By Kristi De Rycke, Registered Assistant
Although this title sounds like something out of a horror flick, it has truth to it. Often it is not other people that derail us from our best intentions but ourselves. Discover 7 ways that we get in our own way to greater financial success. Knowing the mistakes that we make can help clear the path to better outcomes.
Keeping Up With The Joneses: It is so easy to look at other people and wonder what you are doing wrong. How can some people pop into adulthood with a brand-new expensive house, 2 fancy vehicles, travel all over the world and eat out as much as they want? It is easy to second guess that you should be able to afford all of that if they can. Before you go to the realtor for a bigger home, remind yourself that you do not know that couple’s situation. Often the Joneses are really the Smith’s dressed up and pretending to be someone they are not. Do you remember the scene in The Wizard of Oz when Toto the dog pulls back the curtain to review that “The Wizard of Oz” is really just a common man? I truly believe that this would be the case in many households. The average credit card debt in this country is $6,028. (1) The median savings in the American household is $11,700. (2) The bottom line is that people can buy whatever they want on credit, but they may not actually be able to afford it. Now decide if you want to be the Joneses. Do you want the daily stress that comes with living above your means? Maybe it is better to be a Smith who genuinely acts like they are a Smith.
Don’t Bite Off More Than You Can Chew: When you purchase a large item like a vehicle or home, make extremely careful not to overshoot your financial situation. These decisions can affect you months to years down the road. Before you meet with the realtor or walk onto the car lot, do your own homework! Figure out how much per month you can really afford for those items. Keep in mind that the person you are meeting with (either the banker or the salesman) will make a profit off what you purchase. As a single woman, I had a situation with buying a home where the bank lender tried to convince me that I could afford double the mortgage amount based on my information. I flat out told him that I wanted to buy the condo, but I also liked to eat meals on a regular basis. He backed off and I was glad I stuck to my guns. Every month when I sat down to write the check, I could not figure out how I would have done it with a higher monthly mortgage payment. Worst case scenario you do purchase a less expensive house than you could have afforded. You can make an extra payment per month and potentially shave tens of thousands and years off the mortgage. Wouldn’t it be a happy day not to have to write the mortgage check?
The Fountain Of Youth: It can be very easy to convince yourself that you will be young forever. Days turn into weeks, weeks turn into months, and months turn into years. If you save $100 per month starting in your 20s and it made a hypothetical average of 7% annually it would be worth $250,000 in 40 years. What if you waited until you were 40 years old to get serious about your retirement? Your $100 per month starting at 40 and growing for only 20 years at a hypothetical 7% would be worth only $51,428. Check out bankrate.com for a calculator to run your own numbers.
The 3-Year-Old Meltdown: Have you ever been at Walmart only to see the mother dragging the screaming 3-year-old out of the store. The kid is yelling “I want the toy. I want the toy. I want the toy NOWWWWWW!”” We were all that 3-year-old at one time that had no patience. Did you know that the 3-year-old version of us pops out long after we thought it was gone? We see something that we want before we can afford it. The credit card is pulled out of the wallet and scanned before we realize what has just happened. We figure there is no harm done. Credit cards have become so common that it is hardly thought of to put an item on credit. Did you know that if you buy a $1,000 TV today at 20% interest and pay the minimum payment of 15%, it can take you 12.7 years and $2197.00 to pay it off? (4) We must work twice as many hours to pay for it than we would have to pay the original price.
Lifestyle Creep: We are creatures of nature. It is only natural that we always want more. We start off our careers making a low amount and gradually get raises, possible promotions and bonuses. Often, we just start spending a little more and a little more in conjunction with these increases in pay. The worst part is it often does not really enhance our situation or feeling of joy with greater spending power. Consider the option of always putting away 1% of any pay raise to go towards one of your financial goals. Then use the other percentage for cost-of-living inflation and other purchases. Another option if you need every single penny of any pay raise is to take any bonuses or gifts and apply to financial goals. You should enjoy pay raises but just make sure to do it in a way that you notice and gain quality of life.
Always Last In Line: Parents are often very used to putting their kids first above their wants and needs. This is not a good plan for your finances. Many people will choose to cash out retirement savings or choose to pay for their children’s college instead of funding their own retirement plans. This may be a good idea if you all agreed that the best decision is to move in with them when you are no longer working. You exchange putting away for your future self when they were young so they can support you after retirement. There is often a thought that retirement can wait until after children are raised and out of higher education. Compound interest is the magic that happens when your investments grow over time and build on each other. Check out this blog for more information on compound interest. You could end up having to put away double the amount monthly if you wait until your 40s than you would have to in your 20s.
Fail To Plan And Plan To Fail: It is so very easy to run from activity to activity through the week without much of a plan. It does not matter if you are a busy single person, a 2-person working couple with kids or a retired grandparent. We tend to stack our schedules to the point of busting. Planning can help in small ways including planning your meals for the week. This will prevent you from spending more on a take-out or pizza delivery. Plan your grocery store trips to avoid extra purchases. When you are looking at bigger purchases, do your research before you go shopping? Look into the option you really need and what you could get by without. Compare prices across brands and stores before you buy. Planning is most critical when you are thinking about major things like your financial goals. You need to have an idea where you are at, where you want to go and how you are going to get there. Follow your plan so you make sure to remain on track. For more information on establishing a financial plan check out this blog.
By Greg Johnson
Life is full of challenges and it does not matter what stage of life you are in they will be there. Determining what you want to make out of your life is what will be the difference. You can either manage the scenarios Kristi describes above or you can just say that is how it works. Either way your future self will someday blame your current self if things do not work out the way you want them to. Take some time and really reflect on what Kristi's message is and how you relate to it. If it's time for a change, make 2021 the year the change will happen. Best of luck and let us know if we can help.
“These hypothetical examples are for illustrative purposes only and do not represent the performance of any specific investment. Investing involves risk including the potential loss of principal. Indexes cannot be invested in directly, are unmanaged and do not incur management fees, costs and expenses. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performances is no guarantee of future results. Please note that individual situations can vary. Therefore, the information presented here should only be relied upon when coordinated with individual professional advice.”