Your Finish Rich Plan - A Personal Finance Blog

Bad Financial Moves – Ten Reasons Why You’re Broke

You know the saying: “If you fail to plan, you plan to fail”. Almost everybody does. Yet it’s amazing how many people live their lives without so much as a thought for their financial future. They live paycheck to paycheck, and even worse, sometimes they’re literally penniless on the couple of days before payday. Debt is not taken care of, there’s no emergency fund, no insurance, no investments, nothing…

If that’s your situation, you no longer have to ask yourself how you got there. Here’s how it happens:

You don’t focus on your finances.

The main reason most people don’t get ahead financially is that they don’t spend enough time focusing on their finances. It’s very hard to take good decisions without knowing where you are financially. For that, you must keep track of your income in relation to your expenses and spending habits

You don’t develop a good financial plan.

No one would imagine going on vacation without planning for it. Yet when finances are concerned, many people don’t plan. Some people feel overwhelmed, thinking it’s too big a task to plan for their financial future. Some refuse to see they’re in financial trouble, so they don’t see the need for a financial plan. And some seek immediate gratification, spending today and letting tomorrow take care of itself. No matter what you believe, it’s nonetheless true that a good financial plan can be the difference between comfortable living and struggling to get by.

You don’t have an emergency fund.

A June 2005 survey conducted by Experian (the credit reporting agency) reports that 41 percent of us have no emergency savings of any kind. Of those that do have “rainy day” savings, 31 percent report that it would sustain them for 3 months or less. Even if you’re in debt, an emergency fund can be the difference between weathering a financial storm like unemployment, medical bill, house repairs (not renovations) and having to get further into debt, and maybe even having to file for bankruptcy.

You run up credit card balances.

If you carry unpaid balances on credit cards, you are already losing money in interest payments alone. Credit card companies have high interest charges that accumulate with unpaid balances. This is the flip side of compound interest: compound interest that you are charged. Just like you can be earning money on an ever-increasing investment account, you can also be paying interest on an ever-increasing debt balance.

You have bad credit

Poor credit is reflected on your credit score and will reflect the type of loan a lending institute is willing to provide you. If your credit score is low chances are you will have a great deal of trouble borrowing money or obtaining a credit card. If you do get credit, it will most likely be at a high interest rate. There are also other things that you may not be able to do if you cannot obtain a credit card such as rent a car, fly, or book a hotel room, unless you get a secured credit card or use a debit card. A solid credit history is also important because most insurers either use credit information to price your insurance policies, or develop an insurance score derived from your credit history. Update: a thin credit file is also detrimental to your score.

You have costly lifestyle habits.

Although habits seem minor, the prices add up. Buying a $1 coffee each day cost you $365 every year. Imagine how much more money you spend by eating out regularly. If you smoke, the cost of cigarettes alone could drive you to quit. David Bach sums this up brilliantly with his Latté Factor® concept.

You married the wrong person.

Larry Burkett, noted financial author, says, “Money is either the best or the worst area of communication in our marriages.” Money and money fights are the #1 cause of divorce, not to mention the thing we fight about the most. When it comes to money, men tend to take more risks and don’t save for emergencies, while women tend to see money more as a security issue. So who you marry has a huge impact on your finances. Couples who are unable to agree and/or compromise on money issues create stress in their marriage. Divorces are lengthy, emotionally distressing, and expensive.

You’re not insured, under-insured, or your deductible is too low

As you’re working hard to create or increase financial wealth, you need to protect yourself and your family from unforeseen emergencies, sickness, accidents and possible death. When shopping for insurance products, match your needs with what the product offers and seek out the best deal. You can buy insurance to cover all kinds of risks, but basic needs can be met with property (home and auto), health, and life insurance. The goal is to make sure that you have proper financial coverage in case anything should happen. Getting stuck with too little coverage will only complicate your situation, since you’ll most likely have to foot the difference. Similarly, not having a basic emergency fund will force you into choosing a low deductible and as a result, you will have higher premiums to pay.

You wait too long to invest.

When making investments, time is of the essence. Simply put, the early bird gets the worm, thanks to the power of compound interest. Compound interest is when put money in an investment vehicle and just let it sit. Year after year, you’ll be earning returns and/or interest on an ever-increasing amount, generating a snowballing effect. Compound interest does earn money over time; so don’t wait too long to start saving for retirement. The longer you wait to invest, the smaller your return on investment.

You invest in things you don’t understand

Keep it simple and understand what you are doing. That doesn’t mean that you can’t try sophisticated investment products. Just be prepared, educate yourself, and don’t risk all your money on them. Make sure you know what you are investing in, by asking a lot of questions, don’t hesitate to get another financial opinion. Dave Ramsey puts it best: Never invest in anything you don’t understand and can’t explain to someone else who isn’t investment-savvy. A little extreme, yes, but good enough for the average investor.

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