It’s Not How Much You Earn, It’s How You Use It

I recently read an article about a well-known actor/musician who had been estimated to have earned over $650 million during his 34-year career yet was almost broke. You may ask yourself, ‘How in the world could that happen?’ In this case, there were several issues that could be considered unique and some that happen to everyday people. A yacht, owning 14 houses and an island, shooting your friend’s ashes from a cannon and a $30,000 to $50,000 monthly wine bill are some of the more unique ways this celebrity pursued to head toward bankruptcy.

Most of us don’t have such ‘opportunities’ so this article will focus on some of the more common issues that can lead to financial strain or even bankruptcy and how you can avoid them.

Let’s start with the easy one: Living beyond your means or as the saying goes, “Keeping up with the Joneses.” Simply put, this means spending more than you have or can afford to spend through a lack of self-control or with the desire to keep up social appearances. Generally, this is accompanied by credit card abuse or some other means of easy credit. It is easy to buy now and pay later; however, the truth is that you pay much more by accumulating and paying interest over time. Developing a plan for your finances can help you stay within your spending limit and not venture beyond it.

Living paycheck to paycheck and not developing any savings plan is another sure-fire way to go broke. At some point, be it retirement, disability or loss of job, the paycheck will stop. Developing a habit of saving takes discipline but it can be made much easier by making it automatic. Participating in a workplace retirement plan is a great place to start: you can put money away before you ever see it. You can also have a portion of your paycheck be deposited directly into a savings account or to build your emergency fund. Again, it is harder to spend what you don’t see in your account.

Another no-no impacting a sound financial future, but one not often considered, is not taking responsibility for your decisions. Everyone makes bad decisions but by shifting the blame or avoiding responsibility for your poor decision, you create a mental mindset to not learn from the mistake. I suppose the same thing could be said for thinking all your decisions are the best and not recognizing when you don’t know what you don’t know. That mindset can allow you to think you can be successful in anything, which we all know is simply wishful thinking but also leads to our next topic.

Get rich quick schemes or investing in businesses outside your area of expertise: you’d be surprised how many people get tripped up here. Many people get involved in activities that promise a high return on their money with only a little bit of effort. Day trading and trading options are two ways that people believe they can quickly make big money, but far too often, they simply lose it all. Almost any activity promoted on late night television can probably fall into this category, such as flipping houses or raising chinchillas. Other times, legitimate businesses can start and fail because the owner thinks that because they’ve been successful in one project or vocation that it can translate to being successful in any project or vocation. Before taking on a major project or investment in a business, carefully consider your expertise, as well as of those you plan to partner with.

There are many ways to put yourself in a financial stress and a lot of it can be avoided by having a plan and abiding by it. Discover the risks to your financial well-being and take the steps to address them now. And consider the actor noted at the beginning: he might have been much better off if he’d simply heeded the advice that, “wine isn’t considered an investment if you drink it.”