Learning From Literature

The Dumb Things Smart People Do With Their Money by Jill Schlesinger

Cover of The Dumb Things Smart People Do With Their Money

The Dumb Things Smart People Do With Their Money: Thirteen Ways To Right Your Financial Wrongs by Jill Schlesinger is a personal finance book published in 2019.

Smart people still often make dumb financial decisions. Individuals accomplished in other areas of life frequently fear looking foolish when it comes to matters they don’t know much about (like the financial world). In turn, they don’t seek advice regarding these topics. Consequently, costly and sometimes disastrous mistakes are made. Therefore, intelligence can act as a hindrance when it comes to financial decisions.

A few examples Schlesinger encountered during her time as a financial planner:

  • Small Business Owner (former banker)
    • Making $300k+/yr 
    • Strongly resisted disability insurance (cost of 8k/yr)
    • Three years later, he developed multiple sclerosis → couldn’t travel like he needed → salary dropped by over 75% → forced to use his whole retirement account (worth $500k+) within a couple of years to support the family 
  • Engineer
    • Had $1.2 million invested and was ready to plan retirement
    • 90% of it was in company stock – strongly resisted diversifying his portfolio 
    • One year later, the dot-com bubble burst and the portfolio value dropped to under $400k
    • He was forced to work a decade more than desired until retiring at age 68
  • Doctor
    • Refused to make a will / trust
    • Upon dying, his kids were hit with an avoidable $1 million+ estate tax bill 
    • The children were forced to sell the childhood family home to pay

Even if you don’t suffer a financial disaster, you’re likely wasting your hard-earned money, missing out on a significant chunk of wealth, or subjecting yourself (and loved ones) to unnecessary emotional distress.

Purchase the book by clicking this link!

Enjoy!

Table of Contents

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Dumb Thing #1 – You Buy Financial Products That You Don’t Understand

We often research what we ate at a restaurant more than the financial products our future depends on

Commonly misunderstood products:

  • Example 1 – Physical Gold
    • Volatile
    • No income creation
    • Simply not necessary
    • Requires insurance and storage
    • Pay premiums when buying and can’t get the best deals when selling (limited access to secondary markets)
  • Example 2 – Hedge Funds
    • Complex rules about when you can withdraw money
    • High fees
    • IRS can count gains as ordinary income (likely higher tax rate)
    • Only 10% significantly outperform the S&P 500 index
      • That 10% is usually reserved for billionaires + institutional investors with extremely large amounts of money
  • Become more involved — research and ask critical questions
    • Be as deliberate as you are when making other big purchases, like a car / home
  • Don’t fool yourself by thinking you understand a financial topic when you have only superficial knowledge
Dumb Thing #2 — You Take Financial Advice From The Wrong People
  • Many professionals lack legal responsibility and desire to serve our best interests 
  • Don’t be afraid to ask — this is your future at stake + an upstanding advisor will be glad to answer any inquiries
  • People who don’t pay for financial advice are still taking advice from the wrong people → THEMSELVES
    • Negative feelings (fear, embarrassment, etc.) prevent many from getting the financial advice we need – don’t make excuses or convince yourself you can handle it all
  • Even if you think you can handle it yourself, it’s easy to spend a little money and have an expert do it
    • People pay someone to clean their house even though they could do it just fine
    • In How I Invest My Money, 25 financial professionals are interviewed on how they manage their finances – and many of them have an advisor even though their job is to handle money every day!
Dumb Thing #3 — You Make Money More Important Than It Is
  • Money is one of the top anxiety-provoking subjects
  • Over-importance of money can lead to financial AND mental problems
  • Past experiences / upbringing influence feelings toward money
  • Tips
    • Challenge underlying assumptions of your financial behavior
    • Reflect
      • Look at the facts objectively and see if you’re being irrational
    • Don’t let money shape your identity / self-worth
      • Money is only important in how it can fund the lifestyle that makes you happiest
      • In Smart Couples Finish Rich, David Bach describes a “value planning” method to explicitly define the role of money in your life

Warning Signs:

  1. Keep money secrets
  2. Lose sleep over money issues 
  3. Other people tell you that you have money issues
  4. Adopt a perfectionist stance to financials 
  5. Constantly compare your financial life
  6. Check investment accounts daily / weekly
  7. Ruminate about your financial life at work
  8. Overthink your budget when you are financially stable
  9. Incapable of spending money on fun things
  10. Keep moving your financial goals

If you have a problem:

  1. Admit you overvalue money → Make a plan → Start with baby steps
Dumb Thing #4 – You Take On Too Much College Debt
  • Of people with student loans:
    • 40% are behind in payment or in default
    • 80% regard it as a source of “very significant stress”
  • Can’t embrace life, career, or investment opportunities
    • Since you have to make payments → forced to work a job you hate, delay retirement / purchasing a home / starting a family
  • Overcome emotional thoughts + See college for what it is → a business decision
  • For Parents
    • Talk to your kids about financing early + get to know their work ethic 
    • A truthful assessment will force your kid to reflect on what they truly want, work hard for it, and look for creative solutions
    • Tailor support to the individual needs / desires of each child
  • For Children
    • Do your research
    • Decisions should reflect financial circumstances + career aspirations
    • In most cases, you can achieve career ambitions without large debt
Dumb Thing #5 — You Buy A House When You Should Rent
  • Renting means buying flexibility (+ less hassle)
  • In some markets, buying can be better than renting → Run an objective analysis
    • Most people buy when they can’t afford it and lock themselves in
  • Consider negative outcomes
    • Second house → what if you can’t find a renter?
    • Drop all cash into your dream home → what if you need it?
  • Don’t underestimate costs
    • Closing costs, insurance, taxes, upkeep, lost opportunity cost for retirement savings, time, inflexibility, etc
    • Typical homeowner pays 1-3% of the purchase price on upkeep per year
  • Before Buying
    • Pay off consumer debt
    • Have an emergency fund
    • Max out retirement contributions
Dumb Thing #6 — You Take On Too Much Risk

If you can meet all your goals without having to take the added risk that comes from trying to outperform the market, then what’s the point of even trying?

Morgan Housel, author of The Psychology Of Money
  • No single thing is worth risking your entire future
    • Anything that can break, will break eventually so don’t let that break be your ruin
  • Taking on excessive risk has little to do with how smart / responsible we are
    • Biases warp our perceptions
    • Gamblers believe they “figured out” slots, roulette, etc
  • To make sound financial decisions → think beyond recent time horizons + consider different future scenarios 
Dumb Thing #7 — You Fail To Protect Your Identity
  • Identity theft is a mostly intangible threat and therefore ignored
    • We don’t feel it directly — until we do
    • That’s why we lock our car doors but don’t set up two factor authentication
  • Can cause months of stress and inconvenience, if not actual financial losses
  • NO ONE IS SAFE
    • The author had cybersecurity expert Kevin Mitnick on her podcast — she gave her name + address and within 5 minutes he had obtained her SSN and more
  • Basic steps can go a long way — frequently changing passwords + checking your credit 
  • Jill freezes credit by contacting Experian, Equifax, or TransUnion
    • If you’ve been defrauded, report it to the FTC + file a police report
  • Tips
    • Be skeptical (not paranoid)
    • Never send wiring instructions / sensitive information via email
    • Assume a scammer will potentially read everything
Dumb Thing #8 — You Indulge Yourself Too Much During Your Early Retirement Years
  • Indulge yourself too much early on → won’t leave enough to support yourself decades later
  • Result of a failure in long-term planning
    • Some make poor spending choices because they feel overwhelmed, depressed, or out of it — It’s a major life change 
    • Think about what retirement looks like beforehand
  • Retirement money doesn’t last as long as you think – unconsidered expenses, healthcare rising, inflation, etc
    • Taking 3% out of a $2 million account a year (a generally accepted %) → $60k per year (before taxes!)
  • Don’t assume your expenses will be way less in retirement than currently

5 Key Actions

  1. Have A 5-Minute Convo
    1. Sit down and actually crunch the numbers 
  2. Rethink Retirement Age
  3. Dream More
    1. Many don’t know what they’ll do in retirement because they don’t think about it enough
  4. Embrace The Gray
    1.  Work and retirement aren’t complete opposites
  5. Hire A Financial Planner
    1. Need an advisor when confronted by a situation you can’t handle yourself – for most people that is retirement
Dumb Thing #9 — You Saddle Your Kids With Your Own Money Issues
  • How you behave around money with your kid matters
    • Upbringing is a primary factor in how we act regarding money
    • You might think you’re being a good parent but are spawning anxiety, insecurity, self-doubt and more
  • Common Problems
    • Having no limits (spoiling)
    • Being excessively frugal
    • Pressure to succeed financially 
  • Main Problem → relating money with too much emotion
    • Even if kids aren’t traumatized, they learn to cultivate emotions around money instead of handling it coolly / rationally 
  • For Parents:
    • Maintain a healthy relationship with money yourself
    • Strike a balance
      • Instruct your kids about money so that they understand how it works and can take responsibility
      • BUT not so intensely that your kids treat money in unbalanced ways
Dumb Thing #10 — You Don’t Plan For The Care Of Your Aging Parents
  • Talking about aging is difficult but necessary
    • Have to contemplate negative things in order to protect against them
  • The future arrives and we suffer avoidable financial + emotional pain
    • Can cost tens or even hundreds of thousands of dollars
      • Median costs of Genworth 2017 Cost of Care Survey:
      • Assisted living = $3,750 / month
      • Private nursing home care = $8,121 / month
      • Home health aide = $21.50 an hour / tens of thousands a year
      • Costs rising 4.5%+ per year
  • If you don’t plan…
    • You’ll still have to foot the bill + sacrifice your own needs
    • You’ll never know if they’re making sound decisions
    • You’re going to have these conversations anyway if a mistake is made
  • It’s hard to talk with siblings about your parents’ future, especially if you don’t get along
    • Attack the problem directly
    • Ask what could they offer to help (financially, visiting a few times a year, etc)
Dumb Thing #11 — You Buy The Wrong Kinds Of Insurance, Or None At All
  • Insurance is thankless
    • You pay good money and won’t get a benefit unless something really awful happens
  • Insurance is complicated
    • Dense language + elusive pricing
  • INSURANCE IS NECESSARY
    • Pay someone else to take the risk for you
    • It usually isn’t expensive
    • Downside of not buying insurance could be catastrophic
  • Need a trustworthy agent? → Ask your financial advisor, CPA, or attorney for a referral

Five Danger Zones: 

  1. Underestimating Life Insurance Needs
    1. Record how much you spend per month and plan accordingly
    2. Ex — Insure the stay-at-home parent too. Who will take care of the kids? You’ll have to pay for someone
  2. Buying Permanent Insurance
    1. Term is optimal for most people + has a significantly lower cost
  3. Needs Changed But Not Insurance
    1. Did you get married / have another kid? Did your expenses rise? Do you need to change your beneficiaries? 
  4. Failing To Use Employee Benefits
    1. Many have access to coverage through their job
  5. Surrendering Policy
    1. Don’t drop your plan because you haven’t used it — 10%+ of people end up with a disability + as you get older, chances of dying rise dramatically
Dumb Thing #12 — You Don’t Have A Will
  • Worst mistake of all
    • Selfish + Irresponsible — your family will pay a huge price while still grieving (not only financially but emotionally + hassle)
    • Necessary no matter your age / how much money you have
  • Process Of Dying Without A Will
    • Takes way longer (months) + costs legal fees
    • Spouse DOES NOT automatically get everything
    • Estate goes through probate court (some assets pass directly like retirement accounts)
    • Court chooses administrator of the estate
    • Court assigns assets to heirs based on state laws (each state is different)
    • Court decides where minor-aged children go
    • Court never includes charities or unrelated people
  • Run through your estate plan with loved ones
    • Ex — where documents located, track expenses related to funeral, contact info for CPA / attorney / advisor, etc
Dumb Thing #13 — You Try To Time The Market

“Basically any attempts to pick the times to buy or sell, I think, are a mistake for 99% of the population. And I think that even attempts to pick individual securities is a mistake for people… They don’t need to do anything but (invest in a low-cost S&P 500 index fund). Then they’ll get a decent result over time. To some extent, the smarter you try to be, the worse you do in investments.”

Warren Buffet
  • By trying to time the market, you are making decisions based on emotions… and you probably don’t realize it
    • Biases are easier to perceive in others than ourselves
    • Gamblers believe they “figured out” slots, roulette, etc
    • The Psychology Of Money explains the top 20 flaws, biases, and causes of bad behavior that affect people when dealing with money
  • People regard success as evidence of brilliance / setbacks as bad luck
    • Past investing success is not evidence you know what you’re doing
    • You sell at the top and think you made a good choice → No, you made a emotional choice based on no real data and it just happened to work out
  • Passively Invest
    • Maintain a diversified portfolio allocated according to your time horizon
    • Annually rebalance your portfolio to reflect the levels of risk you originally decided on
    • Passive investing > active investing
      • Over 85% of active managers don’t beat the market in a given year (90%+ over a longer time frame)

“I believe being willing to stick to a diversified portfolio of index funds is the closest thing to an investing superpower that exists in the age of shiny object syndrome. Patience seems to be a much simpler and more satisfying road to our financial goals than always trying to find the next best thing”

Ashby Daniels in How I Invest My Money
Thirteen Smart Things Smart People Should Do
  • The author concludes with actions smart people do every month, quarter, year, and three years

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