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The first day of April was the time for pranks. One day of fun and frivolity may be ok, but no one wants to live a life of constantly having the rug pulled out from under them. From a financial perspective, many find themselves in what can seem like a perpetual April Fool’s joke with failing budgets, debt spirals and investment strategies that cause them to lag the market. Here are a few tips to “troll proof” some important areas of your finances:
Self Prank 1: Sometimes the “perfect” budget can lead you into discouragement. You started the New Year with a renewed resolve to spend every dime on paper first. You got your new favorite spreadsheet from your buddy the budgeting guru or you categorized your expenses in the best app. You started out strong, but then the unexpected expenses started happening. The price of gas skyrocketed, and before you knew it, your monthly surplus turned into a monthly deficit.
It is enough to make you want to throw in the towel. You wonder if it is even worth it to keep trying to stick to a budget. You are at a crossroads and the decisions you make at this point can either improve or derail your long-term financial wellness.
Rather than giving up on the perfect budget, this is the time to pivot but maintain the goal. Find the budget that fits your personality. If the big spreadsheet is not working, maybe it is time to try the envelope method or write something on a piece of paper instead of using an app. Have you tried automating your savings using direct deposit so that you can think less about the spending and have assurance the extra money is not being spent? Find a coach or a peer group that can encourage you to keep going, but don’t let your move to improve your situation totally throw you off track.
Self Prank 2: Shooting for the perfect credit score may lead you into a debt trap. You have a decent credit score now, but you covet being in the 800+ club. In order to do this, you start to look into every method to boost your credit score.
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Following the steps to have a perfect credit score often does not line up with what is financially beneficial in the long run. For instance, a portion of your score rewards is having different kinds of debt. This is fine, but if you have a history of not handling credit card debt well, should you risk your financial wellness for that purpose?
This can also be the case with credit card points for travel or cash back rewards. For some, building up credit card points can lead to financially unhealthy behaviors when you do not pay off the debt every month. The key is to know yourself and your history with all your financial products. Determine if a slightly better credit score or a little cash back is worth threatening your overall financial picture.
Self Prank 3: Chasing the best investment return can lead to underperformance. You noticed your investment mix is not doing as well as your peers. You may hear from others how they are doing great in certain individual stocks, ETFs, or cryptocurrencies, and so you decide to hop into the fray without considering how increasing your exposure to these hot investments may increase the level of risk in your portfolio. Sooner or later, what made that portfolio outperform manifests in the form of negative returns. Suddenly, you are in a situation where your new portfolio is down 20%, while your old portfolio may have gone down 10%.
Before you make that adjustment to keep up with your friends, consider your risk tolerance and goals. Do you understand why these investments go up and down in value and the history associated with it? This helps you determine if this investment change lines up with your goal. For instance, if these new investments have better historical returns over long periods of time, then switching may be a good move if you have 20 years. If you are not sure about the history of the investment and if it lines up with your goal, it is often better to sort that out before making a change.
While this is not a comprehensive list of how things can go wrong when trying to do right, the concepts can apply to many situations. When making a change to improve, anticipate what can go wrong first and make sure your overall financial wellness will take a step forward. After all, your finances are probably an area you don’t want to feel foolish about!