St. Patrick’s Day may be right around the corner, but wait before you take a risky dip for that pot of gold at the end of the rainbow. Every financial decision we make involves some risk, and it’s important to understand which risks are worth taking and which are not.
Be sure to speak with a trusted financial advisor before making any big financial decisions. In the meantime, read on to learn a bit more about which financial behaviors to approach with caution, which to avoid altogether, and which to do with confidence.
Proceed with caution
There are many ways to manage your money, and some philosophies will work better for you than others. So, when we talk about risk, it is important to remember that risk is a relative concept. the five behaviors below may be considered risky, but they may be a risk you are willing to take:
- Take on a lot of credit card debt. Sometimes credit cards can really come in handy! But when your income doesn’t match the monthly payments, you have a problem on your hands.
- Holding a stock too long. They say time in market is more important than timing in market, but sometimes a stock really just goes nowhere! You have to take risks to get rewards, and it’s comforting to know that any loss on stocks is tax deductible.
- Go to your friends for financial advice. Maybe your friends are smart and do well. But you cannot guarantee that their specific real estate investment strategy will suit your personal situation.
- Make decisions alone. Contrary to point 3 above, making decisions without expert advice can lead to errors. Listen to finance podcasts, sit down with a financial advisor and read classic finance books to give you a better chance of success.
- Take out student loans. “The truth is, taking out a loan is a risk,” Garrett Parker told http://moneyinc.com. “As long as you have a viable major field of study and a plan, a student loan is actually an investment.”
Avoid these behaviors
Now that we’ve talked about maybes, let’s move on to financial behaviors you should almost always avoid:
- Overspending on things you don’t need — like that daily Starbucks or that music streaming service you don’t use very often.
- Living on borrowed money. Interest payments are not your friends. If you’re still paying a bill long after you’ve used the item (like that gas tank or grocery cart), it’s time for a change of strategy.
- Buy a new car. Not only are you going into debt, but you are buying a property that is depreciating in value very quickly.
- Spending too much on your home. How much space do you really need? Buying a home is a long commitment, and you want to make sure it doesn’t weigh too heavily on your weekly budget.
- Living paycheck to paycheck. Costly emergencies can happen at any time. Strive to save a little from each paycheck so you’re prepared.
- Not investing in your retirement: consult The NerdWallet Retirement Calculator to see how much you will need to live on after you stop working. It may be more than you think!
There are many financial philosophies out there, and not all of them may be right for you, but there are two principles every non-professional investor should follow: Diversify and be patient.
By spreading your money across many bond and stock holdings, you minimize your risk of capital loss. And by being patient and waiting to invest in the stock market when the price/earnings ratio is in the right place, you will get better results. Financial advisors like Merrill Financial Associates in Provo can help you!
Along with these two investing principles, the old standards apply: spend less than you earn, put some of your money aside in a savings account, and track your spending.
No financial decision is completely without risk, but you can be informed to know which risks are to be taken and which are not. Be cautious about behaviors such as taking out student loans, avoid living paycheck to paycheck, and diversify your investment portfolio. It may not be the path of least resistance, but it will help you sleep better at night, knowing that you are taking care of your future.