5 Foolish Things Americans Should Stop Doing With Money
As Forrest Gump’s mama would always say, “Stupid is as stupid does.” That simple truth highlights the fact that actions speak louder than anything else. In regard to money, we can talk a good game and ignore our own shortcomings, but our actions will ultimately decide our financial literacy. Unfortunately, poor actions can also cost a pretty penny. Let’s take a look at five stupid money moves Americans should stop making.
1. Expensive weddings
Declaring your love to the world no matter the costs may sound reasonable at first, but you have to do the best with what your bank account gives you. The Knot 2014 Real Weddings Study reveals couples spend an average of $31,213 just to begin their marriages, not including the honeymoon. In fact, average wedding costs in the northeast range from $34,409 in Baltimore to $76,328 in Manhattan.
Some couples can truly afford expensive weddings, but budgets often become an afterthought during wedding season. In 2014, 45% of couples went over budget, while 26% didn’t even have a wedding budget. Only 32% of couples stayed within or under budget. The most expensive party item was the reception hall ($14,006), followed by the engagement ring ($5,855), reception band ($3,587), and photographer ($2,556).
A wedding is meant to be a celebration of love, not a hindrance to financial prosperity. Pressure is expected from vendors wishing to sell you a lavish experience, but if the pressure is coming from within your own relationship, you may have bigger problems. A recent study from Emory University finds that spending $20,000 or more on a wedding is associated with higher divorce rates than couples spending less. After studying several factors, Dr. Andrew M. Francis and Dr. Hugo M. Mialon conclude that marriage duration is either not associated or inversely associated with spending on the engagement ring and wedding ceremony.
Making yourself house poor with a McMansion you can’t really afford is a stupid, costly mistake for Americans. The housing bubble collapse tried to treat the McMansion pandemic of yesteryear, but animal spirits are alive and well as the majority of Americans claim to be living in an inappropriate-sized home. According to a new analysis from Trulia, only 40% of respondents say they are living in a home that’s their ideal size, and 43% believe their dream home is somewhat or much larger than their current residence. Several factors influence whether people desire a different-sized home, but every generation as a whole shows a bias toward a larger home.
Adding insult to injury, one house is not always “enough.” The National Association of Realtors reports that vacation home sales surged last year to above their recent peak level in 2006. Investment purchases fell for the fourth consecutive year. An estimated 1.13 million vacation homes were sold in 2014, up 57.4% from the prior year and the highest amount since NAR began the survey in 2003.
Some vacation home buyers may be enjoying their gains in the stock market or preparing for retirement, but people tend to forget that the good times don’t last forever. Interestingly, 45% of vacation homes purchased last year were distressed properties, meaning they were either in foreclosure or a short sale, compared to 42% in 2013. The typical buyer in 2014 only had a median household income of $94,380.
3. Fancy wheels
Americans are veering off-course when it comes to affordable transportation. TrueCar.com reports the estimated average transaction price for light vehicles in the U.S. hit $32,957 in 2014, up $778 from a year earlier, and more than half of the annual income of the median U.S. household. Making matters worse, consumers are using debt to fuel their fancy wheels. The average loan amount for a new vehicle jumped $950 year-over-year to a record high of $28,381 in the fourth quarter of 2014. Even used vehicles haul an average loan amount of $18,411.
“In most parts of the country, vehicles are viewed as a necessity to everyday life, which is why we continue to see consumers willing to take out larger loans as the average price of vehicles continues to rise,” said Melinda Zabritski, Experian’s senior director of automotive finance, in a press release. “As more consumers lean on financing, it’s important for them to consider all of the factors involved, including monthly payments, interest rates, and loan terms.”
Instead of becoming infatuated with the latest auto trends and supercharged price tags, recognize the value of lower payments on a dependable used car that allows you to reduce interest costs and save money on property taxes. If you skip payments altogether and pay cash for used cars costing $15,000 or less that you keep for 10 years at a time, you’ll have an even easier time reducing your number of stupid money moves.
After overspending on weddings, homes, and cars, it’s not too difficult to understand how some Americans are unfamiliar with the concept of saving or investing for the future. Nearly half of Americans are placing virtually nothing aside for the future. According to a new Bankrate.com survey, 18% of respondents are saving virtually nothing at all, while another 28% are saving no more than 5% of their incomes. Overall, fewer than one in four Americans are saving more than 10% of their incomes, including one in seven who are saving more than 15%.
Even people managing to save money are taking undue risks. A recent American Express survey finds that more than half of people who keep their savings in cash plan to hide dollars in a secret location at home. To be clear, keeping some cash on hand can be beneficial in times of emergency, but making it your primary savings vehicle exposes you to security risks and inflation. If you’re keeping cash in a freezer, sock drawer, or mattress, you’re taking additional risks since these are the most common “secret” spots and are routinely advertised as such in movies.
5. Eye-popping debt
Some forms of debt are stupid, while others are eye-popping stupid. For example, 12 million Americans are trapped every year in a cycle of 400% interest payday loans. These last-resort loans are so popular, there are more than two payday lending storefronts for every Starbucks location, and rake in an estimated $27 billion in annual loan volume. Repeated payday loans result in $3.5 billion in fees each year.
Payday lending has become such a problem that the Consumer Financial Protection Bureau (CFPB) recently introduced new restrictions to help protect consumers. New rules would require lenders to verify borrowers have the ability to repay the loans, and set a limit on the number of times a loan can be renewed.
“With payday loans, vehicle title loans, and many types of installment loans, the pattern is all too common. A consumer facing difficult financial circumstances is offered quick cash with no questions asked and in return agrees to provide access to a checking account or paycheck or vehicle title in order to get the loan,” explains CFPB Director Richard Cordray. “No attempt is made to determine whether the consumer will be able to afford the ensuing payments – only that the payments are likely to be collected. Indeed, in many of these markets the lender’s business model often depends on many consumers being unable to repay the loan and needing to borrow again and again while incurring repeated fees.”
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