10 Easy Ways to Sabotage Your Finances

Your personal finance should improve every year, but some year is harder than others. 2020 is one of these difficult years. We all had a tough year and many of us are worse off than last year. However, there is a light at the end of the tunnel. Pfizer just announced a great result for their COVID vaccine. This is a big study with nearly 44, 000 participants, and the vaccine has 90% effectiveness. Wow, this is fantastic news. If they can ramp up the production and delivery of the vaccine quickly, life will return to normal next year. I can’t wait.

2020 is a bad year for many people. Some of us took a step backward, but life will improve next year. One year is too short of a window to judge your progress. Four years is a much better timeline. Everyone really should be better off than 4 years ago. However, some people are stuck in a negative spiral. Instead of getting better, their finances keep spiraling downward. Today, we’ll look at some of the things that can sabotage your progress.

Are you better off than 4 years ago? (2020 edition)

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*Originally written 2013 and updated in 2020.

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 avoid these common problems.

#1 Divorce

A 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 legal fees and alimonies for many years, not to mention the emotional turmoil. My college friend, Alex, has 3 young children and got a divorce. He won’t be able to retire early anytime soon.

Unfortunately, about 50% of marriages in America end in divorce. That’s just a flip of the coin. I don’t like the 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 help your marriage.

  • Wait a bit to get married. You should get to know your partner very well first. Hopefully, you have similar goals and work well together.
  • Don’t fool around.
  • Avoid financial pressure. Money problems are one of the biggest contributors to divorce. Avoid debt and work on improving your finance together. Marrying someone who has similar money values will help a lot.
  • 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.
  • Put off having a kid for a few years. Enjoy each other’s company and get to know each other very well before throwing a bomb in the relationship.

Relationships are hard. We had 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. They also screw up your judgment.
  • 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, car racing, free climbing, sky diving, piloting, etc…

#3 Buy Too Much House

It’s pretty easy to qualify for a large mortgage and many buyers use that as a guideline. You should NOT buy as much house as the bank will lend you. 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 Debt

It’s unfortunate, but Americans have a lot of debt. The average American owes about $90,000. This is a big increase from $47,000 in 2013.  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 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 in buying an expensive car unless you already have too much money. My personal cap for a new car is 3 months of income. That’s a pretty good guideline, right?

#6 Not Diversifying Your Investments

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

*You can experiment and take more risks when you’re young. Once you’re older and have a sizeable portfolio, I think it’s a really bad idea to put all your eggs in one basket.

#7 Not Being Prepared For Medical Emergencies

Medical emergencies will happen and you need to be prepared for them. Everyone should have good health insurance. This is a big problem for early retirees because health insurance can be very expensive. We’ll have to see what President Biden can do over the next 4 years. I hope we’ll get the public option in the health insurance marketplace.  Short term and long term disability insurance is also a good idea if you can afford it.

#8 No Emergency Fund

Every household should have at least 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.

2020 shows us that even 3-6 months of an emergency fund doesn’t last that long. I still think that’s reasonable, though. The stimulus, extra unemployment payments, and extended unemployment benefits helped a lot. Hopefully, we’ll all get back on track soon.

#9 Out of Control Lifestyle Inflation

Most of us make more money every year through raises. Unfortunately, we also spend more and more every year. That’s good for the economy, but it puts financial independence out of reach for most families. If we keep lifestyle inflation under control, it’ll be much easier to build wealth and achieve financial independence.

#10 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 much richer now. Money isn’t everything, though. We’re wealthy enough and much happier than if I didn’t retire.

#11(Bonus) 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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Joe started Retire by 40 in 2010 to figure out how to retire early. After 16 years of investing and saving, he achieved financial independence and retired at 38.

Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!

Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.
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53 thoughts on “10 Easy Ways to Sabotage Your Finances”

  1. I’ve been fortunate to miss most of these. That’s why I never dismiss luck when talking about personal finance. There are some basic things you can do like have insurance and buy cheap transportation. Some other things you just have to be lucky with.

    Advancing my career has been a bit of a setback, but I think I do enough given other responsibilities.

  2. Exciting news about the Pfizer vaccine, the only interesting thing is that the vaccine has to be stored at -70 degrees Celsius (I’m not sure what that is in Farenheit) which is pretty cold.

  3. What a surprise to find a finance blog run by an ex-software engineer like me 🙂 I believed I’m the only freak with engineering background who became fascinated by personal finance and FI!
    Great list, thanks for sharing. One thing which also can sabotage your finances is the risk that your loved ones won’t be able to find and locate your assets, should anything happens to you.

    The reason is that these days people have multiple and complex assets, such as bank accounts, insurance policies, stocks and options, often in multiple countries.

    The problem is that our families are not aware with all of these assets, and on the other side the companies which store them, don’t have the legal obligation to inform our loved ones, should anything happens to us.
    As a result, there is a high risk that one day all of our assets will go to the wrong hands – $100B unclaimed assets problem in the USA alone.
    Digital inheritance services can help a lot to avoid that risk.

  4. i’m glad i got divorced when i was pretty broke. she was pretty spend-y and not very work-y. luckily i have a lawyer friend who couldn’t stand my ex so he did the divorce for free excluding the filing fee. i think i paid her $1000 incentive to sign and i consider that tuition paid to the school of life.

    thankfully things have been fantastic the past 18 years in the smidlap chateau.

  5. A very comprehensive list, Joe. I’ve been lucky to avoid most of these pitfalls. As humans, a reminder and reset is never a bad thing. Thanks for the valuable information! Take care.

  6. 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.

    • 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?

  7. 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.

  8. 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.

  9. 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.

    • 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.

    • 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. 🙂

      • 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.

  10. 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… 🙂

  11. 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.

  12. 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!

    • 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.

  13. 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.

  14. 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.

    • 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.

      • 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.

  15. 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.

  16. 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]

  17. 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…

    • 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.

  18. 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.

  19. 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.

  20. 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.

    • 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.

  21. 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

  22. 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.

    • 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.

  23. 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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