One of the reasons for this blog is that some things that I think are basic common sense regarding finance - aren't basic common sense. The fact is that most of us have been raised to think that "personal finance" and specifically, "investing" are big complicated ideas - things that "other" people do. I've never been intimidated by the idea of investing, because I follow one simple rule: if I don't understand it, I don't want any part of it.
A friend of mine came to me with an idea that her neighbor gave her. Instead of buying a car with the cash she had saved, he suggested that she take the cash, invest it in a mutual fund, take out a loan for the car and then pay the car payment with the interest earned from the mutual fund. Her neighbor told her that this was the way that smart investors used money to make money and it sounded reasonable to her.
There are several things wrong with this story, but the biggest one is this: she didn't understand what he was proposing. I seriously doubt he was trying to lead her astray, but inevitably, this story would have ended badly. Anytime you put your money in places you don't understand, the story will end badly. Which brings me back to my simple rule: don't invest in or spend money on things you don't fully understand. If someone offers you investment or financial advice, take the time to look it up. We're bound to make mistakes with finances, but fully-informed mistakes are learning experiences...ignorance is not an excuse.
So in another post, we'll talk about what was wrong with her neighbor's advice...
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