I was struck by a comment made by a fellow financial planner at an event I attended recently. She expressed the view that, regardless of your wealth, it’s remarkably easy to run out of money.
She then cited an example of someone – not a client – who was a high net worth individual with a substantial salary, who had ended up with next to nothing because of a series of mis-steps and a failure to plan effectively.
In this article, read about four of the most common ways that individuals run out of money, and a very straightforward step you can take to reduce the likelihood of that happening to you.
1. Only living for the moment
It’s far too easy to get carried away in good times and assume that things will never change.
For example, if you’re in a lucrative job with a great career path mapped out, it’s easy to believe you’ll always be this comfortable and can spend money accumulating assets with little thought of the future.
However, it’s equally easy to let it all go to your head and over-inflate your lifestyle. This could quite easily result in you exceeding your means.
Additionally, it leaves you with little elasticity should things not go ahead as planned, or you’re hit by an unforeseen event. Such events could include the company you work for going bust or you becoming incapacitated and unable to provide for your loved ones.
You shouldn’t just live for the present on the assumption that nothing will change. There’s nothing wrong with making the most of your wealth, but it’s prudent to find a balance.
2. Not respecting the importance of money
One often overused, and to my mind rather trite, phrase is that “money can’t buy happiness”.
Without getting into deep psychological analysis, it may well be true. But what it can do is provide you with the security and an element of financial freedom either through a regular income, or a significant lump sum.
It’s far better to have those as the foundation of your financial plans, rather than letting a slogan dictate a sceptical attitude to your financial future.
Spending without any structure effectively creates a self-fulfilling prophecy: “I told you money can’t buy happiness and I’ve gone out and proved it.”
It’s important to respect how important money is as you’re planning your financial future. It’s also crucial to differentiate between happiness – which is more a state of mind – and comfort.
3. Not having a financial plan
You’ve read this in previous articles of mine, but I make no apology for repetition.
One of the first things you’ll hear from me is the importance of structure and, so, a coherent plan. All major projects require one, and your financial future is no different.
Whatever you want to do in the future, you need to ensure you have a plan in place to do it.
It doesn’t have to be too detailed at the outset, so you don’t need to fear hours and hours of detailed analysis and subsequent financial micro-management. Any good plan will expand and be adapted as you go through your life journey to meet your changing needs and circumstances.
As an extra point here, it has to be a plan that everyone concerned buys into. There’s no point you being sensible and planning ahead if your spouse or partner is spending money with abandon.
4. Building your wealth for the sake of it
Part of your plan should include recognising that you want to enjoy yourself while you’re accumulating your wealth.
Like most things, it needs balance. Living a frugal lifestyle may help you accumulate vast amounts of wealth, but you need to consider the money you should spend in the pursuit of relaxation and happiness.
You also need to be aware of the other people in your family. Your planning needs to include an appreciation of their future happiness. If you’re the main breadwinner, you’ll want to try and ensure their futures are secure in the event of you being unable to provide for them.
It’s good to have financial targets and use them as motivation and an underpin to your financial future, but they shouldn’t become the be-all and end-all of your planning process.
The importance of understanding your core values
One way to avoid all the mistakes you’ve read about in this article is to establish some core financial values at the outset when you’re putting together your financial plans.
A good way of doing this – and it’s a way I recommend to all my clients – is to put together a “Statement of Financial Purpose”.
Within this, you’ll establish what’s truly important for you – both now and in the future. This will include key subjects such as your family and relationships, travel and adventure, your children, and your future financial security.
Once you’ve put together your statement, you can then plan ahead with those priorities in mind. It will also form the keystone of future amendments to your plan.
I often say to clients that if you always do this, you will never make a bad financial decision.
Get in touch
If you want to talk about any of the financial issues you’ve read about in this article, please get in touch.
You can call me on 07769 156 250.
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