10 Threats to your Future Prosperity
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
Recommended Reading
Invest it Wisely – Life Insurance: Do you need a Rider?
Young and Thrifty – 6 Financial Tips for a Good Start in your 20s
The Digerati Life – Developing Financial Goals
A thoughtful list Bret, thanks. I’d add that the relative importance of your 10 Threats is individual-specific, and will likely change over time for each of us. For example, for someone beginning their working career, perhaps 8. Excessive Debt, 3. Limiting Beliefs, and 2. Insufficient Savings are the most important, as it’s critical to get off on the right foot by establishing a personal culture of not overspending (living well below one’s means), saving (lots of time for compound earning!), and setting sights high. Later in life, when assets have been accumulated and kids are in the house, 10. Inadequate Insurance, 5. Bad Investments, and 4. Poor Planning may become relatively more important.
That’s a great point Kurt.
I have written about life changes in one of my favorite posts, The Four Seasons of Personal Finance. I should have organized these ten threats to prosperity chronologically.
Good list Bret, although we should mention that the coffee lady – although certainly clumsy and/or stupid – DID burn herself to a tremendous degree. It’s not enough to convince me it was a shining example of the legal system at work, but it isn’t as black and white as we remember it.
In terms of legal overreach, I like to point to another McDonald’s case – the original Monopoly game. The subcontractor which ran the game had employees which stole from the prize pool, yet McDonald’s ended up having to pay for breach of contract when they stopped doing business. Poor McD’s!
Hi Paul,
As for the coffee lady, that’s why they put cup holders in cars. Third degree burns on the insides of your thighs can’t be pleasant. But, it doesn’t justify a $4 million settlement in my mind. They should have tripled her medical costs for pain and suffering. After all, she did spill the coffee on herself.
McD’s does seem to be a popular target of the lawyers. They are often their own worst enemy. But, just because they have deep pockets doesn’t mean there should always be a massive settlement.
The common perception of this case is a pet peeve of mine.
She needed skin grafts and was in the hospital for 8 days because of that coffee. She tried to settle with McDonalds for $20k, which was what the whole thing was expected to cost her, and McDonalds refused, so she got a lawyer who then went after them. If she’d just kind of hurt herself and sued McDonalds for emotional damages, I’d agree that this was unnecessary litigation, but she was injured more seriously than should be possible with a cup of coffee.
Hi Keely,
You aren’t the only one who has this as a pet peeve. I also got a heated email from another reader. I wish she had of commented for everyone to see.
I was aware the McDonald’s coffee was hotter than most restaurants serve and I was aware the injuries to the lady were severe. I didn’t realize she spent 8 days in the hospital. I also didn’t realize McDonald’s refused to settle for $20K. They do seem to be their own worst enemy.
Thank you for enlightening everyone.
Hi Bret,
I’m new here. Wanted to add that McD’s had over 700 complaints about the coffee, which I believe was 10 degrees hotter than was believed safe. They were also using much cheaper lids than they do today. The woman wasn’t driving, she was parked in the parking lot, and the slight pressure on the cup collapsed it.
A great documentary on this is “Hot Coffee”, which I watched because my sister is trying to sue the doctor who butchered her “non-emergency c-section” (doctor’s own words in a deposition—pray tell, why did you perform it then?) She can’t feel her labia, the tops of her legs, or have more children. She is in chronic, untreatable pain and has spent over $100k out of pocket over 8 years, despite having good insurance. She was a virgin till she married, and four years later, her sex life was over for life. Where do you even begin to assess what all that is worth? What if she lived in a state with a $250,000 limit? It wouldn’t even cover her actual medical costs after she paid her lawyers.
1/25 people will be avoidably harmed by their doctors
3-4% of them will try to sue
1% will win.
This means .0012% of all patients will ever get a settlement for damages, even though 4% should automatically be eligible.
In states where there are random caps on damages, malpractice costs do NOT go down for doctors, meaning it isn’t lawsuits driving costs. Doctors know they have a pretty good chance of getting away with sloppiness; if they were so scared, we wouldn’t have people being sewn up with medical sponges left in after surgery.
I do agree that truly frivolous lawsuits should have some sort of penalty for the person suing–like paying the legal fees. There was one from some handicapped group saying that the height of the Chipotle counters deprived them of the “experience” of ordering at Chipotle….ummm, being handicapped definitely has some drawbacks, one of which is being really short. Why don’t you demand better wheelchairs? No, better to have employees stooping down low so that the 1/5,000th customer who rolls in can see the guacamole.
Thanks for stopping by Mighty,
It’s a really tough question of how to reform the legal system, because somebody is going to be the loser either way. Just the sheer number of lawyers and lawsuits highlights how out of control our legal system is. Some people, like your sister, won’t ever receive adequate compensation for their losses. Others lose everything they have worked for to frivolous lawsuits and dubious judgments.
All of the wrongs cannot be righted, nor can the world be made perfect, especially by lawyers.
I think what is most interesting about this list is that most of these things are within our control which we means we can’t make any excuses if things don’t go well. This is really an outline of what not to do and that we should all do the opposite. Get that in place and you will be financially sound.
Hi Miss T,
You are so right about that. People just need to take charge and do the things that will make them sucessful, while avoiding the things that will bring them down.
Hi Bret,
Great, insightful list. We need to take control of what we can, and not rely on others to provide our future for us. It’ll be great if the governments fulfill their promises when it comes to my own contributions, but I’ll probably be better off if I pretend the money is gone for good.
Thanks for sharing this, and for the kind mention.
Hi Kevin,
I am also not counting on Social Security for my retirement. I still think it will be there, but it will likely be inadequate to support me in California. But, I’ve known that for the past 25 years and have always planned to take care of myself.
I usually avoid politics on the blog, except for my posts on the economy, because it is unavoidable. Anyway, I have been watching the Republican National Convention and that is their whole platform. Let’s get the government out of the way, so you can take care of yourself. The Democrats want the government to take care of everybody and everything. Of course, talk is cheap and promises are made to be broken. It will be interesting to see what happens after these elections.
Bret, this is a great list. I think the lost of income, poor planning, insufficient savings, bad investments, and inadequate insurance are the most obvious (& very important). One thing that struck me though was that you also included things such as limiting beliefs, theft and fraud, confiscation. Those things rarely factor into the financial plans of most people, yet they are real threats nonetheless. Great post.
Hi Roshawn,
When I blog about finances, I think a lot about my own experiences and the experiences of others. Now that I’m getting older, I am gathering a lot of experience. The Limiting Beliefs was a huge problem that cost me a lot of income for almost a decade. I have also experience some theft and fraud. Thankfully, I have never been sued. But, I have an umbrella policy, just in case.
Agree with each and everything that has been written over here. My family has faced the problem of retirement savings insufficiency. Most individuals are not managing to meet their retirement goals and, on average, they find themselves five years behind target in their retirement savings plans. While short-term solutions may be possible for those who already find themselves in this situation, long-term, mindset-changing interventions are required in order to educate people regarding tax-efficient and disciplined retirement savings and encourage them to adopt this approach as a matter of course. The fact that contribution levels are generally too low points to a lack of understanding of the need to err on the side of caution when preparing for one’s retirement. People need to be taught that one should never aim to save ‘just enough’ for retirement, but rather to approach it from a clear understanding of exactly what they will need to maintain their standard of living, and then allow a little bit extra if possible.
Jennifer Goldblum
Some people are proactive in saving for retirement and others aren’t. One really great idea is automatic enrollment in 401K plans. That would be a huge help to millions of employees who don’t want to hassle with it. But, it doesn’t force mandatory participation, because employees can opt-out. I think this would be especially helpful to the young and inexperienced. It would get them started earlier and provide a much higher return.