Money isn’t everything, but it sure does give you choices in life. There are only two ways to make money:
Work for your money (be paid for every hour of work you do)
Invest your money (make your money work for you / passive income)
Saving money is the first step to creating wealth and means more money in your back pocket. It’s the fundamental basis of all successful money management but unfortunately doesn’t mean that your money is working for you.
Without also investing, you will never have any more money, than what you can save.
Whether you are just starting out with investing journey or have been involved in investing for decades, deciding to invest money requires careful consideration. A seemingly promising investment may actually cost more money than its value – and even cause you significant economic losses.
Business Insider asked a number of certified financial planners what people are investing in, but which often don’t do anything good for them.Here are seven things you think will make you rich, but experts say you will most likely end up paying the price for:
Encryptors like venture capitalist Tim Draper believe that cryptocurrencies can replace cash in 10 years. Other experts saythat the market is about to usher in a “death cross.” Stylish bitcoin may become a reality in the future, but your first priority should be to develop a solid plan to save for retirement – especially if you are not sure of cryptocurrency and just looking for a piece of the pie.
As Sophia Bera, founder of CFP and Gen Y Planning, told Business Insider: “Simple first, then sexy. If you don’t maximise your retirement account first, don’t invest in cryptocurrencies,” she says.
2.A Home With A Big Loan
The traditional view is that housing is always a good buy,but not always. Spending too much on housing is a major reason why people struggle financially and is easy to do, especially when property prices and rents keep increasing. Prices will continue to rise; you can’t control that. What you can control is the amount that you choose to spend on housing, especially if you are living a lifestyle that you can’t afford (right now).
If the only thing you can afford is to look at your house, because the payment is high, you can’t provide it, travel, and don’t contribute to your retirement plan, then this is not a good idea.
If buying a home would make your debt-to-income ratio more than 35%, then this is not a wise investment.
Even if you earn a good income and can afford to spend more on housing, consider spending a little less rather than always the maximum –leave yourself some breathing room because life circumstances change. What if you lose your job tomorrow? Or get sick or injured and can’t work for a period of time? What if interest rates rise to those seen in the 1980s (ask your parents about that)!
3.Negatively Geared Investments
Borrowing money to invest is known as ‘gearing’.Borrowed money can be invested in direct property, direct shares and also managed funds for example. It isn’t generally used to invest in cash or fixed interest (term deposits), as the returns of a geared investment need to outweigh the cost of borrowing (the loan interest rate) for you to make a profit.
If used correctly, gearing can propel your wealth creation and make a substantial difference – but there are also. More risks involved. Gearing is not for everyone.
When the returns of a ‘geared’ investment do not outperform the cost of the borrowings, then theinvestment is said to have ‘negative cash flow and is therefore ‘negatively geared’.
When borrowing to buy an investment property for example, it’s very common to have a negatively geared investment initially, but after a few years (as rental income rises), the property should turn ‘positively geared’, whereby the rental income eventually starts to cover costs. Whilst a property is negatively geared, it costs the investor money from their own pocket to hold the property (they pay the difference in costs) – the investor would be banking on capital gains (increases to the property value), to offset the income losses, so they still make a profit in the long-term. It’s therefore important to turn a negatively geared investment into a positive geared investment as soon as possible.
The aim is to buy an investment property which is not too negatively geared, so that’s still affordable to hold until becoming positively geared (otherwise it’s too much strain on an investor’s budget).
You may be interested in buying a timeshare or hotel credit to lock today’s price, but the annual fee is not a wise investment and what’s worse is there is minimal liquidity – it’s hard to resell when you get tired of it.
“I have talked to hundreds of people about the same story,” said Doug Spencer, Senior Resident Financial Planner at CFP and Financial Finesse. “‘Oh, we like this place, it’s much cheaper than paying a hotel every year.’ Until four years later, you are tired of this place, or you need to take advantage of the holidays to attend a friend’s wedding and family activities, or you have children Can’t afford the holiday. Then you pay the bill every month. For a place you will never use, you can only use it during off-peak hours.“
5.An Expensive Tertiary Education
The benefits of investing in your education depend on the circumstances, and Tania P. Brown, CFP and Financial Finesse’s resident financial planner tell Business Insider.
“A HECS debt of $50,000 may not be worth a small increase in wages,” she says.
Scott Spann, CFP and Ph.D., agrees that “a university degree comes from a high degree, a degree program and a low-paying job prospect” often, it may not be worth it.
Think about your career with the end in mind. Treat it like a business. What salary will you be able to reasonably expect after your finish your studies. Is the cost vs. reward worth it.
6.Your Friend’s Business Idea
The idea of supporting your friends is worthwhile, but the amount you invest in a private business must be the amount you are willing to lose – or at least not be returned for a long time.
“I have customers investing in bars, and after four years they get free drinks, but they don’t see any refunds,” CFP, AFC and brunch and budget founder Pamela Capalad told Business Insider.
Don’t mix business with friends
Through docking fees, petrol fees, insurance premiums and ongoing maintenance fees, vessels cost a lot of money to maintain. A boat is a lifestyle purchase and often will go down in value over time, just like a car.
“A ship is never a good investment! But they are very interesting,” says Linda Robertson, director of planning operations at CFP and Financial Finesse.
The two best days of boat ownership are (1) the day you buy the boat and (2) the day you sell the boat.
The ‘return’ you make on an investment is your ‘reward’ for investing (and risking your money). The risk is the possibility of losing your money. So, if an investment costs you money, then it’s not a good investment. Losses do not make you money.
Think long term and assess the cost vs. reward, always.
Disclaimer: This information provided is general in nature. It is based on the knowledge and experiences of the author and not intended to be taken as financial advice. It does not take into account the objectives, financial situation or needs of you or any other particular person. You need to consider your financial situation and needs before making any decisions based on the information. You may have to modify the information and do further research, for it to suit your personal financial situation. Therefore, before acting on the information, it is recommended that you consider its appropriateness to your circumstances or consult a financial adviser, tax adviser or legal professional to assist you in doing this.