9 Ways to Avoid Detonating Your Financial Life
by Ted Halpern
"You only have to do a very few things right in your life so long as you don't do too many things wrong." –Warren Buffett
There’s a simpler way to build wealth than guessing which stock will be the next Google or Apple: Don’t make colossal financial mistakes. It’s simple, yes, but unfortunately, it’s not necessarily easy.
Investing is critical to building wealth, and a calculation called the “rule of 72” can make it seem pretty easy. Using that rule and assuming a 7% rate of return, your investment would double every 10 years. If you started investing at age 25, you could see at least four of those doubling periods during your working years.
You can see what a powerful driver of wealth creation that could be in theory. Someone who started investing at age 25 could have four chances for their money to double under those conditions by age 65!
But of course, life tends not to trend that smoothly. You can’t set your watch to 7% returns annually, and there may be life events that interrupt the doubling periods. Some of them, fortunately, are completely avoidable if you know about them—and for the ones that no article can help you avoid, at least you can be aware of the financial risk.
But you can’t bank on 7% returns annually. As the saying goes, stocks always go up—but they don’t go straight up. Your personal financial growth may not trend smoothly either. You may suffer losses in certain years, and you may face life events that interrupt the doubling periods, like losing your job and your ability to save or getting into unhealthy financial habits.
Although you can’t prepare for everything that could go awry, there are some mistakes you can work hard to prevent. For the ones that no advice can help you avoid, at least you can be aware of the financial risk. Here are nine ways to avoid these costly mistakes:
1. Just Say No.
Don’t drink to excess, don’t gamble to excess, don’t do drugs, and don’t cheat. The bottom line is that simply avoiding costly problems makes it easier to stay on the path you intend.
2. Don’t get divorced.
I say this tongue-in-cheek, because it’s not as if you should stay married for financial reasons—but there is no question that divorce can throw a huge wrench into your financial life. For example, say you divorce at age 40, and need to divide up half your assets. At that point, you have just two doubling periods before age 60. You will be 50 by the time you break-even, given that hypothetical 7% annual return, which you may or may not receive.
3. Invest like you earn.
Unless you’re a lottery winner, you didn't get to your current income level by pure chance or luck. It probably took a lot of time, discipline and hard work to get to where you are in your career. The same is true of investments—it’s a long-term, disciplined process that should not depend on factors outside your control (like a certain stock outperforming). So if a particular investment “opportunity” crosses your path that promises the moon and seems way far out of the norm, it’s likely not an investment worth making. Save gambling for the casino, not your future financial security.
4. Don’t sell the gas station.
If you have a main source of income, don’t sell it before having any idea of what you'll do next. Unfortunately, I have seen more than one person make millions in their business, cash out, spend it all, and then find themselves trying to build anew from square one. There’s no fuel left in the tank. It is a hard thing to start from scratch in mid-life or later in life, especially if other setbacks occur along the way. So if you have a reliable source of income, maintain that ‘gas station.’ Use it to fill up your tank, and if you want to drive around town looking for other opportunities, you will have the security of knowing you have a backup source of fuel.
5. Don’t spend out of boredom or stress.
This is not a colossal mistake on a case-by-case basis. $20 here or $40 there when you see a sale going on is not a big deal. But if you let excess spending become a habit, it becomes a major way to detonate your financial life because you are living right at the limit of your income (or perhaps past it, if you get into credit card debt). So before you swipe your card or click “Add to cart,” ask yourself, “Do I really want this? Or am I just bored?”
6. Don’t use “I deserve it” as an excuse to overspend.
Sometimes the line between “I deserve it” and “I want it” becomes blurred. It’s subjective for every person. But there is a line when big splurges become habitual. It’s another way lifestyle costs can creep up on you. If there is something you want as an “excess item,” make sure to keep it within a prudent level of expenses.
7. Keep things special.
There is nothing wrong with enjoying a celebratory 5-star meal with a fine French wine. There is something wrong with enjoying that same bottle of wine with the mac and cheese you gobble down with the kids after soccer practice. Keep certain luxury items a rarity so they remain special to you and they don’t become a reoccurring line item on your budget.
8. Don’t take on long-term financial commitments based on a short-term windfall.
It is good to be optimistic about the future when you get a big bonus, or a larger-than-normal business distribution. But likewise, you have to understand what is a sustainable—earn first, buy later. So if you work in a field where your income is variable from year to year, don’t take on a third car payment or buy a vacation home solely based on your success in one year. Think about your net worth relative to what you earn, and how long have you been earning at that level. A single year’s success cannot pay for an obligation that is 5 to 30 years in duration.
9. Don’t forget to dream!
While a large part of building wealth is simply managing to stay on the right path and avoiding the bad stuff, it is also important to focus on the positive and motivate yourself to stay on the right path! You need to believe you are worthy of financial security if you want to achieve it.
A version of this article first appeared on Nerdwallet.
Cover image: adaptation of “Bomb” by Edward Boatman from the Noun Project
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