Every day you make financial decisions. Some are minor, like buying a new outfit. Others are major, like deciding to start a new job. But all of them, large and small, can have an impact on your future.
The problem is that you can’t always tell how your decisions will affect you in the long run. It’s only later, looking back, that you can see which choices were good ones – and by then, it’s too late to change them. However, there is one way to get a sneak preview of how your decisions could turn out: Look at what happened to other people who made the same choices.
In 2016, Claris Finance polled 2,000 people about their financial decisions. The respondents said their worst financial decisions included not saving enough, racking up debt, living extravagantly in their twenties, and not investing enough. These are all useful things to know if you’re facing the same kinds of decisions in your life.
Here’s a look at what these people described as their seven best decisions – and how you can use that knowledge to make wise choices for yourself.
1. Getting a College Education
Of all the financial choices in the Claris survey, the one most people were happy about was the decision to get a college degree. More than two out of five people said they had gone to college and were glad they’d spent the money on it. Nearly one out of five said getting their degree was the smartest choice they’d ever made.
However, not all college graduates were happy about this decision. Nearly one-quarter of the people in the poll said college was a waste of time for them. Another 19% said if they had to do it over again, they’d pick a cheaper school.
The Pros and Cons
There’s no doubt that a college degree can have a big impact on your financial future. Figures from the Bureau of Labor Statistics show that people with a bachelor’s degree earn an average of $1,137 per week, compared to $678 a week for people with only a high school diploma.
The problem is, getting that degree takes four long years – and many thousands of dollars. According to The College Board, tuition and fees for four years of college range from $39,508 for a state university to $135,010 for a private college. And that’s not even including the cost of housing, books, and other items.
Of course, student aid can cover a lot of these costs. However, this aid often comes in the form of loans that stick with you when you graduate. The Project on Student Debt reports that nearly seven out of ten recent college grads owe money for student loans, with the average tab coming to $28,950. That’s a lot of debt to be carrying when you’re just starting out.
Making It Work for You
Going to college can be a great financial choice – but it’s not the only choice. There are lots of fields, such as plumbing or car repair, that offer a good income without a college degree. If you’re interested in one of these fields, it’s worth exploring it as a career before you commit yourself to four years of college.
If the job you want does require a college degree, there are ways to earn one while avoiding massive student loan debt. For instance, you can:
- Choose an Affordable School. There’s a big difference in cost between a private college and a state university. You can save even more by attending a community college for your first two years, then transferring to a four-year school to earn your degree.
- Seek Other Forms of Aid. Student loans aren’t the only form of financial aid. Many students can get a large chunk of their costs covered by grants and scholarships. The College Board reports that in 2015, the average in-state student at a state university paid less than half the published price for tuition and fees. Grants, scholarships, and tax breaks paid for the rest.
- Work Your Way Through School. In many cases, it’s possible to work part-time while you’re taking classes. The money you earn can offset the cost of your tuition. It might take longer to complete your degree this way, but you’ll have less debt when you graduate.
Finally, it pays to choose your college major wisely. A Georgetown University report shows that degrees in heath and the STEM fields – science, technology, engineering, and math – led to much higher salaries than degrees in the arts, humanities, or teaching. Majoring in health or STEM will give you the best long-term return on the money you invest in college.
However, it’s also important to pick a field that interests you. There’s no point in spending four years in school to get a job you don’t actually like. Look for a career that you can enjoy and make money at, and then choose the best major for that career path.
2. Buying a Home
In the Claris survey, 15% of the respondents said their best financial decision was buying their first house. Owning a home was a source of pride for many, with about 14% calling it their proudest financial achievement. At the same time, being unable to buy a home was a source of disappointment for an even bigger number of people. Roughly 29% of those who took the survey said this was their biggest financial regret.
The Pros and Cons
Buying a home can be a sound financial decision in three ways:
- You Gain Equity. When you rent a house, all you get for your month’s rent is the right to use the house that month. But when you buy, each monthly mortgage payment gives you a little bit more equity in the house. Keep at it long enough, and you’ll own the house free and clear. At that point, you’ll never have to pay rent again.
- It Can Generate Income. Your house can also put money into your pocket directly. Renting out part of the property – say, a spare room or a basement – can bring in a nice chunk of extra income. It can also provide a handy cash cushion to fall back on in case of a job loss or other emergency.
- It’s an Investment. If you’re lucky enough to buy at the right time, you could make money from your house by selling it for a profit. During the big real-estate boom of the late ’90s and early ’00s, when housing prices shot up dramatically, many people were able to sell houses for a tidy profit after owning them just a few years. But buying a house as an investment is a risk – as many people learned when the housing market crashed in 2008. All the people who bought at this time ended up with houses that were worth less than what they paid, and sometimes less than what they owed on the mortgage.
However, owning a home also has its downside. For one thing, buying often costs more per month than renting. You need to come up with a big chunk of cash for the down payment, and your monthly payments are likely to be higher as well. On top of that, you’re responsible for all the costs and work of maintaining the house.
Also, buying a house ties up your financial assets. If you ever need that money back in a hurry, you could be forced to sell your house at a loss.
Making It Work for You
To decide if buying or renting a home is the right choice for you, think about your situation. If you expect to stay settled in one area for decades to come, then buying a house could cost less in the long run than renting.
On the other hand, if you have a job that moves you around from city to city, you’re probably better off renting. If you buy a house, you risk losing money when you have to sell it – not to mention all the hassle involved. The New York Times has a handy calculator you can use to figure out whether renting or buying is a better deal for you.
If you choose to buy, make sure you don’t buy more house than you can afford. One common guideline is to make sure your mortgage payment isn’t more than 28% of your monthly income. Spend more than this, and you could end up “house poor,” with a fancy home but no money to spend on anything else.
Be careful, though. If you choose an adjustable-rate mortgage when interest rates are low, your payment will be low to start out with, but it could skyrocket if interest rates take off in the future. A house that you can easily afford right now could suddenly start eating up well over 30% of your income. It’s much safer to buy with a fixed-rate mortgage, so you know your payment will stay affordable over the life of the loan.
You can also get more bang for your housing buck by buying a fixer-upper. As you repair and update the house, its value will increase, and so will your equity. That way, you’re likely to get more money back when it’s time to sell.
3. Living Below Your Means
Many people in the Claris poll said the best financial decision they’d ever made was to live below their means and stay out of debt. Specifically, they were glad that they’d managed to live within their income early in life. A total of 13% said they were happiest about living below their means in their 20s, and another 7% were happy about doing it in their 30s and 40s.
The Pros and Cons
Living within your income can be tough when you’re young. Your first job after school is often the lowest-paying one you’ll ever have. It can be a stretch to make that starting salary cover all your living costs – especially if you also have student debt. And it’s hard to resist the urge to spend money and live it up when all your friends are doing it.
On the other hand, when you’re young, you also have fewer expenses. Your 30s and 40s are the time in your life when you’re most likely to settle down, buy a house, and have kids – all of which can eat up money fast. According to the USDA, raising a child costs anywhere from $12,350 to nearly $14,000 per year, including housing, child care, food, and transportation costs. All those are expenses you don’t have when you’re young and unencumbered.
That’s why many financial experts say your youth is the best time in your life to start saving. For instance, Amy Dacyczyn, author of the “Tightwad Gazette” books, says that she and her husband spent the first 18 months of their marriage living in a “dirt-cheap” apartment and saving as much as they could. During that short period, they saved half the money they needed for a down payment on a house.
Sure, living on a starting salary without using credit isn’t easy. It could mean having to live with your parents for a year or two, or sharing a small apartment with a roommate, or limiting the amount you spend on fun stuff like clothes and clubbing. But it could also mean the difference between entering your 30s with money in the bank or with a pile of credit card debt.
Making It Work for You
Here are a few tips that can make saving while you’re young a little easier:
- Set Goals. It’s easier to stay motivated to save if you think about what you’re saving for. For instance, you could aim to build an emergency fund, pay off student loans, take a great vacation, or buy a house. Keeping that goal in mind makes it easier to say no to fleeting pleasures like $10 cocktails and cab rides.
- Automate Your Savings. Have a portion of each paycheck deposited automatically into a high yield savings account that’s separate from your main bank account. Keeping the money out of easy reach makes it harder to use it impulsively. And you can’t really miss money that was never in your account to begin with.
- Have a Budget. Figure out how much of your earnings you can afford to spend on housing, food, transportation, and so on. Then keep track of your expenses to make sure you stay within these limits. In the Claris poll, 42% of respondents said making a budget was the best way they’d found to save money. If you haven’t set up a budget for yourself yet, start one with Tiller.
- Keep Your Expenses Low. Once you have a budget, look for ways to pinch pennies in every category. For instance, you can save on food by cooking at home, cut back to a cheaper cell phone plan, and shop at thrift stores to cut your clothing budget. You don’t have to give up all the things you enjoy; just look for ways to enjoy them for less.
4. Dealing With Debt
Respondents in the Claris poll offered different ideas about debt. Many of them were happy about paying off their debts. About 5% said paying off debt in their 20s was their best decision, and another 5% said the same thing about paying off debt in their 30s and 40s.
Yet 7% of the respondents said their best decision was not to worry so much about debt. These people, apparently, think that borrowing money was a good move for them. It seems puzzling for two groups of people to have such different views of debt – but in a way, they’re both right.
The Pros and Cons
Studies show that debt is a serious burden on people’s happiness. A 2012 paper by the New Economics Foundation (NEF) cites several studies showing that the more money people owe, the less happy they are. When debt reaches high levels, it can even put people at risk for mental disorders, such as depression.
However, these studies also show that the type of debt makes a difference. Consumer debt, such as credit card bills, hurts people the most. By contrast, borrowing money for a mortgage or for investments doesn’t appear to make people unhappier. In other words, there’s good debt and bad debt.
Mortgage and investment debt are better than credit card debt for two reasons. First, with this type of loan, you’re borrowing money to gain something of value – so even if it costs you money up front, it’s likely to make you better off in the long term. And second, mortgages tend to be fixed-rate, long-term loans with manageable monthly payments. That makes them easier to pay off than a high-interest credit card balance that just keeps growing out of control.
Most likely, the people in the Claris poll who said paying off debt was a wise decision had the bad kind of debt – the kind that just weighs you down. By contrast, the ones who said they were glad they hadn’t worried about debt probably had good debt – the kind that pays off in the long run.
Making It Work for You
Debt can be a useful financial tool, but only if you use it wisely. To make debt work for you instead of against you, keep these rules in mind:
- Borrow for Needs, Not Wants. Borrowing to buy a house or a car, to pay for college, or to start a business can be an investment in your financial future. Borrowing to pay for a vacation or a fancy stereo system is not.
- Keep Your Payments Manageable. The monthly payments on all your debts put together – mortgage, car, credit cards, everything – should never be more than 36% of your monthly income. To keep your payments under control, look for loans that you can pay back a little at a time, with low, fixed interest. Avoid credit card debt and, worse still, payday loans, which charge a huge rate of interest and give you very little time to pay.
- Pay it Promptly. Even the good kind of debt costs you interest. The quicker you can pay it off, the less you’ll have to pay overall. If you can squeeze any extra money out of your budget to put toward paying off your debts, do it. If you have several different loans, focus on paying off the bad debts first.
The next item on the list of top financial decisions is investing, with 7% of the people polled by Claris saying it was the smartest financial choice they’d made. Those who did not invest, by contrast, often listed it as one of their biggest regrets. Nearly one out of five respondents regretted never investing in the stock market, and nearly one in eight regretted never investing in a business.
The Pros and Cons
As noted above, it’s good to save as much money as you can while you’re young. The problem is, if you just keep that money in the bank, it won’t grow much over time. In fact, today’s interest rates are so low, your money won’t even earn enough to keep up with inflation – so its real value will actually decrease.
If you want your money to make more money, you have to invest. There are lots of different investments to choose among, from low-risk investments like Treasury bonds to higher-risk stocks, mutual funds, even fine art through a company like Masterworks.
In general, more risk leads to higher returns in the long run. Lower-risk investments pay less, but they’re also less likely to lose money in the short term. This makes them useful for stashing money that you expect to need in the next few years.
No matter what kind of investment you choose, it pays to get started early. The sooner you put your money into an investment, the more time it has to grow. If you start investing $100 a month at age 21 and keep it up for 20 years, you’ll have over $150,000 when you’re ready to retire. Wait until you’re 41 to start, and you’ll have only $55,000 – about $95,000 less.
Making It Work for You
Even if you’re on a tight budget, you can still get an early start as an investor. Instead of going through a big brokerage account that requires at least a $1,000 minimum investment, sign up with an automatic investment plan through a company like Acorns. Acorns allows you to start investing with just $5. A plan like this puts your investments on autopilot, so you can steadily grow your nest egg with no effort.
Another good option is an online investment firm such as JP Morgan Self-Directed Investing or Stash. These make it easy to buy stocks or exchange-traded funds (ETFs) with whatever small dribs and drabs of cash you can spare each month. ETFs are a great choice because they let you buy shares in a whole collection of securities as easily as buying a single stock. This diversifies your investments, reducing your risk.
Finally, if your workplace offers a retirement account, such as a 401k, be sure to take advantage of it. These plans are easy to use because the money comes directly out of your paycheck. Not only do they allow your money to grow tax-free, but in many cases, your employer will match the contributions you make up to a certain point – say, 5% of your earnings. If you don’t invest at least this much, you’re turning down free money.
Pro tip: If you invest in a 401k or an IRA, make sure you sign up for a free portfolio analysis from Blooom. Once you’ve connected your accounts they’ll check to make sure you’re properly diversified and have the right asset allocation based on the amount of risk you’re willing to take. They’ll also make sure you’re not paying too much in fees.
6. Having a Traditional Career
For 6% of the Claris respondents, the best decision they’d ever made was “sticking with a traditional career.” The survey doesn’t define “traditional,” but most likely, these people mean that they opted for a 9-to-5 job with a regular paycheck, rather than going into business for themselves.
The Pros and Cons
This view goes against the advice of certain financial experts, who claim, “You can’t get rich working for someone else.” For instance, Jeff Haden, writing for Inc., points out that the 400 wealthiest Americans make most of their money from successful businesses and investments, not from a salary. And Thomas Stanley, author of “The Millionaire Next Door,” noted that most of the millionaires he’d interviewed were small business owners.
However, as economist Nassim Nicholas Taleb points out in his book “Fooled by Randomness,” there’s a problem with Stanley’s argument. The only people he interviewed were millionaires – people whose businesses had already succeeded. But there are far more people who start a business only to see it fail, taking their savings with it. In other words, maybe you won’t get rich working for a salary, but you won’t end up broke, either.
On the other hand, the best reason to start a small business or become a freelancer isn’t the money. It’s because you have something that you’re passionate about, and you want to make your living doing it. The 2012 NEF paper found that people who are self-employed tend to be happier with their work and happier overall. So the chance to do what you love could be worth a little financial risk.
Making It Work for You
If you already have a job you love, there’s no good reason to give it up for the uncertainty of working for yourself. However, if you have a dream and really want to pursue it, there’s nothing wrong with giving it a try – as long as you have a backup plan. Not every new business succeeds, so it’s important to keep your resume in shape and hold on to your old work connections. That way, you’ll be able to go back to a 9-to-5 job if you have to.
Also, remember that even if your business succeeds, it will almost surely take some time to get off the ground. Don’t take the plunge unless you have a solid emergency fund with at least six months’ worth of living expenses. If your business hasn’t started to make money by the time those six months are up, it’s probably time to start looking for a regular job again.
7. Taking the Trip of a Lifetime
Finally, 4% of those in the Claris poll said the best choice they’d made was “taking that trip of a lifetime.” That’s not a huge number, but they’re just part of a much larger group that saw travel as a good use of money. More than 40% of the survey-takers said they had traveled either a little or a lot and were glad about spending their money that way. Only 6% said they regretted the amount of money they’d spent on travel.
As for the people who chose not to travel, most of them were not happy about that choice. One out of five respondents said they hadn’t traveled much but wished they had. Only 11% said they were glad they hadn’t spent money on travel. And when Claris asked people to name their biggest financial regrets, the most common answer for people over 60 was never being able to take that trip of a lifetime.
The Pros and Cons
Research in the field of happiness economics suggests that the survey respondents are on to something when they talk about the value of travel. In general, studies find that spending money on experiences brings more happiness than spending it on possessions.
The joy of a great vacation extends well beyond the trip itself. You can look forward to it beforehand and look back on it with pleasure afterward. You can also enjoy sharing your stories about the trip with friends. All in all, spending money on a vacation can give you more bang for your buck than spending it on, say, a new TV.
It also makes sense to travel while you’re young and have the time for it. Long trips are harder to handle once you’re settled down and raising a family. So if traveling the world is your dream, youth is a great time to do it.
However, spending big bucks on travel is only a wise decision if you can actually afford it. If you go into debt for it, or sacrifice all your hard-earned savings, it won’t bring happiness in the long run.
Making It Work for You
Fortunately, there are ways to have that trip of a lifetime without sacrificing your future financial well-being. You just have to find ways to stretch your vacation budget. Here are a few affordable travel tips:
- Travel in the Off-Season. The more people there are trying to visit a vacation site, the more expensive it will be. That means you can save big bucks by going at a less busy time of year. For instance, beach resorts are cheaper in the spring and fall, rather than the middle of summer.
- Go With a Group. Hotels, airlines, and other attractions sometimes offer discounted rates for groups of ten people or more. Groople can help you find group deals for a specific destination.
- Use Travel Comparison Sites. Sites like Expedia can help you find the best rates on airfares, hotels, rental cars, and more. You can also sign up for travel alerts from Bing Travel or Airfarewatchdog, which let you know when a good deal pops up.
- Skip the Hotel. Hostels offer a cheap, no-frills alternative to hotels – usually between $20 and $30 a night. Other cheap lodging options include Airbnb rentals, staying with friends, or crashing with a stranger through Couchsurfing or Servas International.
- Be Flexible. Being willing to shift your travel dates by a few days, or fly into a different airport, could save you hundreds of dollars. Sometimes you can even get a free airline ticket if you’re willing to be “bumped” off your original flight.
Every person is different, and a financial decision that’s great for one person could be terrible for another. Going to college, buying a house, having a traditional career, and traveling are all great choices for many people – but only you can decide whether they’re the right choices for you.
You can learn from others’ experiences, but you also have to think about your own situation. Sometimes, what worked well for others can work for you too. But in other cases, you have to strike out on your own.
Use the information here to guide your decisions – but don’t look on it as a straitjacket. Ultimately, your financial decisions are yours to make.
What’s the best financial decision you’ve ever made?