Podcast Episode 193: Things That Don’t Make Financial Sense

Today’s Wisdom:

Sometimes we make decisions that just don’t add up. It happens all the time in the financial world as well, and it leaves us scratching our heads. Today we’ll look at some examples of things we see in financial planning that don’t make sense and tell you what options you should be considering instead.

Want to save time? Click the timestamps below to jump ahead to specific spots in the episode.

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What You’ll Learn:

It’s not too uncommon to find people who make financial decisions that just don’t add up. In an effort to save money, sometimes we do things that don’t make a lot of sense.

On this episode of the Money Wisdom podcast, we’re going to give some examples of the things we’ve seen and explain why they don’t actually benefit you.

For example, think about a time when you’ve gone way out of your way to save a few dollars. This happens all the time to us whether we’re grocery shopping, buying gas, or any other number of examples. Have you actually added up how much it costs you in time and gas to go the extra distance to save a small amount? Many times it doesn’t really make much sense and could actually be costing you money.

What about people that keep large sums of money in a bank account because it gives them security? Sure, there’s value in not having to worry, but cash that isn’t earning any interest is losing out to inflation over time. The common misconception is that you have to take on a lot of risk to earn a decent return, but that’s not true.

There are options to earn 2-3% on your money when in an investment over a few years that isn’t going to put your cash at risk. We always recommend keeping about six months’ worth of expenses in savings and putting the other money to work in some way. Your advisor can help build you a plan that accommodates your risk tolerance but also allows you to keep growing your nest egg.

Another thing that doesn’t make sense is having a car that’s a quarter of the price of your house. We’ll see people that have a $200,000 home and drive a $50,000 car, but which is the better investment? Wouldn’t you want to put more money into the asset that’s going to retain its value or increase over time like real estate typically does? Or would you spend more on an asset that is guaranteed to depreciate every year?

Speaking of houses, do you delay paying off your mortgage because you want to keep that mortgage interest write-off for tax season? It happens often enough that people have the money to pay of their mortgage and even want to do that but hesitate because they don’t want to lose that write-off. We refer to this as a situation where the tail is wagging the dog. Keep in mind that most people aren’t itemizing their deductions under current tax laws and that mortgage interest doesn’t even have an impact. It’s important that you way both sides of this with an advisor and determine which path makes the most financial sense.

The last one that we’ll discuss is having tax-free municipal bonds inside an IRA. This is something you can do, but it will typically get caught by a firm if you’re working with a financial advisor. But we do see this happen by accident. The question is why would you put a tax-free investment into an account where you’re not paying the taxes on the interest earnings anyway?

As you begin the show, make sure you keep an ear out for Joel’s difficulty using PayPal after selling a set of car rims.

Let’s get started with the show. You can listen to it by using the audio player above and click on the timestamps to skip to a specific topic of conversation.

[1:10] – Joel’s money stuck in PayPal  

[3:07] – Things that don’t make sense: Driving across town to save a small amount

[4:56] – Tax-free municipal bonds inside an IRA

[5:55] – Living in a house that’s worth $200,000 while driving a $50,000 car

[7:04] – Having the money to pay off your house but don’t because mortgage interest is the only write-off you have  

[9:45] – Keeping a lot of money in the bank just for security

Thanks for listening to this episode. We’ll be back again next week for another show.

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Final Thoughts:

“Everybody thinks they’re paying too much in taxes. Even people that are not paying any money in taxes think they’re paying too much in taxes.”

– Joel Johnson, Money Wisdom Podcast

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