Barriers to Financial Success
By: Mark Wendell
Imagine our country if all citizens were focused on the quest for retirement financial security. Most people are their own worst enemies while attempting to manage their wealth. When we consider that the quality of our lives is the culmination of the financial decisions we make each day, if we tend to make more bad decisions than good decisions, or worse, if we can’t make decisions at all, it shouldn’t be a surprise that financial security remains elusive for many retirees in all financial brackets.
When it comes to finances and investment decisions, many people are simply not wired to be able to make decisions dispassionately, without emotions clouding their reasoning; and that’s when people tend to make the most behavioral mistakes with their financial decisions. Understanding these behavioral mistakes and how to avoid them is crucial to achieving financial security.
Impulse purchases – We’re all prone to an impulse purchase now and then, but for some people, it’s more of a pattern than a one-off indulgence. And when these purchases add to debt, the damage is compounded. Paying the debt on yesterday’s pleasures with today’s income is self-defeating, especially when items purchased are depreciating expenses vs. wealth-building appreciating assets or income producing tools.
Using bonuses or income increases to add to lifestyle and not savings – When people lack a goal, a vision or a purpose, they are more likely to want more lifestyle than savings. You will thank yourself later by putting a portion of your increased compensation away for a higher quality retirement.
Not paying attention to income-to-equity conversion – Often overlooked as a strategy to grow wealth, paying down debt faster than required is a simple strategy: such as paying additional principal payments monthly on your credit cards, mortgages and car payments. This strategy will help grow net worth by lowering your debt to income ratio more quickly.
Not tracking progress monthly in a spreadsheet – If growing wealth year after year is important to you, a vital monthly exercise must be your use of a budget spreadsheet and a net worth computation that reflects your monthly growth or shrinkage of wealth. Complacency is a common reason why this important step is not taken.
Ignoring tax implications in your daily financial affairs – Due to the complex US tax code, there are frequent ramifications to your daily financial transactions that could be harmful or beneficial to your long-term financial picture. Doing research on the internet and/or consulting professionals prior to your financial transactions may be well worth the time and money spent.
Following the herd – While investing, many people have a fear of being left behind, which is why there is a human tendency to follow the herd in times of stock market exuberance or panic. Invariably, this leads to moving in and out of the market. To diminish this temptation, having a professional involved with your investments to guide you through the highs and lows may help smooth out your emotional and impulsive nature.
Procrastinating – Procrastination, typically brought on by the inability to make decisions, is one of the primary causes of financial distress. This distress is a reason people procrastinate further and is usually due to their inability to perceive the importance of placing financial matters high on a daily to-do list.
Trying to avoid risk – With little or no risk, there are small investment returns. A moderate degree of investment risk will provide higher levels of returns over a long-time horizon that will provide higher net worth balances at retirement. We must consider other insidious forms of risk that may have a corrosive effect on our wealth: inflation risk, longevity risk, insurance risk, and interest rate risk.
People who have well-defined goals, a clear career/life purpose, an ear for professional guidance, a proactive attitude concerning wealth, and a thoughtfully prepared plan in place, are better able to check their emotions and muster the necessary discipline to follow a plan to achieve their financial security objective. In doing so, they are more likely to avoid many behavioral mistakes that can become a barrier to growing their retirement wealth.