To The Moon

A refresher course on some bad spending habits.

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Business strategy is very simple when you get down to it. There are only two ways to increase your bottom line: raise revenue, or cut costs. Everything else is just an offshoot of those two basic principles.

Personal finance is no different. If you’re having difficulty paying the bills, you’re left with the same two options: cut your spending or increase your income. I spend a lot of time talking about the obstacles to that latter part, and have written countless words on the subject. Today, I’d like to tackle the other half of the equation: why do we sacrifice our own futures so easily and readily?

We really are our own worst enemies. This is often true in our social lives, health, and plenty of other areas. But nowhere is it more true than in our personal finances. With the recent collapse of many crypto valuations and other scams and schemes making the news, I thought it’d be a good time to revisit why this is the case.

There’s real psychology behind some of this — and the only way to combat it is to know when your mind is playing tricks on you. Knowing what motivates you to do the things you do and why you continue to do so is a big part of maturity, not to mention financial security. Watching out for flawed thinking and vetting “opportunities” a little more thoroughly can help you detect when your natural impulses are leading you in the wrong direction.

Once you know that, you can take back control and make the wiser decision. Your future self will thank you. So let’s look at some poor investment decisions and what motivated them. We need to learn from, rather than repeat mistakes.

Scratch-off tickets

Alright, I have to start with this one because I see so many people fall victim to these stupid things to various degrees. I’m not here to begrudge anyone over the occasional five-dollar longshot. Live your life, by all means. But I know people who buy entire “books” of these things at once or put 10% of their take-home pay into them, and everything in-between.

The word of the day here is impulsiveness because no one who thinks hard about this decision would come up with “yes, I should buy all these.”

I would recommend just about anything over buying these tickets. They’re just horrible. One of the most useless purchases out there, even when compared to traditional gambling. As a matter of fact, if it comes down to it, I would sooner advise you to put all of your scratch-off money on the roulette table if it meant avoiding these stupid tickets.

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Most investors are familiar with ROI — meaning the expected return on your investment — but are you familiar with RPT? RPT stands for return-to-player, and it’s the value of “investments,” let’s say, where you’re guaranteed to lose in the long run. An RPT of 96% means that someone who puts a dollar into a slot machine, scratch-off, blackjack hand, etc. can expect to retain 96% of their money in the long run. Put another way, you’ll gradually die off at 4% intervals.

For scratch-off tickets, I’ll choose to ignore tax implications and just make this simple. The government takes about 30% right off the top in all these prize pools, making the starting RPT about 70% and instantly making the tickets one of the worst purchases you can make. They have no utility or use outside their value, so there are no other considerations here. Just how bad the purchase is.

Now a lion’s share of that already-horrible return is thanks to about 1–5 big winners in a pool of, often, hundreds of millions. Take them out of it — which is often the case if you’re buying a ticket that’s been out for a bit — and you lose 10% or more of your expected return at a time. The end result is essentially:

“The second you purchase a $10 scratch-off ticket, its value is $4.”

It’d be hard to find something worse to buy. Reminding yourself of just how bad a purchase these items are can serve as a good check on impulsiveness. That said, the power of visualization is strong, and we tend to foresee positive, rather than negative, future outcomes for ourselves. Everyone imagines winning a million dollars; no one imagines being penniless in the street.

But the future value of that ten-dollar ticket — if invested properly — is closer to $100. Maybe start looking at them as $100 tickets instead.

Crypto

Oh, dearest crypto. It turns out that being an entirely unregulated market was more of a curse than a selling point. I understand the underlying desires and rationale for an alternative currency, I really do. No one likes banks. That said, people thought banks were shady with money? Pfft. That’s got nothing on the crypto world. The notorious Deutsche Bank’s money laundering operations look like a child’s lemonade stand by comparison.

Crypto’s target victims were fear and hype-based “investors,” respectively. It’ll probably go on a run for a bit again soon, and take another wave of people with it. I’d think not after watching firms collapse and investors get eviscerated last year, but I know better by now.

That doesn’t mean that you have to join them, though. See, fear of missing out and desire to join in on a hyped and much-discussed “investment” both share some traits. They’re emotional, for one, and that’s generally not a good way to manage your money. They also have no factual foundation or numeric support for their argument.

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We all let our emotions get the best of us at times. I was so excited when my holdings recovered after COVID, I took early modest gains on many that were designed to be long-term holdings. I’ve missed out on huge returns on many of them, as a result. Things like this will happen. You’ll mistime something due to panic, elation, or anything else. But we can at least be careful when we’re initiallyenteringan investment.

I pretty much ask myself two items before each investment. The first is simple:

“What are the facts and valuation that support this purchase?”

Not how I feel, not whether something is hot, just a forced, focused look at the actual basis for buying something.

The second item is equally important, and a little more “feeling” based:

“Can I stomach this particular level of risk and volatility?”

There are some items that may ultimately prove to be good investments that I discard because of this question above. But it also saves me from taking risks I’m not comfortable with — ones that could ultimately undo all of my progress.

When I asked these two questions about crypto, I came up with the following two answers, in order:

• Seemingly nothing beyond some “what if” and “could be” statements
• No way

And that was all the answer I needed. Maybe you can stomach a lot of risks — you’re younger than me, have a higher income, whatever. I’d just really focus on that financially-sound part before following through with any investments. Popular ones, in particular.

Credit

We are a credit-fueled society, in the developed world, and even more so in the United States. And while building credit is a sound part of pretty much any amateur financial planning strategy, abusing that credit is often an unfortunate side effect.

I’m going to be pretty frank here — if you know you’re impulsive or fairly short-sighted when it comes to financial items, you’re better off not having immaculate credit and ditching the card entirely. If the alternative is high balances, missed payments, and a gradual strangulation of your monthly income by the forces of creditors, having a limited credit history is preferable.

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You can still build credit through fixed loans on your car, secured cards, or even a small personal loan. But those don’t offer the same pitfalls that a typical credit card or line of credit does. Namely the ability to purchase anything at any time whether or not you have any actual money. From anywhere, too, thanks to online shopping.

In the early part of my banking career, I worked on residential, rather than commercial loans. The most striking part to me was just how many people were absolutely crushed by debt at relatively young ages. I’m talking about credit card totals equivalent to annual salary or thereabouts.

We’d get mortgage applications that wouldn’t work because of the debt burden, so we’d try to add some payoffs into the deal to see if we could still get them into the house they wanted. At that point, we’d inevitably discover they didn’t have the assets to cover the payoffs and the deal was dead. Worse yet, every day that went by with balances that high did further damage to their credit, gradually eliminating their chance to escape it through refinancing it or moving it to a fixed loan.

A lot of people also have trouble differentiating “need” from “want” and credit cards don’t help in this regard. If you’re on your last $75 until Friday, you’re going to really see the difference between needs and wants. But if you have $75 and a line of credit worth $15,000, it feels like you have some buffer, some security. You don’t.

Thoughts

I know this type of stuff is boring, particularly against my usual topics. But we spend so much time figuring out how to boost incomes, develop side hustles, remove obstacles to class mobility and increased earning potential, etc. Every once in a while we should step back and recognize some avoidable bad decisions, too.

Sometimes a reality check is all you need. But keeping these types of items near the top of your mind goes a long way to reducing the impulsiveness and lax behavior that encourages such purchases. A little refresher now and then doesn’t hurt any of us.

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