The Dumb Things Smart People Do with Their Money

1. Don't Buy What You Don't Understand

Smart people get snookered into financial products they don’t understand all the time.

Complexity is a red flag. Financial products often come with layers of complexity, designed to obscure their true costs and risks. If you can't explain a product simply, you shouldn't buy it. This applies to everything from gold bars and reverse mortgages to hedge funds and variable annuities.

Ask the right questions. Before investing in anything, ask:

• How much will this cost me?
• What are the alternatives?
• How easy is it to get my money out?
• What are the tax consequences?
• What's the worst-case scenario?
• What are the fees and commissions?

Boredom is a warning sign. Many people avoid learning about finances because they find it boring. This boredom is often a mask for fear. Overcome this fear by asking questions and reading the fine print. Don't let boredom lead you into costly mistakes.

2. Seek Fiduciary Advice, Not Sales Pitches

Many smart people make the mistake…taking financial advice from someone who is trying, first and foremost, to sell you something that will make him or her money, rather than help you.

Fiduciary vs. Suitability. A fiduciary is legally obligated to act in your best interest, while a salesperson is only required to offer "suitable" advice, which may not be the best for you. Understand the difference and choose wisely.

Questions to ask your advisor:

• Are you legally obligated to put my interests first?
• What professional certifications do you have?
• Have you ever been sanctioned for unethical conduct?
• What conflicts of interest do you have?
• How are you compensated?

DIY can be dangerous. While some people can manage their finances effectively, many need professional help. Don't let ego or a desire to save money prevent you from seeking advice when you need it. If you're not sure, get a second opinion from a fiduciary.

3. Money Is a Tool, Not a Goal

When it comes to money, we all suffer through our share of “Oh, shit” moments—those life-altering instants in which we realize we’ve screwed up royally.

Money is not the measure of success. An excessive focus on money can lead to unhappiness, anxiety, and poor financial decisions. It's important to remember that money is a tool to achieve your goals, not the goal itself.

Obsession leads to paralysis. An unhealthy attachment to money can cause you to overanalyze and procrastinate, missing out on opportunities. It can also lead to brash, emotional decisions that run counter to your best interests.

Warning signs of over-emphasis on money:

• Keeping money secrets from your spouse
• Losing sleep over money issues
• Obsessing over your investment accounts
• Constantly comparing your finances to others
• Moving your financial goalposts

4. Don't Overpay for College

Many smart people make the mistake of assuming too much college debt.

College isn't worth it at any price. While a college degree can be valuable, it's not worth taking on crushing debt. Do your research and consider all your options, including state schools and community colleges.

Think strategically about college:

• Don't overvalue name-brand schools.
• Consider the job market and your career goals.
• Don't let your kids' desires dictate your financial decisions.
• Have honest conversations with your kids about what you can afford.
• Explore all financial aid options.

Prioritize retirement over college. You can borrow for college, but you can't borrow for retirement. Make sure you're on track to meet your retirement goals before you start funding your kids' education.

5. Renting Can Be Smarter Than Buying

You’re not “throwing money out the window” by renting. Rather, you’re buying flexibility.

Homeownership isn't always the best option. Many people assume that buying a home is always better than renting, but this isn't always the case. Renting provides flexibility and can be a smarter financial move in certain situations.

Consider renting if:

• You're not sure where you want to live long-term.
• You're not ready for the responsibilities of homeownership.
• You're not sure if you can afford the costs of homeownership.
• You're in a volatile real estate market.

Don't fall for the myths. Don't let the "American dream" or the idea that you're "throwing money away" by renting cloud your judgment. Make a rational decision based on your individual circumstances.

6. Avoid Excessive Risk, Embrace Passive Investing

Failing to buy the right insurance or to invest wisely are just two of the many dumb mistakes that smart people make.

Risk is often misunderstood. Our brains are wired to focus on recent events and to overestimate our ability to predict the future. This can lead to excessive risk-taking or excessive fearfulness.

Recency bias is dangerous. Don't let recent market performance influence your investment decisions. Past performance is not a guarantee of future results.

Passive investing is the key. Instead of trying to time the market, create a diversified portfolio that reflects your risk tolerance and stick with it through up and down markets.

7. Protect Your Identity, It's Not Optional

You must assume that your personal information is already out there on the Dark Web.

Identity theft is a real threat. Don't assume that you're too smart to be a victim of identity theft. Take steps to protect yourself, because your personal information is likely already compromised.

Steps to protect your identity:

• Guard your Social Security number and other personal information.
• Be careful about what you share on social media.
• Use strong passwords and change them frequently.
• Enable two-factor authentication whenever possible.
• Monitor your credit reports regularly.
• Be skeptical of emails and phone calls asking for personal information.

Don't be lazy. Protecting your identity requires effort and vigilance. Don't let laziness or a false sense of security leave you vulnerable to fraud.

8. Don't Blow Your Retirement Savings Early

You simply must fully fund retirement before attending to your kids’ college.

Retirement comes first. It's tempting to prioritize your kids' needs over your own, but you must fully fund your retirement before you start paying for their college or other expenses.

The 3-3.5% rule. A good rule of thumb is to withdraw only 3 to 3.5 percent of your retirement savings each year. This will help ensure that your money lasts throughout your retirement.

Don't underestimate healthcare costs. Healthcare expenses can be significant in retirement. Factor these costs into your retirement plan.

Don't move the goalposts. Once you've reached your retirement goals, don't keep moving the goalposts. Enjoy the fruits of your labor.

9. Don't Burden Your Kids With Your Money Issues

Our parents might have instilled in us the notion that money is all that matters in life.

Money is a loaded topic. Your attitudes and behaviors around money can have a profound impact on your children. Be mindful of the messages you're sending.

Avoid these common mistakes:

• Making money the focus of every conversation.
• Criticizing your kids for their spending habits.
• Spoiling your kids and failing to set limits.
• Comparing your family's finances to others.
• Keeping secrets about money from your spouse.

Teach healthy money habits. Encourage your kids to work, save, and budget. Help them understand the value of money and the importance of financial responsibility.

10. Plan for Your Parents' Care, It's Your Responsibility

You simply must fully fund retirement before attending to your kids’ college.

Aging is inevitable. Don't avoid the difficult conversations about your parents' future care. Planning ahead can help you avoid unnecessary financial and emotional stress.

Start the conversation early. Don't wait until a crisis occurs. Begin discussing your parents' needs and desires while they're still healthy and able to make decisions.

Consider these factors:

• Where will your parents live?
• How will you pay for their care?
• Who will be responsible for their day-to-day needs?
• What are their wishes for end-of-life care?

Be proactive. Don't wait for your parents to bring up the topic. Take the initiative and start the conversation yourself.

11. Get the Right Insurance, Not Just Any Insurance

If you’ve suffered through one of those horrible “Oh, shit” moments with your money…please know that there’s no shame in making a financial mistake.

Insurance is a necessary evil. While it's not fun to think about, insurance is essential for protecting yourself and your family from financial ruin.

Don't underestimate your needs. Make sure you have adequate coverage for life, health, disability, property, and liability.

Avoid these common mistakes:

• Buying permanent life insurance when you only need term.
• Failing to update your policies as your needs change.
• Not taking full advantage of employee benefits.
• Surrendering your policies too soon.

Shop around. Don't just buy the first policy you see. Compare quotes from multiple insurers to find the best coverage at the best price.

12. Have a Will, It's Not Just for the Rich

Failing to have a will is indisputably the worst.

A will is essential for everyone. Don't assume that you don't need a will because you don't have a lot of assets. A will is necessary to ensure that your wishes are carried out and that your loved ones are protected.

A will allows you to:

• Specify who will inherit your assets.
• Name a guardian for your minor children.
• Designate an executor to manage your estate.
• Express your wishes for end-of-life care.

Don't procrastinate. Drafting a will is not difficult or expensive. Don't put it off any longer.

Last updated: January 15, 2025