Your list of financial goals probably doesn’t include running out of money in retirement, living on public assistance, having too little spending money, working until you have to be carried out, losing your home or other property, or personal bankruptcy.
Yet your financial actions may be carrying you in those directions.
“There are so many ways to destroy your wealth. You don’t have to be creative or do anything weird; you just need to do what comes naturally,” says Shawn Connors, president of the Financial Literacy Center in Kalamazoo, Mich.
“Building wealth goes against human nature,” he cautions. “So go with your instincts and you probably will ruin everything.”
Many people unfortunately do “what comes naturally” with their money, which is why financial planners often tell tales of clients and prospects who were committing financial suicide.
“When you talk in general terms about how people are throwing their money away, nobody ever thinks you are talking about them,” says Judith A. Shine of Shine Investment Services in Colorado. “You can warn them a million times, but they think risk is something that happens to other people and that they can somehow have these behaviors and overcome them all.”
With that in mind, I asked advisers what steps they would take if they actually were trying to lose their financial life–in other words, the kamikaze approach to managing money.
After ruling out the really crazy things, such as buying into limited partnerships that own emu farms, what was left were behaviors that ordinary people take on every day. Making just one of these mistakes might not kill you financially. String a few together, however, and you could be mining all of the gold from your golden years.
If you see yourself in these behaviors, assume you are at risk and that you are playing Russian roulette with your future.
Here are some ways you could be committing financial suicide:
– If you live off 100 percent of your paycheck.
The nation’s savings rate is so low that there is little question most people are overspending, and many are living paycheck to paycheck. You need to be saving beyond your workplace retirement plan.
Think about spending this way: If you can’t save at least 10 percent of your income today, you will have a tough time living on 10 percent of your income, which is about all the return that you can expect from your meager investments, once you stop working.
– If you try to play “catch up” now for all of the savings and investing opportunities you missed in the past.
What is done is done. Trying to even the score by going after some big financial win late in the game means taking bigger-than-usual risks.
This approach drives people to leverage their portfolios, borrow from retirement plans, hit up credit cards to find investable money or take home-equity loans to bet the ranch that they can get out of the hole they dug earlier by not saving enough or by investing too conservatively.
“Some people seem to think the market owes them something, and they are going to go all out to get it,” says Peg Eddy of Creative Capital Management in San Diego. “They run the risk of wiping out everything they have done right and winding up even further behind.”
– If you don’t take full advantage of matching funds available in your retirement plan, or discounts in employee stock ownership plans.
An employer who matches your dollar with another 25 cents is giving you an instant, guaranteed 25 percent return on your investment. Even if the employer has no match, at least your money will be growing tax-deferred in the retirement plan, which helps you amass money more quickly.
And a discount on the company stock, assuming the company is reliable, is usually a good bet. Even if the stock falls in value before you exercise such an option, you most likely could sell it upon getting it, pay the taxes due and still come out ahead.
If you can’t take advantage of free money, you clearly are suicidal when it comes to your finances.
– If you try to time the stock market.
Some people have great success trying to buy low and sell high, but most do not. While market-timing won’t kill your finances quickly, the mistakes you are likely to make could leave you short of your goals.
Says Roy Diliberto of RTD Financial Advisors in Philadelphia: “Timing the market with most of your money is a good way to force yourself to work for the rest of your life.”
– If you run up credit card debt, while saving at low rates of return.
It’s no secret that credit card debt is hazardous to your wealth. Many people try to manage their debt while still saving for the future. That’s a fine strategy if your investments can grow at a rate higher than the credit card’s interest rate.
But you also need to look at the return you can get for paying off debt early. If your credit card charges 14 percent interest and you have an outstanding balance, any money used to pay it off early saves you a 14 percent penalty.
If the return you are getting from your savings can’t exceed that amount, you should pay down the debt rather than let it choke the life from your savings.
– If you let the market save for you.
Yes, many people who were way behind in amassing assets for their futures have been let off the hook by the buoyant stock market of the last few years.
But look at your net worth–the complete value of everything you own minus what you owe–and figure out how much of that work was done by you setting money aside, versus how much the market did for you.
The portion that the market earned is the most volatile part of your holdings. The market could turn around and tank, interest rates and economic conditions could change, and more.
– If you confuse safety with security.
This is what happens to people who are too risk-averse. They throw their retirement plans into slow, stable growth instruments that barely keep place with inflation.
Being too conservative with your money is not being too conservative at all. While you avoid the risk of the stock market, you run another risk: Your money won’t grow at a rate great enough to secure your future.
– If you carry only minimum liability limits on homeowner’s and auto insurance.
This may keep your insurance bills down, but it’s a good way to wind up being sued into bankruptcy. It is silly to worry so much about insuring the first $500 you might lose, but not to worry about the next $300,000.
– If you spend your money on status symbols.
Some people would rather have things than money. They seem to forget that the fewer things you own when you are young, the easier it is to own anything you want in retirement.
Recently, I mentioned to a friend that I might replace my beat-up 1987 car and with another used car of the same make.
He wondered why I wouldn’t want a fancier and newer car, one that would “make a statement.”
My car does make a statement. It’s noisy enough to tell you I have arrived, and old enough so you know I don’t spend my money on flashy cars.
Says Bill Morrissey of Sound Financial Planning in Mt. Vernon, Wash.: “People look at having less as an embarrassment. The ultimate embarrassment is not being able to provide for yourself. Everybody has plenty of things they could do without, but they never have too much money.”
