay the higher interest, probably private loans first.

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