Finance Globe

U.S. financial and economic topics from several finance writers.
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Getting No Where by a Lack of Financial Planning

Building wealth isn't just something rich people do. And those who are wealthy don't always stay that way. We've all heard of the countless millionaire celebrities who've filed for bankrupcty. A Bankrate.com article tells the woes of lottery jackpot winners who are back to broke after a couple of years.

Some may wonder, "How can someone with that much money lose everything?" The answer is simple - poor planning and spending too much money. But don't feel sorry for the super-rich who fall victim to their own lack of planning. They had a lot of room for error and still couldn't get it right. But the rest of us, those living on average incomes, often fail to effectively plan, too.

Financial planning is not something reserved for the wealthy who have lots of disposable income, and you don't have to be able to afford the services of a professional financial planner to reach your financial goals. Having a modest income just means that you may need a little more discipline, being more careful about what your dollars go to. Wealth-building comes gradually, but planning for it is key.

I'll give a couple examples about the mess a lack of planning can cause. I have two friends who I wish could get their financial situations in order. I've known them both for nine years, and I've watched them both spin their wheels financially, spending too much money and not planning for their futures.

They don't heed the advice of their countless loved ones who try to help them get them on track. They're both going nowhere in improving their standards of living or increasing their net worth and they are just getting older, losing valuable time in building their wealth.

One is a young man in his late-twenties, with no dependants, whose fairly well-off parents pay for all major expenses; his rent and utilities, his car, his insurance. He didn't have to take out a student loan; his parents paid his tuition. He works full-time and is somehow always broke; his last money comment was that he couldn't go out one weekend because he only had five dollars in his checking account. How can someone have no money when they have no bills? Well, he usually wears really nice clothes and always has the latest in fancy electronics, and entertainment and partying seem to play a big part in his life. No bills, no debts, and he's still financially dependant on his parents.

The other is a 30 year-old single mom surviving on a modest income, with no financial help from the father. Hey, I understand how hard it can be; that's my situation, too. She's always worked full-time and had lived with her parents for years, but saved no money in the mean time. When her trust fund became available to her three years ago, she was finally able to move out. A total of about $60,000, spread over three years isn't life-changing, but I had hoped she'd use some of it to pay off her car and do something to better the lives of her and her children. Well, she just told me that the trust fund has been depleted, she's now broke, she's about to lose her car to repossession, and she can't afford her rent. When I asked her what she's going to do, she said, "I don't know, but I guess I'm going to have to stop getting my nails done." I admire her humor, but her situation is too sad to laugh about.

The circumstances of both my friends are completely different, except that they each have never been able to get on top of their money. Even with all his bills paid for him, or her receiving a small windfall that almost doubled her income for three years. I often say that it's important to live within your means, and that's true. But they both lived within their means, if you consider "their means" to include his parent's contributions and her temporary increase in income. They never spent more than they had, but they spent all of what they had. No planning...at all.

When they volunteer to me stories of their financial problems, I can't help but ask them why they are in such a mess. They both expressed that they didn't make enough money. But in nearly a decade's time, they are both still in the same situation as they were when I met them. It's not that they don't make enough money, it's that they have no plans for the money they make. But they both had money to spend on shopping, pampering, dating, and vacations.

But instead of managing their money, they let their money manage them; the amount of money in their possession dictated how much they would spend at any given time. And here they are, nine years later, with no extra cash and little to show for it. If they each were able to put away just $100 a month over that time, and earned a conservative 5% on their deposits, they would each have $13,661. Not a huge amount, but far better than what they have now and without much effort or a big impact on their budgets.

Planning means taking advantage of your current situation to make things better for later. And making good use of your income means more than just getting the bills paid this month; it means using it to improve your financial standing month-by-month, and year-by-year. Pay off your debts and owe less as time goes by, start saving and reduce your need to use credit in the future, and begin investing so that you can retire in comfort one day.

My friends' situations are extreme examples of a lack of financial planning. No matter your age, financial planning and wealth building should start now. Not when you get the promotion, not when all your debts are paid off, not when the kids move out of the house. You can't afford to put it off any longer.

Whether your annual income is $35,000 or $3.5 million, it's possible to lose it all or build it up to true riches. The key is to plan your financial direction based on the capacity of your income, and remember that you are the only one who can guarantee the success of your plan.



Sources:
"Unlucky lottery winners who lost their money" article - http://www.bankrate.com/msn/news/advice/20041108a1.asp
Savings calculator - http://www.finance.cch.com/sohoapplets/CompoundSavings.asp
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Thursday, 17 October 2019

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