Sometimes it doesn’t take much to find yourself in a tough financial spot, but one of the keys to financial success is to steer clear of the most damaging financial pitfalls. Here are the 6 most serious (and most common) wealth destruction mistakes...
1. Excessive Lifestyle Spending:
One of the most common wealth destruction behaviors is spending too much of your annual resources (especially during peak earning years) on material goods and lifestyle.
The studies on savings show very clearly that over 85% of the “failing to save problem” is caused by looking at savings as an optional budget item. The best way to avoid this mistake is to view it as a mandatory top line deduction from your gross income - just like taxes.
Allocating your spending based on a budget that first subtracts at least 12% to 15% of your gross earned income will help assure you don’t waste your opportunity for lifelong financial independence.
Save aggressively and invest moderately – is a great motto for most.
2. Health Crisis
The number one cause of bankruptcy in the US, and the developed world, is a health crisis. Of note is that about 80% of those in bankruptcy due to a health event actually have adequate health insurance. This is an important point because it’s contrary to what many people think.
The problem is not as much about health insurance as it is disability insurance – the real issue is that people who experience a health crisis are often unable to work for extended periods of time.
Health issues are also the number one reason people retire earlier than expected. It can be nagging injuries, a lack of energy, or a chronic health related condition, but whatever the cause, the result is retiring before you are financially ready.
Adequate disability and health insurance are important ways to reduce this risk.
But it’s also important to note that poor lifestyle choices often lead to health problems, and that’s why it makes good sense to designate your health as both a personal and financial priority.
3. Career Crisis
Regardless as to how financially responsible you are, or how well your investments perform, there’s likely no area that impacts your ability to accumulate wealth more so than your career.
Employment survey data shows that most career professionals, who experienced a job crisis, felt the problem could have been minimized, or avoided all together, if they’d been paying closer attention to what was happening with their employer and / or their area of expertise.
Given the speed of change in todays modern economy, it’s never been more important to keep your skills up-to-date and stay diligently informed in all things related to your career.
4. Poor / Negligent Investment Management:
Inappropriate extremes in risk avoidance or risk taking, lack of diversification, excessive commissions /fees, and investing in illiquid areas are the most common denominators to investment failure.
Investing in and of itself is highly unlikely to ever make you rich, but it quite easily can make you much poorer. Whether it’s at your own hands, the hands of a charismatic advisor, or a fraud like Madoff the risks to one’s wealth is high.
One of the better ways to reduce this risk is to only work with a financial fiduciary required by law to act in your best interest.
In addition, it’s important to practice extreme caution when placing assets in illiquid investments and commission based financial products. It’s also a very good idea to never use an advisor that places your assets in their privately owned clearing firm – demand a 3rd party custodian like Schwab or Fidelity.
And be diligently skeptical whenever working with financial salespeople.
5. Divorce:
This is a difficult topic that most people will never feel comfortable enough to discus, openly, but the unfortunate reality is that about half of all marriages end in divorce. From a financial perspective the planning process regarding the possible division of marital assets is difficult.
Nonetheless, divorce is the single most common financial risk that people face today, and establishing a plan through pre or post nuptial agreements could help significantly reduce the possibility of financial (and emotional) strife. This process is especially important for business owners and their spouses.
6. Absence of Adequate Insurance and Estate Plan:
These two areas go somewhat hand-in-hand, without a good estate plan and adequate insurance people are much more exposed to the potential of a wealth destruction event for themselves, and / or their family.
One of the most common problems we find when talking with high net worth individuals is that they are almost always dangerously underinsured for personal liability. For many people an umbrella liability policy that covers their entire net worth and / or prospective income is needed.
Addressing your estate plan, life insurance, and liability risks periodically with an expert will help assure you are protecting yourself and your loved ones.
In Closing:
In one way or another at least one of the above wealth destruction risks will impact most American families. The best way to reduce your risk is to have a comprehensive financial life and estate plan in place.
Retirement planning has a powerful psychological impact; I’ve seen it many times in my career. People often look at the process as though they’re doing their taxes, and suddenly the prospects of the future hit them. Ultimately, one of the primary benefits of retirement planning is the peace of mind it provides to focus on issues beyond the financials.
The transition from work to retirement is a major milestone in one’s life, and there are numerous personal challenges that many people underestimate. Adequate financial resources are not a guarantee of happiness, and retirement is just as easy to screw up as any other part of life. Truly being prepared for retirement is about much more than just the numbers.
