Five bad tips for your finances

The road to hell is paved with good intentions. We all mean well when it comes to managing our money. But sometimes we get advice that sounds good at first, but actually isn’t that smart. Let's take a look at five misconceptions and things you should avoid doing if you want to get your finances in order.

Put money aside at the end of the month

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Putting money aside at the end of the month to plan for the future should be a good idea, right? While we naturally tend to want to set aside the money we have left at the end of the month, it's better to choose the beginning of the month (or just after we get our salary) to do so. Also, remember to put it in a separate account. This way, you will ensure that you do not spend the money you have set aside as it will no longer be available. If you have a little money left over at the end of the month, feel free to treat yourself with it without any remorse.

Invest in what you love

You have decided to put money aside and even to do so using an investment savings plan, such as the one Vivid offers with its Savings Plan. Because you are passionate about cars, you have chosen to put all your monthly savings into an ETF tracking the automotive sector. You know the industry and follow its news, so this should be a good idea. Not really. One of the most important words when you start investing is "diversification".

Experienced investors do not recommend making all of your investments in one sector, company, or crypto-currency. It will only expose you to the volatility of one industry and make you dependent on its good or bad performance. Instead, investors recommend spreading their investments over several sectors and product types to best hedge against market fluctuations.

Sell when others are selling

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It's no secret. Since the beginning of the year, markets have had a downwards trend. But does this mean that you should sell your investments? In bear markets, investors are often caught up in their loss aversion instincts, thinking that they risk losing more money if they don't sell. However, the decline in asset value is often temporary. Furthermore, if an investor sells when markets are falling, they will definitely lose money.

For long-term investors with an investment horizon of, say, 20 or 30 years, market jolts such as the 2008 stock market crash are likely to have less of an effect on the long-term performance of their portfolio than someone who sells at a loss during downturns.

Cash is safe

Investing your money is not your thing. You believe in the value of cash. That's why you decided to withdraw your entire salary from your bank account every month and hide it under your mattress. But as many of you may suspect, keeping your money under your bed (or in your checking account) is not the smartest way to manage your finances.

The main argument lies in one word: inflation. By keeping your money at home, you don't put it to work, and it gradually loses its value because of inflation.

Remember Scrooge and the gigantic pool of cash in his safe? If you were the richest duck in the world and kept your money in your safe, its size would have fallen by almost a quarter since 2010: the amount of inflation in the Eurozone since then.

One of the few ways to fight inflation - which is exceptionally high at the moment - would be to invest in the markets, although this is no guarantee of success. It is up to you to decide how much risk you are willing to take to fight inflation in the long term. After all, not everyone is Scrooge.

Buying is better than renting

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Paying rent is like throwing money down the drain. Your parents have likely told you this over and over again. But buying a home also has a cost, and it's much higher than you might think at first. When you buy a home, your tax bill will increase considerably, not to mention the interest you will have to pay back to the institution that lent you the money. Owning a property also means that you will have to pay for its maintenance and repairs yourself. So yeah, owning a flat offers a wide range of financial benefits, but renting gives you options that homeownership doesn't, and it's the right choice for many people.

Any opinions, news, research, analyses, or other information contained on this website are provided as general market commentary, and do not constitute investment advice, recommendations nor should be perceived as (independent) investment research. The author or authors are employed by Vivid and may be privately invested in one or several securities mentioned in an article. Vivid Invest GmbH offers as a tied agent of CM-Equity AG the brokerage of transactions on the purchase and sale of financial instruments with the exception of those in the area of foreign exchange brokered by Vivid Money GmbH.