We all know the old saying, “What you don’t know can’t hurt you.” But what does that even mean and where the heck did it come from? I can tell you for certain it definitely doesn’t apply to the world of finance.
In my world, what you don’t know can definitely hurt you. And, as bad as this is going to sound, a lot of the biggest banks in the world were built from people “not knowing.” Whether it’s hidden fees, even if they are legal (no offense, Wells Fargo), or paying interest, these seemingly little things can add up to a lot of money over time.
It still amazes me how careless people can be with these things, but banks know it and they depend on it. If people just paid a little more attention to their various financial accounts or what they’re actually paying in fees, I think they would be blown away.
So, today I’m going to explore four different things that could be killing your personal financial well-being. Most of these things are “out of sight, out of mind,” but they are all very real and play a major role in your personal financial life. What you don’t know, or even what you do know, can definitely hurt you.
We’ve been in such a low-interest rate environment that we basically take them for granted. Well, believe it or not, these are some of the lowest rates we’ve had in the history of the United States.
It wasn’t long ago in the early to mid 80’s that rates were in the mid to high teens. Can you believe paying a mortgage at 15% interest? That would put a damper on the size of house you could afford. Your mortgage would literally be almost 4 times as much as it is today. For me, personally, I wouldn’t be living in the same house I am if I had to pay four times as much.
Even if interest rates just go up a couple percent, the impact on your borrowing can be pretty jaw dropping. For instance, if you had a 4% $250,000 30-year loan, your monthly principal and interest payment would be $1,194 and you would pay roughly $179,000 in interest over the life of the loan, which is still a heck of a lot of money.
However, if your interest rate were 6% on that loan, your monthly payment would jump to $1,499 and you would pay roughly $289,000 in interest over the life of the loan. That’s an increase of over $300 a month and an increase of over $110,000 in interest on what would seem to be a pretty meaningless difference in interest rates. Even though the difference between 4% and 6% is just two percentage points, that’s a heck of a chunk of money.
Now you can see where I’m coming from when I say “surprisingly kill your finances”. Most people wouldn’t think much about two percentage points, but when you actually dig into the numbers, the results can be shocking. Interest rates have been good to us if you’re on the borrowing side, but remember, what goes down will eventually go back up.
The Impact of Inflation
Just as we’ve been in a low interest rate environment over the last decade, we’ve also been in an extremely low inflation environment as well – the two go hand-in-hand. However, just like with interest rates, inflation will begin to rear its ugly head sometime in the future as well.
Even with them being as low as they are right now, we still have inflation even though you probably don’t pay much attention to it. Just think back twenty years for what you would pay for a car or house and it’s drastically less than what you pay today. Inflation can definitely be a silent killer to your personal finances.
If inflation averages 2.5%, then the cost of goods would roughly double every 29 years. Now that doesn’t seem too crazy, but still, that’s literally cutting the worth of your paycheck in half every 29 years. If you’re retired and living on a fixed income, then you better make sure your financial advisor is calculating inflation in scenarios, otherwise, you’re going to be running out of money before you know it.
Now, if inflation rises to 3.5%, which is a little more in line with the long-term average, the cost of goods would double roughly every 20.5 years. Pretty crazy that one measly percentage point could cut that time period down 8.5 years! Yeah, that’s why they call it the silent killer.
So, beware of inflation and know that it’s real. You must account for it in any long-term retirement planning scenario. Trust me, your future self will be quite grateful.
Your Personal Credit Report
It still surprises me that so many people never even think about checking their credit report – but maybe they’ll begin to wake up now with the Equifax breach. It’s so easy to do and so extremely important. Talk about killing your finances—not checking this can kill them in no time.
If someone gets your social security number and starts getting loans and credit cards, you’re going to be in a world of hurt for quite some time. The horror stories I’ve heard from this are just terrible. The stress and time it takes to get everything fixed can take quite a toll.
And, it could have been nipped in the bud so much sooner if people just regularly checked their credit reports. Now, you’re probably asking yourself where you get it and how much it costs. Well, I have good news on both fronts.
Most credit cards nowadays offer access to your credit score and credit reports for free. However, if that’s not an option, go to Annual Credit Report and you can check your report from each of the three main agencies for free once every 12 months.
So, you can check your credit report for free from one of the agencies every four months. I recommend setting up a task every four months to go in and check your report. Again, you can only get one report from each agency every 12 months so you’ll have to keep track of which agency to look up every four months. They’ll let you know if it’s been less than 12 months.
If you don’t do anything else today, please do this. It’s so easy, takes no time and, most importantly, could save you from a lot of pain and heartache if something were to ever happen.
Putting Off Insurance
I run across this one quite a bit. People always think they can hold off getting life insurance or disability insurance. I’m not totally sure where that mindset comes from, but it seems to be ingrained in most people.
On the other hand, though, we would never think about not insuring our house or our car. So, why do so many people seem to kick the can down the road on disability and life insurance when these events would actually have a much bigger impact on everyone’s life around you? Is insuring your life or income less important than your house or car? I certainly don’t think so.
If anything were to happen to you and your family depends on your income, then there’s going to be serious consequences if you’re not insured. Granted, if you have to buy an individual long-term disability policy, they are a little more expensive but term life insurance is super cheap so that should be a no-brainer.
If you’ve been holding off and your family depends on your paycheck, just imagine what it would be like for them if you weren’t around. It’s not a pretty thought. Take the time to ensure yourself. You insure your house and your car, so why not insure your life and your income?
Take action today and don’t let these four things potentially kill your personal finances. They’re easy to understand and implement, so get started today and take control of your financial life.