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By Josh Monroe, CFP®, ChFC, Financial Planner
| March 16, 2020
Why would anyone sabotage their own future? It’s not typically a conscious decision, but the product of focusing on short-term gains instead of long-term results. Here are some common ways we sabotage ourselves:
Some of these are more serious than others, but we often make decisions that set ourselves up for long-term failure without even realizing that’s what we’re doing. Here are seven ways you can sabotage your own financial future and work against yourself.
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
Do you have FOMO? That’s the internet-era term short for “Fear of Missing Out.” Financially, people are often afraid of missing out on purchasing the latest “hot” deal: a new electronic device, the latest model luxury car, or a Black Friday deal that’s too hot to pass up. A few impulse purchases over time may not lead you to financial ruin, but missing out on savings opportunities certainly can.
I’ve written about the power of saving early (see 3 Great Reasons Why You Should Start Saving Early). The lesson is that you can’t get time back, and missed opportunities to save now means one of two things: You either need to add time on the back end — which means delaying retirement – or you need to take on more risk on your investments. By following your FOMO on impulse purchases, you may keep missing out on savings opportunities and significantly decreasing the odds of achieving financial independence.
OK, irrevocable is a bit strong, but I use that word to make my point. If you splurge and buy an outrageously expensive pair of shoes late one night from your smartphone, it may not be a wise decision, but it likely won’t lead you to financial catastrophe.
What are decisions that can lead to financial ruin? Big decisions that are hard to undo, such as the purchase of a house, car or boat. There’s a house for sale in my suburban neighborhood that has been on the market for years. It’s beautiful and has truly amazing architecture. The only problem is it is about 10 times more expensive than every other home around it, and nobody else seems to share the owner’s specific taste. Millions of dollars of equity are tied up in a decision to build an asset that can’t be liquidated. I don’t know the owner’s story, but I’ve seen many stories like it, and it isn’t pretty.
Resale value should always be considered when making big purchases. The more unique an asset is, the fewer buyers it brings. This decision could leave you stuck with a unique, but illiquid asset. Tying up a significant percentage of your net worth in illiquid assets can be a great way to sabotage yourself. If and when you need liquidity, there’s no guarantee that a buyer would be willing and able to pay what you need for that asset.
Getting a pay raise is always exciting, but what you do with that increased income can separate the wealthy from the perpetually poor. As income goes up, there is a natural desire for some people to increase spending and upgrade their lifestyle.
Many would assume the solution to all financial problems is to earn more money. However, when more income is matched with higher expenses, such as second homes, luxury cars or multiple country club memberships, this margin may never appear. I recently met a successful doctor with a seven-figure income last year who found cash flow to be tight each month. To solve this issue, he began automatically saving several thousand dollars per month from checking to his investment account. By constantly upgrading your lifestyle to keep up with or even outpace income growth, you may find that no matter how much income you earn you always feel squeezed.
Did you know it’s possible to be a great saver and still sabotage yourself financially? It’s simple: You save for all the wrong things. Here’s the real kicker, they can be noble goals. For example, saving for your kids’ college or private education is a great goal. But where does that fall on your personal list of priorities?
Make sure you’re on track for retirement and financial independence before diverting too much money toward a child’s education or a second home. All goals are not created equal and, unfortunately, sometimes even noble goals need to take a backseat. Only you will be saving for your retirement. There are far more options for how your kids can fund and obtain their education, including scholarships, grants, and even loans. You can easily sabotage your future (and your kids’) by paying for them to go to college … and then later being forced to move in with them when you’re 75 because you didn’t save enough money to retire with dignity.
A well-rounded financial plan blends offensive strategies, like investing in stocks, with defensive strategies, such as building an emergency fund and buying adequate insurance coverage.
For many people, cash reserves and covering all insurance needs just doesn’t excite them, so they put all their chips on offensive strategies. This strategy could work out great if life never throws you a curveball. I recommend that all my clients purchase umbrella insurance to protect their assets above and beyond their home and auto policy limits. Shortly after one of my clients acquired this excess liability coverage, he was involved in a multi-car accident in Atlanta. He was so relieved to have the peace of mind that he was adequately insured for such a circumstance.
Being underinsured and ill-prepared to fund an emergency could set you back years on your investing plan, undoing any potential advantage to skipping the defense. Playing offense only with your finances is a lot more like a Las Vegas strategy than a financial plan.
Are you familiar with the term “paper losses?” For many people it’s easier to understand this with real assets than securities. If you buy a house for $500,000 today and six months from now it’s only worth $400,000, have you lost $100,000? Not really; it’s just on paper. Now if I knocked on your door and offered to pay you $400,000 and you accept, you can lock in that loss and make it permanent. However, if you ride it out and wait to sell your home at $500,000 or higher in the future, that loss was never realized.
The same is true for stocks. You own shares of stocks, bonds, and mutual funds. The value fluctuates daily but you can certainly panic and make a temporary loss become permanent by reacting to low values and selling to avoid further losses.
Someone told me recently they watched their account daily during the Great Recession in 2008. When their balance plummeted by 50%, they sold all of their investments in stocks and only held cash to avoid losing any more. Worse yet, when the market turned around, they stayed in cash, afraid to invest again for fear of losing more. Instead of avoiding more losses, he simply galvanized that one as a permanent loss of capital. Do this a few times in your investing life and you can be certain to sabotage yourself no matter how much you have saved.
You’re familiar with the term “blind spots” when it comes to driving. Unfortunately, they exist in our everyday life too, especially our finances.
The big problem is that often, I can’t see my own blind spots and you can’t see yours, either. That’s often why we hire professionals to do a job we think we can do ourselves: They work with others every day and have seen others struggle with the same issues. Many people go it alone when it comes to financial planning. But, often, they don’t know what they don’t know. As a result, they can’t fix what they don’t see.
In our client conversations we often uncover blind spots in estate plans, taxes and savings strategies that were hiding in plain view. A financial adviser can serve as a guide to help you see your blind spots and help you avoid sabotaging your financial future.
Written by Josh Monroe, a CERTIFIED FINANCIAL PLANNER™ practitioner and a Chartered Financial Consultant designee who listens actively and plans thoughtfully to help clients achieve their goals. He joined the Brightworth team in 2019 as a Financial Planner.