The difference between being financially secure or financially vulnerable has little to do with the salary you earn or receiving an unexpected windfall. More often it’s about avoiding – or falling into – wealth-destruction traps.
If you want to be financially free, you need to avoid these wealth-destroying behaviours:
1. Spending your future savings
When you start working it’s so easy to maximise your credit and buy everything you want now. The problem is that you’ll be paying it back for several years. Servicing your debt can leave you with no money to start saving for the dreams you really want to achieve. The worst debt traps usually involve unmanageable car debt, store cards and credit cards.
2. Spending too much on your wedding
There are so many things you’ll want to do as a married couple, like buy a home, travel and start a family. If you wiped out your savings, or worse, got into debt to pay for the wedding, you’ll find your dreams of married life becoming a financial nightmare. Financial stress is the number one cause of divorce, so don’t let one special day ruin your marriage.
3. Cashing in when changing jobs
Every time you change jobs and cash out your retirement savings, you set your retirement date back several years. If you cash in at the age of 30, you reduce your retirement income by one-third. To catch up, you would either have to increase your retirement contribution by 22% or delay your retirement by five years. If you cash out at the age of 35, you’ll need to increase your contributions by a massive 72%! The earlier you start saving for retirement and the longer you leave your money invested, the less you actually need to save.
4. Investing too conservatively
There are simply not enough pay cheques before retirement to fund your retirement years, so you have to invest in an asset that will grow above the rate of inflation. If you put 15% of your salary under your mattress each month for retirement, inflation would erode those savings to the extent that you would only have two years of your annual salary available upon retirement.
If you invest the money in a money market account earning in line with inflation, you will have only six times your annual salary. If, however, you invest 15% of your salary for forty years in a balanced fund, with an average return of five percentage points above inflation, you would have 17 times your annual salary upon retirement. The later you start investing, the harder that money needs to work for you.
5. Not preparing for emergencies
Emergencies are the number one reason people fall into debt. A really big catastrophe, like losing your job, crashing your car or getting sick can wipe out your savings. If you want to protect your wealth, make sure you have an emergency fund for unexpected events and take out insurance to be prepared for greater financial tsunamis.