5 All-Too-Common Financial ‘Sins’ … and How to Atone for Them

1. Spending money you don’t have

Overall, the rise of American consumerism is a good thing. It’s good for the economy, stimulating growth as individuals purchase more goods and services. It also benefits the consumers who purchase products that bring joy or improve the way they live.

However, there is a fine line between living “the good life” and taking out an insurmountable level of debt, which could lead to financial ruin. In today’s world, almost any purchase has a payment plan or financing option available to allow consumers to obtain merchandise they can’t currently afford. This may lead people to spend heavily on items like a smartphone, house, vacation or higher education. Acquiring all these luxuries through financing may be a very imprudent decision. It’s imperative to be cognizant of your income level and cash flow and only spend within your means.

2. Procrastinating retirement planning

Many folks hold off on planning for retirement. This mindset is common among both young professionals and established business executives. They assume that there will be a more opportune time to start planning for their financial future. This may be because their anticipated cash flow will improve when their kids are out of the house, they will be earning more money after a promotion at work, or they will experience a meaningful liquidity event after the sale of their business.

In reality, the longer one waits, the harder it is to save and accumulate wealth. This is due to lifestyle creep and lack of compound interest. There is no better time to start saving than the present. Saving even small amounts of money regularly starting now is a far better approach than planning to save larger amounts when your financial situation hopefully improves in the future.

3. Making financial decisions based on what your friends are doing

The social pressures that come with living in a tightknit community or having a close group of friends may be some of the most difficult money challenges to overcome. These pressures lead to a “keeping up with the Joneses” mentality, which may lead to heartache, regardless of income level. There is always somebody richer than you and who has better stuff than you. Coming to terms with this fact of life can make it easier for you to focus on what’s actually important.

Social pressures may also lead people from the same circles to adopt a similar investment philosophy. However, the investments that are usually discussed on the golf course, family barbecue or at other gatherings are the ones that will garner excitement, not necessarily what has the most practical benefits. This includes discussing only their winning stocks, exotic investment opportunities, and exclusive deals. There is typically no mention of the various investments that they lost money on or of diversified portfolios made up of low-cost index funds (Yawn!). Yet, the latter is a far more practical approach to accumulating wealth and reaching one’s goals.

The best practice when it comes to friends and your finances is to keep the two separate.

4. Dismissing your insurance needs because it’s expensive

Premium payments for life, disability and long-term care insurance all eat into one’s annual cash flows. These costs are viewed as a nuisance, and obtaining this coverage is pushed off by some folks until it’s too late.

I tell my clients to embrace this annual financial outlay and to view it as a small tax on being alive and healthy enough to provide for your family. It may be a financial annoyance today, but it can save your family from financial devastation in the future.

5. Avoiding estate planning because it’s uncomfortable

Estate planning, and all of its components, is generally the least popular part of financial planning because it involves contemplating one’s demise. It is not fun stuff. What is even less fun, though, is the fiasco that is sure to ensue after the death of a family member who didn’t do proper estate planning.

Taking the time to sit down with a competent attorney who specializes in these issues is imperative. The attorney can draft the relevant documentation, such as a will, health care proxy, power of attorney and trusts, if necessary. Furthermore, the attorney can put together a cohesive plan and coordinate with the client’s other advisers to ensure that everyone is on the same page. Together, this collaboration will help ensure that the client is provided for in the event of deteriorating health, as well as for the orderly disposition of their assets upon their death.

Here’s what to do about your own financial sins

The first step when repenting for one’s sins is to acknowledge the wrongdoing. Hopefully, the aforementioned points will help you recognize some common errors made when managing personal finances.

The second step is implementing changes in one’s life to correct course. Typically, taking small steps, rather than making drastic changes, is an effective approach. There are many examples of minor modifications that can help correct your personal finances. These include:

• Enrolling in your employer’s 401(k) plan and having a small percentage of your salary automatically deposited into your account every paycheck. It’s also advisable to sign up for automatic escalation of your annual contributions so you will gradually be depositing more money each year.
• Getting a relatively cheap term life insurance policy, so you have some coverage in the event of premature death. Additionally, signing up for group disability insurance through work is inexpensive and can ease the financial burden on your loved ones if you are unable to work due to a disability. The modest expense of both of these policies should not meaningfully impact your cash flow.
• Resisting peer pressure can be more challenging. However, writing out a simple Investment Policy Statement (IPS) can be extremely beneficial in this regard. Your IPS should clearly define your financial goals and how you plan to reach them. It can also help you stick to a disciplined process on spending, saving and investing. Utilizing an IPS helps investors focus on what is important while ignoring what isn’t.

There’s an anonymous quote that sums up this approach quite well. It goes like this: "Small choices become actions, actions become habits, and habits become our way of life." Tiny adjustments can not only lead us to a better spiritual life, but can improve our financial life, as well.