The 5 Biggest Money Traps You'll Face in 2022

The Federal Reserve is raising interest rates for the first time since 2018. But we're at a very, very different place with high inflation in the United States. Inflation has rocketed; it was higher than expected—7.9%. I think there's quite a bit of room to raise interest rates, raising by 50 basis points. If we conclude that it is appropriate to move more aggressively, we will do so.

Over the past two years, now we've seen some really major macroeconomic events that we haven't really seen for a long time. We've seen zero interest rates, and we've also seen huge money printing, and obviously now, a steep rise in inflation. One of the scary things about the year ahead is that we're going to start dealing with the consequences. And no, that's not some doomsday prediction; that's just the truth.

I got an email from Jerome Powell yesterday. He said, "Bad luck, Brandon. Interest rates are going to go up probably six more times this year, and apparently, there's nothing I can do about it." So, damn. But what's really unfortunate is that for a lot of people, they're going to get caught completely off guard with what's in store over the next few years. And I find that really sad because there are a few key ways you can avoid getting caught up in the consequences of the interest rate rises that we're going to see.

So, with that said, let's discuss five big money traps to definitely avoid in the year ahead.

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Now the first three money traps are very much related, but I will still split them up into their own sections. So if you did want to skip ahead, maybe you can definitely check out the chapters in the play bar at the bottom of the frame. But with that said, the first big money trap is financing a vehicle that you do not need.

Now, this could mean that maybe you have two vehicles when really you could easily make do with just one, or it could also mean that you're financing quite a lavish vehicle that you just don't need. Either way, you've taken on more debt than you really needed to. And as you can imagine, for most people, their car is the second most expensive asset that they own, behind their house.

You know, the loan taken out to buy a car usually isn't small, and with that said, if a big chunk of that debt has a variable interest rate, your car payments are going to get more and more expensive over the next few years. Essentially, your monthly payments will rise, but you won't be paying down any more of the principal.

So if you do have a big car loan now, just go and check that one. Well, first of all, check how much do you still owe and then work out how much interest you're paying each month. Lastly, figure out whether you can handle it if the interest portion maybe doubles or triples over the next year or two.

And if you do decide that you know what, I don't want exposure to that, well, I do actually have some good news. Because right now, used car prices are sky high due to obviously the chip shortages, which is restricting new car production. So you'll probably be able to sell your car for a lot more than what you might expect. So, might be something to consider.

But then from there, the second major money trap that is going to bite real hard in 2022 is overextending on a mortgage. So it's the exact same story; it's just a different asset. So interest rates rise, variable rate mortgage payments also rise.

A problem we've been seeing globally over the past 10 years is that because we've been living in an ultra-low interest rate environment, a lot of people have taken advantage and they've already borrowed to buy property. But all of this buying from people getting in on cheap mortgages has driven up house prices so much that now if you're looking to buy a house in 2022, chances are you're going to have to commit to a substantially larger amount of debt than what you would have needed to about, say, eight to ten years ago.

Now, obviously, I don't want to try and tell you, you know, exactly what you should be doing with your money. I mean, obviously, that's your business. But if you're looking to buy a house now, I think it would be very smart to really consider how much mortgage that you're willing to take on, especially if you're looking at a variable rate loan. I know in the US, you guys have these amazing, like, 30-year fixed-rate loans. Here in Australia, we don't have those, unfortunately. Pretty much all mortgages turn into variable rate loans after a few years.

So if you're someone that is looking to take on a really big variable rate loan just to get into the market, just consider not only what your initial, you know, payments will be, but also what they could be given a multiple percentage point rise in interest rates over the next year or two.

And actually, one more thing regarding those 30-year fixed-rate loans in the US. Another thing to consider if you're looking at getting into the market is maybe taking action on those loans sooner rather than later because the 30-year fixed rate is actually starting to rise. Around this time last year, it was 3.45%; now it's already 4.72%. So that rate is already moving north—again, something to consider.

But now moving on to the third big money trap—hey, hey, same story again—it's credit card debt. Now, I won't spend too long talking about credit cards here, but I hope you're noticing that there's a recurring theme. The big money traps across the next few years are all related to being in debt. The one thing we know is that these interest rates are going to be rising over the next few years.

So the easiest way to avoid financial hardship across the board is just to avoid the effects of rising interest rates. So, aka, minimize your variable rate debt. That's probably the single biggest takeaway from this video: just minimize your debt load. You know, interest rate rises will hurt less.

So it's the exact same thing with credit cards. Credit cards are a weird one to talk about because the debt here probably isn't as large as your car loans; definitely not as large as your mortgage. But the interest rate on that smaller debt is just way, way higher. I mean, the average credit card interest rate, I think, is 16%. And while maybe a one or two percent rise in the credit card interest rate doesn't actually shift the needle as much as a mortgage going from three percent to four percent, it's still definitely something to consider.

And also, I mean, just generally, credit cards are one of the biggest money traps, period. So seriously, I would just… just don't ever flirt with credit card debt. It's just, it's not worth it, just normally with those insane interest rates.

But with that said, let's now move on to the fourth big money trap, and this one is keeping most of your net worth in cash. This one's pretty plain and simple. People think cash is safe, but over the long term, that is wrong.

Why? Well, the annual U.S. inflation rate is currently 7.9%. Yes, that means on average, the prices of stuff are about, you know, eight percent cheaper this time last year. Prices going up means the buying power of your dollars goes down. For example, if you had 100k in the bank this time last year, that same $100,000 is now effectively only worth $92,000. This is what they don't tell you in school, right?

So because inflation is so high right now, what investors around the world have been doing is hunting for opportunities where they can park their money in cash-producing assets—so stocks, bonds, real estate—assets that can hold their value while providing you with a return to try and negate the effects of inflation. For example, in the last 12 months, the S&P 500 has risen 17%. So while inflation has pulled us back 8%, if the majority of your net worth was tied to the stock market, then you've still managed to beat inflation by nine percent.

Now, of course, this isn't without its own risks because the S&P 500 may not have performed that well. But as an ultra-long-term strategy, most investors do keep the vast majority of their net worth invested as opposed to being held in cash, as historically, it's been a much better strategy to be in the market than to have simply stayed in cash.

But with that said, I do want to move on to the fifth and final money trap. This one is going to sound weird considering what we're literally just talking about. The fifth money trap is having no cash in the bank.

Now, trust me, this is not a contradiction. It's still important to make sure you have some sort of stash of cash tucked away, easily accessible, you know, just in your bank account. Why? Well, with all that's happening in the world right now—stocks swinging around and inflation making everything more expensive—potentially not being able to work if you catch that dreaded Rakona flu, then we're probably going to run into a situation sometime, sometime over the next few years where we're slapped with an unforeseen expense and we need some quick cash to sort it out.

And I know personally, it really helps me sleep at night knowing that I've got a couple of thousand dollars just sitting in a bank account, tucked away, that I can access whenever I need to. For example, you know what happens if your car breaks down? Well, servicing costs are going to be higher than last time you went in—inflation. If you maybe just chose to get a cheap secondhand car replacement instead, well, good luck finding a cheap replacement.

We just need to accept that this is a volatile period when it comes to prices. And the best way to mitigate any unforeseen circumstances is to just have a stash of cash set aside specifically for unforeseen circumstances.

So while I wouldn't put the majority of my net worth in the bank, you know, cash definitely does have its place, being the most liquid asset that exists.

So that's it, guys: five money traps. But obviously, really the main themes here are just avoiding getting hurt by interest rates and avoiding getting hurt by inflation spiking.

So overall, guys, I hope you enjoyed the video. Thanks very much for watching. Leave a like on it if you did enjoy it or if you found it useful. Subscribe if you have not done so already. If you want links to New Money, Patreon, or Profitful, or the Clips channel, links down in the description below. But guys, that will do me today. Thanks for watching; I'll see you guys next time.