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10 Easy Ways to Sabotage Your Finances

by retirebyforty on November 22, 2013 · 39 comments

in goals and milestones, lifestyle

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Yes! Almost everybody should be getting richer every year especially those who read Retire By 40. 96% of our readers who took the poll are steadily increasing their wealth over time. In that article, we outlined a few simple steps to achieve your financial freedom, but there is one side topic that deserves its own article.

don't sabotage your finance

Don’t sabotage yourself

If wealth building is so simple, everyone should be rich by the time they are 40, right? Unfortunately, that’s not the case. People run into financial trouble all the time and it can be tough to recover from those setbacks. The best thing to do is to minimize our encounters with these common problems.

#1 Get A Divorce

Divorce will make a mess of your finances and well being. I don’t know much about the detail, but I think you basically have to divide your assets in half. You’ll also pay a ton of lawyer fees and alimony for many years, not to mention the emotional turmoil.

Unfortunately, 50% of marriages in America end in divorce. That’s just a flip of the coin and I don’t like those odds. Luckily, we are doing well in our marriage and I hope it continues for the rest of our lives. We have similar values and enjoy each other’s company. That’s the basic foundation of a marriage. Here are some ways to improve the odds.

  • Don’t fool around.
  • Avoid financial pressure. Money problems are one of the biggest contributors to a divorce. Avoid debt and work on improving your finance together. Marrying someone who has similar money values will help a lot, too.
  • Don’t lie to your spouse. You have to be able to trust your partner.
  • Take some time off for parent’s night out once in a while. Maintain your relationship.
  • Wait a bit before having a kid. Enjoy each other’s company and get to know each other very well before throwing a bomb in the relationship.

Relationships are hard. We have our bumps too, but we work them out together. Good luck to all the married couples out there.

#2 Enjoy Risky Habits Too Much

Risky habits will screw up your finances at some point. Here is an easy way to find out if you have one – go through the process of obtaining a life insurance policy. Insurance companies like people with minimal risks and they will screen you thoroughly. If you have too many risky habits, you won’t be able to get the preferred rate.

  • Gambling – You’ll lose in the long term unless you’re the house.
  • Drugs – This is a slippery slope. Drugs are just too expensive and the effects are only temporary. It doesn’t make sense financially.
  • Alcohol and tobacco – Moderation is the key here. Substance abuse will mess up your health and it’s not cheap either.
  • Reckless driving – Taking chances in traffic will get you hurt eventually.
  • Risky hobbies – free diving, free climbing, sky diving, etc…

#3 Buy Too Much House

It used to be easy to qualify for a large mortgage and many people use that as a guideline. You probably should NOT buy as much house as the bank allows. A more expensive house means more property taxes, furniture, maintenance, and higher utility bills. Housing is usually everyone’s highest monthly expense and we should minimize that as much as we can. What’s the size of your ideal home?

#4 Build Up Debt

It’s unfortunate, but Americans have a lot of debt. The average American owes about $47,000.  We have student loans, car loans, credit cards, mortgages, and personal loans. If you have debt, it doesn’t matter how you got there, you just need to work on getting rid of it. You are paying a lot of interest every month and the money could have gone into building wealth instead. Of course some debts are worse than others. Mortgages are not that bad actually as long as you can handle the payment comfortably.

#5 Drive Expensive cars

I almost skipped this one since I don’t think about cars much at all. It is a big expense especially if you like luxury cars. A car loses its value every day, so there is no point buying an expensive car unless you already have too much money. I’d say a car should NOT be worth more than 10% of your net worth.

#4 Not Diversifying Your Investments

One common mistake many investors make is not diversifying their investment. Don’t put more than 10% of your portfolio in one stock. One big stumble can set you back quite a bit if your investment is too concentrated. It’s important to figure out your target asset allocation and stick with it through thick and thin.

#5 Not Being Prepared For Medical Emergencies

Medical emergencies will happen and you need to be prepared for them. Making sure you have appropriate health insurance is a good start. Short term and long term disability insurance is also a good idea if you can afford it. Chronic health problems are tough to live with and it’s best to live a healthy lifestyle.

#6 No Emergency Fund

Every household should have about 3-6 months of living expenses in an easily accessible account. We all run into a big expense once in a while and if you don’t have an emergency fund, then you’d have to struggle to come up with the money. This is how a lot of people get into debt.

#7 Giving In To Lifestyle Inflation

Most of us make more money every year though raises. Unfortunately, we also spend more and more every year. That’s good for the economy, but it makes financial independence impossible for most families. Keeping your lifestyle costs under control is hard, but it will help you build wealth much faster.

#8 Not Fostering Your Career

Your career is probably your most valuable asset. With some hard work and a little luck, you’ll be able to raise your earned income for 40+ years. I’m a bad example here. I lost interest in my field and quit my engineering career only after 16 years. If I had stayed interested, then we’d be wealthy much sooner.

#9 Wasting Time

I feel like I wasted a ton of time when I was younger. I spent way too much time playing video games, watching TV, and goofing off. I should have spent the time doing something more productive like blogging or learning new skills instead. I love video games, but I no longer spend any time on it. It’s just a huge time sink. Maybe I’ll get back into it when I’m 65. Time is precious and it can always be converted to money somehow. If your goal is to be secure financially, then don’t waste a lot of time.

#10 No Financial Goals

Last, but not least, is not having financial goals. I think this one is particularly difficult for young people. When you’re young, you just want to enjoy life and spend some money. If you don’t set some long term financial goals, then you won’t have anything to work toward. Here are some examples.

  • Build an emergency fund.
  • Buy a house.
  • Pay for a graduate degree.
  • Save for your kid’s college education.
  • Pay off debt.
  • Achieve financial independence by age 50.

Don’t Be Discouraged

It’s not always possible to avoid these problems. Some of them are just the luck of the draw. If you can’t avoid it, then you need to get back on your feet and keep going. Divorce is probably the most terrible one out of all these. It’s just a huge setback and so devastating.

What are some problems that set you back financially? Share it with us so we can learn from your mistake. 

Photo credit: flickr Stefan

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{ 39 comments… read them below or add one }

Maverick November 20, 2013 at 3:27 am

Good list, Joe. Yep, divorce is a big setback. Colleague got divorced, former wife got half his 401k and pension as well as other assets. I’d say diversification dictates no more than 5%, instead of 10% of any single investment.

I would also encourage parents to teach their children how to repair things like bikes, change oil in autos, build tree forts, bake cookies, open a savings account, etc. Do these activities instead of video games, excessive texting and social media time sucks. It will help them immensely later in life.

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retirebyforty November 20, 2013 at 2:36 pm

My friend just got a divorce and it’s pretty devastating to his finance. It’s tough on everyone.

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davidmichael November 20, 2013 at 4:50 am

Geat topic Joe. Divorce is one of the biggies here. In order to settle a difficult divorce myself, on advice of my attorney, I took out funds from my retirement and split the money. Twenty years later when I was ready to replace funds into the system (teaching), my $22,000 taken out required $250,000. Such is compound interest. And…I was saddled with alimony for life and child support.

My second wife’s pension was in the form of an annuity from the largest insurance company in California (Executive Life). At 65, the $80,000 policy purchased by her former husband for her retirement was to be worth $650,000. But…the company went bankrupt. Yep. The largest insurance company in California. So our planned for retirement funds of $10,000 monthly dwindled down to $3000. Thank God for Social Security. The SS program is doing exactly what FDR designed it for…to keep seniors out of poverty. Otherwise, we’d have breadlines in every city in America. Don’t let the politicians screw this one up as any one reading this blog could end up with a fraction of their planned net worth by age 65 or 70.

Finally, diversification is key. Do not…repeat, do not trade in the stock market. There’s only one way to make lasting money in the market and that is through long term investments (30-40 years). Index funds or dividend paying stocks can balance out rental real estate.

We have made up our lost funds for the past 20 years of our retirement by working intermittently, overseas and in the USA. It’s actually been a lot of fun and keeps our minds active but that cool $10,000 a month would have been more fun.

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retirebyforty November 20, 2013 at 2:37 pm

Thanks for your advice. It’s really too bad her annuity didn’t work out. Doesn’t the state guarantee something?
Thanks goodness for Social Security.

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The Warrior November 20, 2013 at 5:22 am

Each of these items is actionable. There’s no thinking about it or try to “analyze” a ton. We can all take daily steps towards improving upon each of these…and that’s how all of us should view it.

I like the layout Joe.

If someone is just completely overwhelmed by life right now, I suggest starting right now, today, on just one of these. Having drinking issues? Go to an AA meeting tonight. Not getting along well with your wife? Have a family dinner with no electronics (i.e. smartphones, tv) on. Don’t have an emergency fund? Take $10 and put it in a jar at the top of your closet. Just take a small action and build upon that daily.

Often we overlook and overcomplicate finances and life. If we take it down to its basic actionable steps we can make vast improvements in both fairly quickly.

The Warrior
NetWorthWarrior.com

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Insourcelife November 20, 2013 at 6:28 am

Good tips but #5 only makes sense for some net worth brackets. A lot of people who are starting out will have zero or negative net worth so they should not get a car at all since 10% of 0 is 0? I guess best advice there would be ride a bike or use public transport but some must have a car to drive to get to work or due to disability. Moving up into, say, 1 million net worth bracket – I doubt it makes good financial sense to drive a 100K car.

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retirebyforty November 20, 2013 at 2:38 pm

I was thinking about that too. Well, my car was worth about $1,000 when I started working. That sounds about right at 10%. If you don’t have money, then you probably shouldn’t drive nice car.

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This Life On Purpose November 20, 2013 at 8:32 am

Great list. #1 Get a divorce, is something I am really scared of! I’m not even married but I have made it VERY clear that I never want a divorce. I guess it’s hard to predict something like that, no one plans on getting divorced but it still happens.

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retirebyforty November 20, 2013 at 2:38 pm

Yeah, that’s a really scary one.

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SavvyFinancialLatina November 20, 2013 at 8:36 am

I can totally see how divorce can set you back significantly. Thanks for the tips!

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Kurt @ Money Counselor November 20, 2013 at 8:44 am

I like the overall point you make Joe, which strikes me as ‘choices matter’ with finances, just like many aspects of life. Bad choices add up and make getting ahead a lot harder than it needs to be.

How about #11: Having kids before you’re financially prepared.

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retirebyforty November 20, 2013 at 2:39 pm

That’s good too. Having a kid when you’re not ready is just difficult.

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FI Fighter November 20, 2013 at 9:08 am

That’s a pretty comprehensive list there, and covers the things that will trip up most people. The easiest combo I’ve seen used to lock someone into 40+ years of service is:

big house + nice cars + no financial plan = rat race for life .

The home mortgage + car loans will probably consume 50% of your income. Add kids on top of that, and you’d be lucky to save even 10% each month.

But that’s the norm around here in Silicon Valley! Most young engineers also don’t realize how easy it is to be replaced or become obsolete… and those stock options won’t last forever…

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retirebyforty November 20, 2013 at 2:40 pm

That’s a good formula to avoid. House and car cost so much already.
Especially in Silicon valley. I went to a pumpkin carving party and everyone was driving a Lexus and I’m sure they are all tied down with very expensive houses.

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aB November 20, 2013 at 10:23 am

So far so good .. have to watch out for #3, and #7.
Fail #5, but part of the plan, and only because net worth is low at the moment.
.. #9 is the eventual goal.

[also there are two #4 and two #5]

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jim November 20, 2013 at 12:49 pm

Great list.

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Martin November 20, 2013 at 1:20 pm

I’ll add a twist to the divorce part — don’t get married. Why play those odds?

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retirebyforty November 20, 2013 at 2:41 pm

That’s a good idea too.

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Justin @ RootofGood November 20, 2013 at 2:29 pm

Good reminders. Divorce is half the marriage equation. The other half being a compatible spouse that at least somewhat shares your financial goals and outlook. In other words, if you want to retire early but your spouse-to-be thinks working forever and spending 110% of what you make is awesome, you’re probably not going to make it very far. And you’ll be ignoring so many of these points. Like Divorce! And expensive cars, debt, and too much house.

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Micro November 20, 2013 at 3:17 pm

Your comment about diversivication reminded me of an article that was bashing having your employer’s stock in your nest egg. You are combining to many things to one entity. You already get your paycheck from them and shouldn’t tie up your retirement to the same ship as well.

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retirebyforty November 20, 2013 at 10:33 pm

Yeah, that’s not a good idea. If you are really confident in your employer, then having some stocks is OK. I wouldn’t have more than 10% of the portfolio in employer stock though. For some people, that’s tough because they get stock options and grants.

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Anon November 22, 2013 at 2:42 pm

I normally agree but some of the larger companies offer good discounts for stock and it’s good to see if your employer does this. My former employer offered a discount of 15% off the lowest selling point in the last 6 months and put no restrictions on selling. So that’s an automatic 15%+ return even if you don’t hold the stock.

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Harry November 20, 2013 at 3:20 pm

Great list, but some items may be beyond your control, especially the divorce item (married for almost 18 years and hopefully never have to face a divorce).
As some peopel already commented: 10% of your net worth seems way over the top for a car.
I am anyways wondering why people get into car loans (or leases, for that matter) in the first place. If you cannot buy it cash down, you probably cannot afford it in the first place.

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retirebyforty November 20, 2013 at 10:33 pm

Less than 10%. :)

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Dividend Mantra November 20, 2013 at 4:18 pm

Joe,

Cool post. I agree with your list here.

I would agree that the “D” word is a biggie for some. I decided long ago that marriage just isn’t for me. Not just for the sake of avoiding divorce, but that decision works out well for me, financially speaking.

I’m a bit guilty of #9. However, I don’t always consider certain things a waste of time. Great video games can be found used for $30 or so and they provide literally hundreds of hours of entertainment if it’s something you play often and enjoy. On an hourly basis, it’s extremely cheap entertainment.

Best wishes!

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retirebyforty November 20, 2013 at 10:35 pm

Not getting married is a good option too, but most women couldn’t handle that. They want commitment….
I still think video games are just such a huge time sink. I love it, but I’ll put it off until I have way too much time on my hands.

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Betsy @ ConsumerFu November 20, 2013 at 7:26 pm

Great list. I’ve seen two friends lose financial security through divorce. It wasn’t just the splitting of assets as much as losing momentum in their lives – financial and otherwise. That and spending too much money on the kids to try to make up for the divorce.

I don’t use an emergency fund. I have liquid savings, targeted savings and long-term savings/investments. Liquid savings is to cover incidental expenses and unscheduled expenses. Like you suggest, I plan for a certain amount of car repairs and medical bills each year. Targeted savings accounts are for things like vacations, new computers, a new deck, etc. It works for our family.

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retirebyforty November 20, 2013 at 10:36 pm

You’re right. It is such a huge setback and it’s hard to get started again after a divorce.

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C. the Romanian November 20, 2013 at 11:37 pm

Hopefully I won’t have to check too many of these mistakes off the list :) I was a bit guilty with #7, but fortunately we managed to get back on track and now those extra spending that we had go into the savings account and I can’t say how beautiful it is to see the money resulting from an increased income go straight to savings instead into thin air… :)

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Little House November 21, 2013 at 6:57 am

Great list. I think the biggies here are divorce, expensive habits, and sinking into debt. I’m guilty of a few of these, but I’m working on it! ;)

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Erich November 21, 2013 at 9:07 am

I don’t understand why people feel Divorce blows away everyone’s finances. If you establish dual custody (assuming you’re a good person and prefer not to only have your kids for weekends like a part time parent), and you were both working full-time, there’s no issue with alimony or child support. If you were paying off a house and have built up some equity that’s split 50/50. My wife has a great government pension, though she saves less towards retirement than me so I guess I’d lose a bit of the home equity split to balance that, but since she’s a worse spender than me I think I might actually come out ok if we divorced. Depends on my housing costs, but I’d save by not owning a car she insists on and insuring it.

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thegooch November 22, 2013 at 8:42 am

you make a lot of assumptions. When I was divorced , my wife had no marketable skills and did not even speak English. I felt bad for her and assumed all the debt, gave her pretty much all of the assets. another compilations was that the military has stationed me remotely when we got divorced, we were not even on the same continent.

moral of the story…don’t assume or make broad generalizations.

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retirebyforty November 22, 2013 at 9:50 am

It’s just such a huge backward step. It probably cost more to live separately overall, but I guess it just depends on your lifestyle.
I know it’d be pretty tough on me. I might get child support from the Mrs. though. :)

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Anon November 22, 2013 at 2:52 pm

In my state, even if you have 50/50, if one spouse doesn’t make as much money they will still have the higher income earner pay child support and alimony. For a while I had to pay 40% of my income even though I have our child slightly more than 50% because I am in a much higher paying professions than my ex.

In the long haul I have been able to save up more than I did my entire marriage for a similar time period. My ex was a spender on little things so we never were able to save much. He also always had to have the fancy car, big, house, etc.

These are all good point though RB40.

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Donny Gamble November 21, 2013 at 9:44 am

Most people have a hard to changing their lifestyles and sacrificing habits in order to grow or move forward in their life or business. Too many people are satisfied with being comfortable.

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Bryce @ Save and Conquer November 21, 2013 at 4:54 pm

Excellent post. Each topic can certainly sabotage a person’s finances. It’s too bad that so many people don’t realize how expensive divorce can be. I have three brothers and all three have been divorced one time. I got lucky and found my perfect companion in my wife. We are both frugal and earn good salaries. We both hate debt. We worked hard to pay off the house in 9 years. We both have similar interests, and are best friends. I am pretty sure we are both in it ’til death do us part.

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retirebyforty November 22, 2013 at 9:52 am

Great job! My family hasn’t seen a lot of divorces. It’s a different culture…

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Jacob @ My Personal Finance Journey November 24, 2013 at 6:36 am

Spot on here with this list. Doing several of these can get you in to trouble, fast.

One that can be very easy to get in to is the one about buying too much house. My fiance and I are looking at buying a new house after I finish graduate school next year. Right now, we’re not sure exactly what my salary will be as I haven’t confirmed the job I’ll have yet.

We’ve noticed that to get the “house” that we want with a yard, it can easier cost $400k if we are not careful. It’s just crazy how much a house can cost these days!

Obviously, we plan to wait until we know for sure what income we’ll have and then try to land under the 28%-of-income rule for the mortgage.

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retirebyforty November 24, 2013 at 5:39 pm

Good luck with the new home. You should wait until you get a full time job though.
Wow, $400k? That’s quite high. Where do you live?

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