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 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
For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.
Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.
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