With so much financial information readily available telling us how to make more money or the nonstop investment advice telling us how to get rich quick, it’s quite obvious that many of us invest too much time and brainpower trying to get our money to make more money instead of focusing on ways to preserve what we already have.
Moreover, instead of focusing our efforts outward, perhaps we should shine a brighter light inward on the personal behaviors and poor decision making processes that are cost prohibitive, and in extreme cases, lead us down a path to financial ruin.
After all, if the first rule of money management is to never lose money, maybe we should stop looking at 20 year compounding interest growth rates and searching for high dividend paying stocks, and take a more detailed look at our own personal finance metrics and behaviors that cost more than they should.
Easiest Ways to Go Broke
- Ignore the compounding interest of poor judgment. Compound interest may be the most powerful force in the universe, but like a double edged sword, it can cut both ways. If you’re constantly making poor decisions or find many of your favorite behaviors on the financially “not so well to do” list, the consequences of never learning from your mistakes will negatively compound over time, or at the very least, take away from any future gains.
- Get divorced. I’m one of those kids who had two “families” growing up, so I know all too well about the financial hit you, and your family, will undergo if parents elect to go their separate ways. So if you’re going to take the plunge into wedlock, choose your partner well!
- Personal finance avoidance/ignorance. Some people simply can’t, or purposely avoid, the basic fact that they’re spending more money than they’re bringing in. If you’re living as if you’re making $75,000 when you’re only making $60,000, you’re setting yourself up for a lifetime of debt repayments, forced to live below your means, and not getting full value for your dollar because you’re repaying your debts plus interest payments (e.g. bank profits).
- Get sick. If you haven’t gotten severely ill, have a chronic condition, or required hospitalization, you’ll find out very quickly what sticker shock (treatment shock?) looks like. I’ve had one out of the blue health scare, and two accident accident related health problems requiring serious medical care, and the medical bills — even with health insurance — would have been difficult to endure without a sizable emergency fund.
- Failure to diversify. If you keep all your eggs in one basket, you obviously have a higher risk of taking a hit to your financial safety. If you require further evidence, just ask the Madoff Ponzi Scheme victims who had their entire portfolio invested in Madoff’s hedge fund only to lose it all because they didn’t see the dangers of lumping all their cash in a single location, asset, or money manager. Investors, now turned victims, who once thought they could retire early or continue to operate charitable organizations soon found themselves back to work or shutting their doors.
- Become a professional student. A sound education is arguably the greatest gift of all, but if you’re taking on several hundred thousand dollars worth of student loan debt to get that education, you’re probably doing it all wrong (unless you’re guaranteed a $100,000+ job). I understand that no one should go broke just because they choose to go to college, but if your parents didn’t open a 529 account for you at a young age, or don’t have the cash flow to make monthly tuition payments, then you’re going to have to take on copious amounts of debt (the slave shackles) even before you get a job. And let’s not forget, you still have to find a high paying job, after you graduate, that allows you to pay for things like housing, transportation, food, and of course, student loan payments.
- Always the speculator, never the investor. Constantly chasing after the next big thing investment (e.g. investment bubbles) is a fool’s errand at best. Sure, you’ll hit a few home runs and you may even make a big name for yourself, but like Babe Ruth, you’ll probably strike out twice as many times as you get to touch’em all. If that’s the case, those financial home runs better pay off big, and you better know when to cash out versus continuing to press your luck.
- Over-leveraging yourself. If you acquire too many assets and don’t have the cash to pay up front, get ready for a lifetime of your stuff owning you. Taking on a small amount of debt as leverage and to eliminate the barrier to entry is a wise move in many situations, but becoming mortgage poor or taking on so much student loan debt that you can’t get pre-qualified for a mortgage isn’t the best way to go. In fact, you’ll probably find yourself two or three paychecks away from bankruptcy.
- Have a kid. Children are adorable and a single smile can melt even the coldest of hearts, but having children is fairly expensive. Experts suggest that the costs associated with raising children from birth to age 18 can range from $118,000 to $250,000 depending on single vs. dual parent homes, income levels, and other socioeconomic factors. I’m not suggesting that you should avoid having kids, but if and when you do, let’s hope you have the financial foresight and wherewithal to keep up with the costs of parenthood.
- Always the gullible pacifist. If you have money or have a career that yields high positive cash flow every month, one of the first words you must learn how to say with amazing regularity is “NO!“. For some reason, when people around you realize that you have money, they will approach you for various reasons justifying why you should allow them to borrow your money, invest in foolish business ideas, or even lay on a thick coat of guilt justifying why you should allow them to sponge off you. The best thing you can do is smarten up, grow a thick skin, and learn how to say “No!” convincingly.
Photo by B. Rosen