4 Dumbest Things You Do With Money

7:21 AM, Jul 19, 2012   |    comments
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(CBS Money Watch) - The recession has actually been good for how Americans handle their money, making them less likely to overspend and more likely to pay off debts. But there are still a number of common money moves that are just plain dumb. Here are four of the most counterproductive things we do with our money and how you can be smarter.

Also see: Smartest things you do with your money




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Carrying a balance: The good news is that consumers are paying down their credit card balances. The bad news is that they have balances on their credit cards in the first place. If you are carrying a credit card balance every month, you're buying things you can't afford. And, your overspending ways become more costly each month because interest is accruing on old debt while you're building up new. If you can't figure out how to cut your budget, get professional help. You can get budget advice for free at non-profit credit counseling offices, such as those sponsored by the National Foundation for Credit Counseling. If you need to find a local office, go to the NFCC.org site or call 800-388-2227.

Investing through a rear-view mirror: Everybody knows that stocks are miserable investments, right? That's because they've underperformed pretty much every other investment class, including bonds and cash, over the past decade. That's why today's generation of 20-somethings don't want anything to do with stocks.  But here's the problem. The rotten stock market is yesterday's news -- just like the unstoppable stock market was the old and not-soon-to-be-repeated story of 2000 -- it was just that no one knew it until it was too late.

Industry experts will tell you that you can look to the past to see how different types of investment will perform. But you can't look to the recent past. That's because markets are volatile, swinging wildly and irrationally over short periods of time. (And 10 years is a relatively short period, in this context.) That's why you never put the rent money in the stock market. But if you have long-term investments that you can leave alone for a decade or more, you'd be foolish to avoid stocks.

Over long periods of time -- like the 83 years of market history tracked by Ibbotson Associates in Chicago -- stocks earned roughly 10% on average; bonds about 5% on average; and bank accounts barely keep pace with the rate of inflation. If you want to boost your buying power over time, look at how corporate earnings are doing now compared to stock prices. If a company's price/earnings ratio is below its growth rate, it's probably a bargain. Look forward at what you think is going to happen in the economy and with individual companies that you own. Your portfolio is far less likely to crash when you look where you are going, rather than where you've been.

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