Have you ever felt like you’re not as far financially as you should be considering how much money you make? If you have, then you’re in the same boat that the rest of us have been in. One of the forces that drives me to be disciplined with my money is this exact feeling. There have been lots of times in the past that I have felt frustrated with myself that I wasn’t doing a very good job building wealth, given the income that I had at the time. When I took a hard look at the things that I was doing, I found that I had fallen in what I’ll call financial pitfalls. In this podcast episode I’m going to share with you some financial pitfalls that I have either found myself caught in or have seen others caught in. My hope is that sharing these pitfalls with you will help you to avoid them and will help you build a strong financial future. If you want to build wealth, I think it’s just as important to avoid doing the wrong things as it is doing the right things.
The 1st pitfall that I’ve seen people fall into is believing that they don’t make enough money to build wealth. I heard a story recently of a wealthy man who has done really well financially. The man has a beautiful home on several acres in a desired part of town. This older gentleman has several rentals properties and he’s clearly winning with money. The interesting part of this guy’s story isn’t that he’s doing well financially, lots of people do well financially. The interesting part of this guy’s story is that he never made more than 20 dollars per hour. He just saved little by little over the years. When he saw an opportunity, he purchased rental properties. The moral of the story is that you don’t need to be making a lot of money to build wealth. Consistently contributing to investments when you’re young can build a substantial chunk of wealth that you can use for income later in life. The trick is to invest often and invest as high of a percentage of your monthly income as you can. It’s not uncommon for me to work with people in their 20’s, 30’s, and 40’s who are invested 40% to 50% of their net monthly income.
The 2nd pitfall that I see keeping people from building wealth is that they spend more than they make. Spending more than we make can cause us to rack up a lot of debt. The most common debt that I see people fall back on consistently is credit card debt. When money gets tight, it’s easy to put our purchases on credit cards, which causes money to be even tighter next month because now we have an even higher credit card bill than we did this month. When I see people who are headed for financial trouble one of biggest signs that they are in trouble is that they’re racking up a lot of debt on their credit cards. Debt can be a trap where we spend and spend and spend and all of this spending adds to our debt. Eventually the debt payments catch up with us and completely overwhelmed us. What I’ve seen happen with most people is that they eventually hit a wall and say to themselves, “I’m tired of having this debt and I’m going to do something about it.” A fire is lit under them and they start to work to get their debt paid off. The turning point from over spending and racking up debt to deciding to pay off debt and then start building wealth is an interesting change in direction. Have you experience this before? Why did you change the path that you were headed on? I’ve personally seen many people on the path towards financial destruction but manage to stop, turn around, and start working their way out of the financial mess that they got themselves into. They eventually start to build wealth.
The 3rd pitfall that I’ve experience myself when it comes to hurting wealth building is jumping into bad investments too fast. For me, this has caused many of my biggest personal financial losses. There have been times throughout my life that I put too much money in investments that I knew too little about and it came back to bit me. I’ve taken several losses on investments throughout the years and each one of them, when I look back, if I would have done a better job doing my homework on that investment, I could have seen that I shouldn’t have been involved in that investment. Like they say, hind sight is always 20/20. It’s easy to see that these investments were a mistake now. I learned several valuable lessons that I’d like to share with you: #1 Before you get into an investment, do your homework #2 If an investment deal doesn’t feel right, it’s ok to walk away from it #3 Be very careful doing investment deals with friends and family. If you can’t afford to be in the investment by yourself, that’s a sign that you should be doing the investment at all. Look at it this way, when you say “No” to one investment that allows you to say “Yes” to another investment, because you’re not tying up your resources on the first investment. So, don’t settle for an investment that you don’t feel good about because you never know, there could be an even better deal just waiting around the corner.
The 4th pitfall that keeps people from building wealth and this is probably the biggest wealth killer and the pitfall that I see the most often, is when people don’t contribute to a retirement fund. It’s interesting to me how reluctant people are to contribute to a retirement fund. A retirement fund could simply be the 401k that your work offers or it could be the ROTH IRA that you could contribute to. There are lots of different retirement investments out there to consider and they are super easy to get set up. There are no excuses for not putting away for retirement funds. I’ve seen retirement accounts that only take 5 dollars to open and you can contribute as little as 5 dollars per month. Anyone can contribute that!
So, why don’t more people contribute to a retirement fund? Here are some reasons that people talk themselves out of contributing to a retirement fund. #1 It’s too hard to set up a retirement account. This reason is completely untrue. You can literally set up a retirement account online and even through a phone app. Setting up a retirement account is easier than you think. #2 People think that they don’t make enough money. Well like I said before, there are retirement accounts out there that you can set up with just a few dollars, so this reason for not setting up a retirement account is untrue as well. #3 They tell themselves that they will do it later. In other words, they’re procrastinating. When it comes to investing, time is your best friend due to the compounding power of exponential growth. If your investment is in the right investment, your money can grow in a compounded manner, meaning that your money makes money and then that new money makes money and your returns keep getting bigger and bigger. #4 People are afraid of loosing money. Many of the retirement funds out there that I’m aware of are tied to the stock market one way or another. The stock market has gone down before, but if you look at it from a long-term investment, it goes up. With investments, you’re not going to get any return unless you’re willing to take a little risk.
The 5th pitfall I’ve seen hold people back from building wealth is that they don’t create an emergency fund. One of the most common reasons fall behind financially is they are hit with an unexpected bill. The bill that I see the most often that hurts people financially is a medical bill. In these cases, something happened to a person and they needed medical attention. They didn’t have an emergency fund at the time to cover the medical costs that they incurred and start making payments. These newly acquired payments can suck up a big chunk of the person’s monthly income which causes them to use more debt for other things like buying general groceries and gas on credit because money is so tight. However, this causes the person to fall in even more debt, which starts a horrible debt spiral towards financial destruction. To be able to avoid this pitfall, do what most personal finance experts recommend, and have 3 to 6 months of expenses in an emergency fund. This way, if you experience a large medical expense, or any other large unexpected expense, this event will be more of an inconvenience and less of a financial catastrophe.
The 6th pitfall that I’ve seen hurt people financially is not having proper insurance. I once was at a benefit that was raising money for a homeless shelter. During the benefit the organization had one of the homeless clients tell her story as a way to show how much the homeless organization had helped her. Within her story she told about how she was a normal person with a normal life. She had a nice home in the country with a decent paying job. One evening she was riding a horse near her home and something spooked the horse and caused the woman to be thrown from the horse. The woman sustained severe damage to her back due to the event which required several back surgeries. The woman didn’t have proper health or disability insurance so her and her husband had to pay for all of the medical bills out of pocket. Eventually they had to sell everything that they owned in order to pay for the medical bills. This woman and her husband eventually found themselves living on the street trying to get by. They had wondered the streets for a couple years before finding the homeless shelter. This story exemplifies the need for proper insurance in life. Had the woman in this story been covered by proper health insurance, her injury wouldn’t have destroyed her financially because a majority of her medical bills would have been covered by her insurance. Had she acquired work loss coverage to protect her from debilitating life events, she would have had income from her insurance policy to supplement her income while she was out of work.
The 7th financial pitfall that I see people get hung up in is that they wait too long before they act. I have a friend who is in his 40’s and he is always talking about how he’s going to start investing into a retirement plan but I’ve been hearing him say he is going to do this for 5 years now and he still hasn’t done it. If he would have started when he first said that he was going to he could have contributed $5,500 into a ROTH IRA each year for the last 5 years. After contributing for 5 years and at 7% compounded growth he would have $33,843.10. This might not sound like much to some people but after doing this for 30 or 40 years you’re going to have a nice chunk of money to have during your retirement years. The earlier you start investing the more you leverage the benefits of compounded interested. Waiting too long to act can not only hurt you when you’re putting money away for retirement but could be applied to the other areas of personal finance like living on a budget, buying proper insurance, starting that emergency fund, or talking to a financial coach about your financial goals. When it comes to your financial health, don’t wait! Do what you need to do now! When it comes to your finances, time really is money!
The 8th pitfall that I see people get trapped by is that they are too afraid of risk. The most common way that I see this played out in people’s lives is that they are too afraid to graduate from a savings account at a bank. They might do a great job saving and putting money away but instead of investing that money, they just leave it in their bank account, either a savings account or a checking account. Just so I’m clear, in my opinion, a savings account is not an investment. Considering the low interest rate that you’ll receive and considering the effects of inflation, you are actually losing buying power with your money by having it just sit in a bank account. Now, I’m not saying bank accounts are bad. Bank accounts are great for having your emergency savings and for saving up for smaller item things. However, if you want to see your money really grow you need to get your money in an investment that is going to outpace the rate of inflation. By having your money grow in an investment account your money is increasing in buying power versus having your money in a bank account it is decreasing in buying power, again due to the affects of inflation. Risk is a very important part of personal finances. It’s something that should be considered in many different parts of your financial life, not just in your investments but you should also consider risks that you can minimize by having the proper insurance, or risks that you can minimize by undergoing proper estate planning.
The last pitfall that I’ll share with you is one that I see many spouses go through and this pitfall comes when a couple can’t come to an agreement with their finances. This pitfall has to do with communication and wiliness to work together. I’ve seen a married couple go through most of their adult lives, get all the way to their 50s before they started investing for retirement just because they couldn’t agree on how to handle investing. Instead of communicating and doing some research, they basically did nothing. From what I can tell, every time this couple talked about contributing to retirement, they couldn’t agree on what to invest in. Eventually, they just stopped trying to talk about money and just kind of tumbled along financially going from paycheck to paycheck not really having a plan to grow wealth and not really doing anything to plan for retirement or estate planning. Don’t let this be you and your spouse. Talk about money in a patient and respectful manner. Do research and learn what you can about investing. Look for different resources that you and your spouse can learn from. If your spouse doesn’t want to listen to you, find a financial coach that you can trust to guide to you a better financial future.
I hope these pitfalls were helpful for you! Thanks for reading!