My mother often says, “You only spend money once,” and whenever I make spending decisions, her words come to mind. The saying hits home, because it expresses a deep-seated truth: if you watch closely how you expend your coin, you’ll have it when you really need it.
Most people are fairly good at generating income. Generally, Americans understand that operating in a competitive world requires education, work, and perseverance, and they do what they must to bring in the cash.
Once that hard-earned dough is in hand, however, some people forget the difficulty of earning it. Money burns holes in these folks’ pockets, and the awareness that it might have been spent differently often comes too late.
If you are bound and determined to live on the financial edge, here are some ways to misallocate your funds:
1. Loan money to people you don’t know well
Generally, loaning money to strangers is a no-no, but exceptions do exist. Whenever I loan money to anyone, however, I consider it gone. If the individual pays me back, the experience is positive for both of us. If I never receive payment, I conclude that the person probably needs it more than I do.
2. Use your retirement savings to fund your children’s educations
While paying for your kids’ schooling is important, you should resist putting your own long-term stability on the line to do so. After all, the point of educating your progeny is to prepare them to attain their own fiscal security. Undermining your financial picture as you reinforce theirs is nonsensical, because later they might be burdened with caring for you as well as their own children.
The better approach is to work together to reduce the costs of attending college and to find ways to foot the bill. Some suggestions might be: spend two years at a community college, attend a local university and live at home, work during the summers, apply for scholarships and loans, take online courses, and purchase used textbooks.
3. Invest without formulating a plan
During bull markets, generating investment ideas that strike pay dirt is relatively easy. When the run is over, however, finding the gold becomes trickier. In order to avoid extraordinary losses, you need a process for making investment decisions. A well-thought-out investment plan adds order and discipline to your choices and helps you identify slippery slopes before you venture onto them.
4. Throw a “Hail Mary”
Too many people enter their fifties before becoming aware that they are not on track for retirement. To catch up, some of them work more hours, others remain in the workforce longer, and a few take inordinate chances with their assets.
This last group is comprised of frantic individuals who buy junk bonds, speculate on penny stocks, and play the options and futures markets, all in maniacal attempts to make up for lost time. Unless you are skilled in the nuances of finance, you should stay clear of schemes that offer too-good-to-be-true returns.
5. Invest in a single company, property, or security
At the time of the Enron and WorldCom debacles, we learned of trusting employees who held their life savings in their beloved companies and lost everything. Diversification is the best way to protect assets. Putting all your eggs in one basket is ill-advised.
6. Get into debt
I am a student of old-school finance, thus I take on debt obligations only when absolutely necessary, and I always repay them as quickly as possible. Credit-card debt is anathema to a rational investment strategy. Those who are intent on making financial progress pay all credit-card bills in full each month.
7. Frequent the casinos
At least two types of gamblers exist—those who gamble compulsively and those who do so for fun. The former group needs professional counseling. Here, I address the latter one. If you gamble for fun, establish a loss limit, and oblige yourself to stop when you reach it. You should conservatively set your gambling allocation, and it should fit comfortably into your entertainment budget.
8. Buy too much insurance
Purchasing life insurance is only sensible if loved ones who cannot protect themselves depend on you for their sustenance. Auto, health, and homeowners’ insurance carriers can tweak their policies to reduce the premiums. Ask your agent about ways to save. The response may surprise you. Unless prodded, insurance agents often neglect to mention the discounts that their carriers offer.
9. Purchase toys
Although maintaining a youthful spirit certainly contributes to living better, the purchase of motorcycles, motorboats, jet skis, sailboats, motor homes, and other leisure items can undermine financial stability. Before expending resources on nonessentials, ensure that you’ve accurately anticipated your income streams and carefully calculated your expenditures. People who err in these computations end up scrambling to meet their retirement goals.
10. Give away the corpus of your estate before you die
In my pre-blogger days as a practicing attorney, clients sometimes sought my advice on handing over assets to their children. While in some circumstances inter-vivos transfers of wealth make sense, often they are bad ideas. If you’re feeling philanthropic, bequeathing piecemeal gifts from income and hanging onto the corpus might be a more prudent approach. No matter what your physical or mental capacity, folks will treat you better if you have resources. Once you are asset-poor, you lose leverage as well as security.
11. Eat out often
Eating at restaurants, picking up carryout, and having meals delivered to your door can put a gargantuan hole in your pocketbook. Splurging three or four times a week can amount to hundreds of dollars a month in extra expenditures, a veritable fortune when compounded at any reasonable return over the long term.
12. Purchase name-brand clothing
For the average wage earner, spending money on name-brand clothing is folly. Looking good is not about the clothing, but rather about how you look in it. If you are thin and in good shape, the duds sold by the major retailers will look great on you, and you can use the savings to help assure your financial future.
13. Take luxurious vacations
Although hard-working folks merit time off, decisions regarding whether and how elaborately to travel must be made within the confines of the big financial picture. Staying at home can be a great way to put your physical conditioning, household projects, and life back on track.
14. Convince yourself that lots of things are necessities
Modern individuals consider cell phones, cable televisions, home-security systems, overseas vacations, kids’ camps, and one-car-per-person lifestyles to be necessities. In financial extremis, however, folks must simplify their lives and tighten their belts. Carefully examining everything you do will allow you to trim your budget and reach your financial goals.
15. Wait too long to take investments off the table
When a bull market is in full swing, reducing holdings in highly productive securities is difficult. Nevertheless, as you approach retirement age, you should take advantage of cyclical highs to convert your higher-risk assets to lower-risk ones. Recognizing when you’ve reached a point of financial adequacy is paramount.
Numerous paths exist for destroying your finances. Taking a careful approach to administering your money will ensure that you’ve done everything possible to conserve your assets and solidify your retirement future.