Your personal finance should improve every year, but some year is harder than others. 2020 is one of these difficult years. We all had a tough year and many of us are worse off than last year. However, there is a light at the end of the tunnel. Pfizer just announced a great result for their COVID vaccine. This is a big study with nearly 44, 000 participants, and the vaccine has 90% effectiveness. Wow, this is fantastic news. If they can ramp up the production and delivery of the vaccine quickly, life will return to normal next year. I can’t wait.
2020 is a bad year for many people. Some of us took a step backward, but life will improve next year. One year is too short of a window to judge your progress. Four years is a much better timeline. Everyone really should be better off than 4 years ago. However, some people are stuck in a negative spiral. Instead of getting better, their finances keep spiraling downward. Today, we’ll look at some of the things that can sabotage your progress.
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*Originally written 2013 and updated in 2020.
Don’t sabotage yourself
If wealth-building is so simple, everyone should be rich by the time they are 40, right? Unfortunately, that’s not the case. People run into financial trouble all the time and it can be tough to recover from those setbacks. The best thing to do is to avoid these common problems.
A divorce will make a mess of your finances and well being. I don’t know much about the detail, but I think you basically have to divide your assets in half. You’ll also pay a ton of legal fees and alimonies for many years, not to mention the emotional turmoil. My college friend, Alex, has 3 young children and got a divorce. He won’t be able to retire early anytime soon.
Unfortunately, about 50% of marriages in America end in divorce. That’s just a flip of the coin. I don’t like the odds. Luckily, we are doing well in our marriage and I hope it continues for the rest of our lives. We have similar values and enjoy each other’s company. That’s the basic foundation of a marriage. Here are some ways to help your marriage.
- Wait a bit to get married. You should get to know your partner very well first. Hopefully, you have similar goals and work well together.
- Don’t fool around.
- Avoid financial pressure. Money problems are one of the biggest contributors to divorce. Avoid debt and work on improving your finance together. Marrying someone who has similar money values will help a lot.
- Don’t lie to your spouse. You have to be able to trust your partner.
- Take some time off for parent’s night out once in a while. Maintain your relationship.
- Put off having a kid for a few years. Enjoy each other’s company and get to know each other very well before throwing a bomb in the relationship.
Relationships are hard. We had our bumps too, but we work them out together. Good luck to all the married couples out there.
#2 Enjoy Risky Habits Too Much
Risky habits will screw up your finances at some point. Here is an easy way to find out if you have one – go through the process of obtaining a life insurance policy. Insurance companies like people with minimal risks and they will screen you thoroughly. If you have too many risky habits, you won’t be able to get the preferred rate.
- Gambling – You’ll lose in the long term unless you’re the house.
- Drugs – This is a slippery slope. Drugs are just too expensive and the effects are only temporary. It doesn’t make sense financially. They also screw up your judgment.
- Alcohol and tobacco – Moderation is the key here. Substance abuse will mess up your health and it’s not cheap either.
- Reckless driving – Taking chances in traffic will get you hurt eventually.
- Risky hobbies – free diving, car racing, free climbing, sky diving, piloting, etc…
#3 Buy Too Much House
It’s pretty easy to qualify for a large mortgage and many buyers use that as a guideline. You should NOT buy as much house as the bank will lend you. A more expensive house means more property taxes, furniture, maintenance, and higher utility bills. Housing is usually everyone’s highest monthly expense and we should minimize that as much as we can. What’s the size of your ideal home?
It’s unfortunate, but Americans have a lot of debt. The average American owes about $90,000. This is a big increase from $47,000 in 2013. We have student loans, car loans, credit cards, mortgages, and personal loans. If you have debt, it doesn’t matter how you got there, you just need to work on getting rid of it. You are paying a lot of interest every month and the money could have gone into building wealth instead. Of course, some debts are worse than others. Mortgages are not that bad actually as long as you can handle the payment comfortably.
#5 Expensive cars
I almost skipped this one since I don’t think about cars much at all. It is a big expense especially if you like luxury cars. A car loses its value every day, so there is no point in buying an expensive car unless you already have too much money. My personal cap for a new car is 3 months of income. That’s a pretty good guideline, right?
#6 Not Diversifying Your Investments
One common mistake many investors make is not diversifying their investment. Generally, you shouldn’t put more than 10% of your portfolio in one stock. One big stumble can set you back years if your investment is too concentrated. It’s important to figure out your target asset allocation and stick with it through thick and thin.
*You can experiment and take more risks when you’re young. Once you’re older and have a sizeable portfolio, I think it’s a really bad idea to put all your eggs in one basket.
#7 Not Being Prepared For Medical Emergencies
Medical emergencies will happen and you need to be prepared for them. Everyone should have good health insurance. This is a big problem for early retirees because health insurance can be very expensive. We’ll have to see what President Biden can do over the next 4 years. I hope we’ll get the public option in the health insurance marketplace. Short term and long term disability insurance is also a good idea if you can afford it.
#8 No Emergency Fund
Every household should have at least 3-6 months of living expenses in an easily accessible account. We all run into a big expense once in a while and if you don’t have an emergency fund, then you’d have to struggle to come up with the money. This is how a lot of people get into debt.
2020 shows us that even 3-6 months of an emergency fund doesn’t last that long. I still think that’s reasonable, though. The stimulus, extra unemployment payments, and extended unemployment benefits helped a lot. Hopefully, we’ll all get back on track soon.
#9 Out of Control Lifestyle Inflation
Most of us make more money every year through raises. Unfortunately, we also spend more and more every year. That’s good for the economy, but it puts financial independence out of reach for most families. If we keep lifestyle inflation under control, it’ll be much easier to build wealth and achieve financial independence.
#10 Not Fostering Your Career
Your career is probably your most valuable asset. With some hard work and a little luck, you’ll be able to raise your earned income for 40+ years. I’m a bad example here. I lost interest in my field and quit my engineering career only after 16 years. If I had stayed interested, then we’d be much richer now. Money isn’t everything, though. We’re wealthy enough and much happier than if I didn’t retire.
#11(Bonus) No Financial Goals
Last, but not least, is not having financial goals. I think this one is particularly difficult for young people. When you’re young, you just want to enjoy life and spend some money. If you don’t set some long term financial goals, then you won’t have anything to work toward. Here are some examples.
- Build an emergency fund.
- Buy a house.
- Pay for a graduate degree.
- Save for your kid’s college education.
- Pay off debt.
- Achieve financial independence by age 50.
Don’t Be Discouraged
It’s not always possible to avoid these problems. Some of them are just the luck of the draw. If you can’t avoid it, then you need to get back on your feet and keep going. Divorce is probably the most terrible one out of all these. It’s just a huge setback and so devastating.
What are some problems that set you back financially? Share it with us so we can learn from your mistake.
Photo credit: flickr Stefan
Source: Retire By 40
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