If you avoid these 4 potentially devastating ﬁnancial moves, you should have a better chance of becoming prosperous and pursuing your goals. If you have made one of these already, it may be time to get back on track.
1) Buying More Home Than You Can Afford
This is our top one as it will truly cripple your long-term financial plan. Years ago, we heard of a very simple financial ratio called the primary obligation ratio which said that your mortgage payment shouldn’t be more than 28% to 34% of your total gross monthly income. Use that statistic in conjunction with putting 20% down on your home purchase and you will typically avoid this number one financial disaster. Many people also forget the cost of furnishing the house which can run 5% to 15% of the home value depending on your taste. While most people think that they can ‘fill’ their home over the rest of their lives, the truth is people work hard to fill up their unfinished homes which compounds their already bad decision. In addition, you should estimate that basic upkeep of your home will be 2% to 4% annually. This goes from landscaping, to a blown water heater, or just painting rooms again. Many people do not put these costs into their budget when they figure their mortgage payment. Lastly, for the newly married couple that has two incomes, you should consider what will happen when you have your first child. In many cases, one spouse decides to stay home after the birth of a first child. Beyond the new kid expenditures, the budget takes a huge hit with one less income.
2) Carrying Credit Card Debt
Besides a reasonable home mortgage, most debt just isn’t good for you. It’s a mistake to carry ongoing credit card debt on a long-term basis. Sometimes credit card debt occurs because of some one-time emergency or catastrophe, but more often than not, it’s created by living beyond your financial means. You spend more money than you make and you do it for a sustained period of time. It doesn’t feel good watching your debt compound at a 18% to 24% interest rate with the credit card company. At an 18% interest rate, your debt will double almost every 4 years. The sooner you establish a budget and financial plan, the sooner you'll pay off the debt.
3) New Automobiles
Make whatever justification you’d like; buying a new car is just about the worst investment you can make. We don’t mean trading in an older car for a newer ‘used’ car, but just buying a new car period. If your financial advisor had an investment that you knew would go down in value 40% over the first two years, you would run for the hills! With body styles changing less frequently in cars today, you can settle for getting a car with almost all the new technology for 40% less. This financial move over 20 years can save you huge money which you can apply toward your financial goals.
4) Not Saving Enough
When you look at a goal like retirement, most of us do not want to retire later nor do we want to live on less after working for 30 or 40 years. If you cannot control the markets or your overall rate of return, the one thing you can do to tip the odds in your favor is save more. Use our simple tip of saving at least 33% of every raise you get and you'll learn to live within your means vs. spending your raises and bonuses. Over time the money will be out of sight and out of mind putting you in a good position come retirement time.
The Opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Luke yengo is a registered representative of Lincoln Financial Advisors. Securities and advisory services offered through Lincoln Financial Advsiors Corp., a broker/dealer (member SIPC) and registered investment advisor. Insurance offered through Lincoln marketing and Insurance Agency, LLC and Lincoln Associates Insurance Agency, Inc.. 18400 Von Karman Avenue, Suite 400, Irvine, CA 92612, phone 949-474-6884. Continuum Consulting is not an affiliate of Lincoln Financial Advisors.