This week, I have been thinking a lot about financial winners and losers. What makes some people succeed, while others fail? Why do those who start out with nothing often wind up more prosperous those who start out with everything? I believe luck and desire have a lot to do with it. But, I wanted to provide something that everyone can do to help avoid financial calamity and prosper in their future.
1. Loss of Income
I read today incomes have declined by almost 5% for near retirees since the beginning of the recession. This doesn’t sound like much on average, but it’s a serious problem for those over 50 who are out of work. They were likely counting on that income for the last push towards retirement. Instead, many are using up their retirement savings just to survive. Young people are also having trouble finding work, right at the time when they need the money to get started and pay off their student loans. Jobs and income are never guaranteed, but people spend money as though it will never stop rolling in. Income usually disappears at the worst possible time.
2. Insufficient Savings
The personal savings rate was at -1% before the recession hit. Now, it’s closer to 7%, on average. That is a big improvement, but it’s way too low compared to other countries and the U.S. a couple of decades ago. At a time when there is so much financial uncertainty, most people clearly aren’t saving enough. There is no good reason I can think of why gainfully employed people shouldn’t save at least 10% of their paycheck. Not only does this cushion them through any bad times, it provides the basis for future prosperity.
3. Limiting Beliefs
One of the biggest things I struggled with early in my financial life was a blue-collar mentality. Even though I am a white collar worker, I never used to believe I deserved to make the kind of money I make now. Seeing that my average peer made 40% more than me opened my eyes and made me realize that I had underestimated my value for years. Others believe money is the root of all evil or that wealthy people are all selfish and greedy. These types of limiting beliefs will undermine your opportunity for prosperity. They must be dealt with seriously.
4. Poor Planning
Financial planning isn’t that difficult and it’s critical for meeting life’s goals and challenges. Unfortunately, most people don’t do any planning, because they are either confused or disinterested. That’s a huge mistake, because most financial goals take years or decades to achieve. Plans have to be reviewed and adjusted to keep on track. If you head down the wrong path or underestimate the resources needed, it may be too late to recover. Failing to plan is the same as planning to fail.
5. Bad Investments
It’s hard to feel sorry for those who have huge incomes, make poor investment decisions and wind up broke. Often, they are financially naive and receive bad advice from people with their own interests. Other times, egos seem to overrule due diligence and common sense. One example is Curt Schilling who recently lost $50 million on a video game company called 38 Studios. I do feel sorry for Curt and all of the other investors who have lost their personal fortune to bad investments. There is a good reason why experts always recommend diversification. You don’t want to lose your entire fortune on one bad investment. Diversification spreads the risk.
6. Theft & Fraud
I can’t remember a more treacherous time for investors than right now. Financial advisers, brokers and hedge funds are losing or stealing billions of investor’s assets and some aren’t even being prosecuted. Investment banks are commingling investor’s assets with their own and get away with small fines. The climate for investors is so bad that many legal protections have been gutted and regulators seem incapable of prosecuting rouge money managers. I refuse to allow anyone to handle my money directly, no matter how large their firm is. All of my investments are deposited in my own accounts, such as mutual funds, that are audited regularly. You can’t trust anyone in this environment, except for yourself.
7. Confiscation of Assets
We live in a society with a corrupt legal system that benefits the irresponsible at the expense of those with deep pockets. One example is the customer who successfully sued McDonald’s for millions for spilling coffee in her own lap. In the United States, there are over 80 million lawsuits filed per year and over 70% of the world’s lawyers live here. Even if you are found fractionally at fault, you can be forced to pay an entire legal claim and the amount of that claim can be unreasonably high compared to any actual loss. Attorneys can estimate your income and determine your assets instantly, thanks to legal databases. Americans have a 1 in 4 chance of being sued within their lifetimes and that goes up for the wealthy. In this legal climate, insurance is mandatory and trusts are recommended.
8. Excessive Debt
I won’t get into the Good Debt vs. Bad Debt debate and I won’t say all debt is evil and unacceptable. I will say that any money you pay in interest is money that you won’t have for other purposes in your life. In most cities, it can be a better value to buy a house, instead of renting. Others like to buy new cars and keep them for a long time. Some invest in college to increase their income throughout their careers. These are all valid financial strategies involving debt that can pay off in the long run. However, anyone who is indebted, especially with high-rate consumer debt, loses all of the current and future value they pay in interest.
9. Personal Catastrophe
There isn’t much anyone can do to prevent a fatal illness or a natural disaster. These types of catastrophes affect many each year and few are prepared financially or emotionally. Money can’t always prevent the impact of a catastrophe, but it can help mitigate the fallout. Those without financial means are left to the mercy and kindness of others, or the bureaucratic assistance of the government. Those with means can make other arrangements. As I am fond of saying on this blog, “When you count on yourself, you are seldom disappointed.”
10. Inadequate Insurance
Insurance is expensive, but the alternative is devastating. If you have no financial assets, it’s easy to throw caution to the wind and skip the insurance premium. If you have a lot to lose, this isn’t an option. The only thing worse than being uninsured is being insured, but not covered for a problem. Most people don’t realize floods and earthquakes are excluded from their policies. Others have no long-term disability or umbrella coverage. Pay attention to your coverage and purchase insurance from a carrier who will pay the claim. Otherwise, the loss may be pinned on you.
The Bottom Line
The bottom line is that wealth is an asset and prosperity a mindset. Wealth must be shepherded and protected, because it is coveted by others. Prosperity must be cherished and cultivated in order to bring happiness to your life.
“Prosperity is a way of living and thinking, and not just money or things. Poverty is a way of living and thinking, and not just a lack of money or things.”
Eric Butterworth – Minister & Author