Have you ever noticed that as women grow older, their hair gets shorter? What used to be long, golden locks eventually evolves into a silky, milky bob. I recently asked my hair stylist (that’s right – with my upcoming wedding, I’ve upgraded from a barber to a stylist) why this happens. Being very straightforward, I asked about the disappearing-hair phenomena. After a 3-4 second “did you really just say that” kind-of stare, she reeled off an equally surprising answer. I, honestly, can’t remember what the reason was. It had something to do with something.
We could all be naive and believe whatever the stylist explained – or – we could intelligently chalk it up to inflation.
Over time, things rise. (Your grandma’s hair is not exempt)
This brings me to the continuation of the 99 Problems Series…
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The most common problem I see people make is (intentionally or unintentionally) ignoring inflation. Caused by the expansion of our money supply, inflation commonly results in the general rise in prices. If you don’t prefer complex terminology, let me put it to you another way.
There is an invisible creature that constantly steals your money. No matter how hard you try to protect your money, it’s not safe. Dollars are devalued and inflation slowly creeps in.
One of my favorite quotes is from Sam Ewing:
Inflation is when you pay $15 for the $10 haircut you used to get for $5 when you had hair.
Trying Not To Lose Money
Staying on the inflationary path, I want to share one of the funniest mistakes I see. If you’re having a conversation with someone about protecting their money, you’ll often hear things like “FDIC Insurance,” “CD’s” and “Savings Accounts.” People say things like: “I’m more concerned with the Return OF my Money rather than the Return ON my Money.” In today’s environment, that means electing to earn maybe 1% in exchange for this security.
The problem with these conservative “investments” is that THEY GUARANTEE that you’ll lose money. Don’t get me wrong- CD’s and Savings Accounts have a place in everyone’s finances (typically if you need the funds in <5 years). But, they are not designed to be long-term wealth creators.
For example, in my article CD’s Are For Hypocrites, I point out that CD’s have produced NEGATIVE REAL RETURNS 8 of the last 15 years. Once you factor in taxes and INFLATION, you’re doing exactly what you’re trying not to do: losing money (purchasing power).
Problem # 5
Holding On To Your House
This problem is not nearly as common as the above two, but it certainly still occurs. Just after the housing bubble, consumers and investors were devastated by their property valuations. They couldn’t believe their house lost 10-20% (or more) of it’s value! This really means NOTHING unless you’re trying to sell your house, right? I mean, who cares what someone else thinks your house is worth?
So you could say the most devastated were consumers and investors (aside from those that are now underwater) looking to sell…because they aren’t going to get as much money from the sale of their property. But, what they don’t realize is that they’re really in the same boat. If they are using the funds (from selling) to purchase a new property for 10% less than it would’ve been (“in a normal market”), then they’re just as well off.
Try telling that to someone who paid $100,000 for a house and is selling it for $90,000. They won’t listen…
Including Home Equity in Your Net Worth
I’m sure a lot of people – personal finance bloggers included – will disagree with this tip. But, if you’re interested in tracking your net worth, I would not include your home equity. Yes, you can open a HELOC to bring liquidity to an illiquid asset (I would definitely recommend opening up a HELOC). But even with the HELOC open, I still wouldn’t count the availability towards your net worth.
All it will do is inflate your net worth and give you a false sense of security.
For example, let’s say you have $10,000 in the bank and you owe $90,000 on your $100,000 home. Technically, your net worth is $20,000 in this simplified scenario. But, as we’ve seen in the last few years, the value of your $100,000 home could quickly increase or decrease $10,000. This will only distort the view of your financial situation.
In the 2000’s, A LOT of people felt wealthier as their home increased in value…and look where it got them.