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When it comes to identifying poor financial well-being, outside appearances don't give you any clues. We tend to think of the truly prosperous as well-dressed, polished and professional. We assume they drive fancy cars and live in fashionable neighborhoods, sending their children to elite private schools. They lead expensive lives and therefore must have the requisite funds to maintain such opulence and grandeur.
This fairytale imagery gets many of us into trouble, however. There’s a tendency to think that if you fake it alongside the rich, then you’ll eventually make it. Unfortunately, the opposite is usually true. The longer someone attempts to offer the impression of wealth, the poorer they become. Instead of living within their means, those desperate to appear successful live right up to their credit limit, only to discover how crippling borrowed money can become.
Rather than attempting to wow the world with a Mercedes and a prestigious address, I advise clients to impress others with their dedication to being of service, living well beneath their means in the process. It takes a lot of resources to flaunt faux success. On the other hand, it costs almost nothing to demonstrate commitment to your core values, which will go a lot further toward impressing the right people.
In short, the financially unwell live above their means. They pay the steep price of never-ending debt to maintain the illusion of abundance, sacrificing any stability they could hope for in the process . When an infrequent windfall occurs, it provides an excuse to spend even more, and thus the debt grows faster than the debtor can ever hope to repay it.
While I painted a deliberately extreme example here to make a point, you don’t have to drive a luxury car or wear finely tailored suits to fail at mismanaging your funds and derailing your financial stability. Thousands of high-school graduates unwittingly get a rough start to their future by choosing a path toward higher education that involves taking on excess debt while being unemployed. In some instances, people as young as 18 are coaxed into student loans that rival the size of mortgages, sold on the idea that they’ll recoup the cost once they enter the workforce with a degree in hand.
Higher education can be one of the wisest investments a person can make. Under the right circumstances, it can launch a young professional along a career path that pays back a hundredfold and then some. But with the wrong guidance, that tremendous debt squelches one’s financial well-being before it has a chance to spring to life. In essence, every student needs to understand the monetary ramifications of their educational path before signing their name to a lifelong commitment that may not serve their best interest. In many instances, students aren’t even aware of the viable paths that are available to them at a fraction of the cost of their first college choice.
As if insurmountable student loans weren’t enough, exorbitant car payments to the tune of $700 a month are another blow to people’s financial wellness. If you can slap down $30,000 or $40,000 without it having a negligible impact on your wealth, then go for it. For most people, the proper course of action is to instead purchase a seven to 10-year-old car with fewer than 80,000 miles at a third the cost of a new car. It’s not what most people do, but it’s what most people can afford. If they do their research, they’ll have reliable transportation until the time comes when their accumulated wealth allows them to buy the car of their dreams brand new off the lot in cash.
While higher educational expenses and automobiles take the top two spots for most common financial pitfalls, expensive housing is a close third. Conventional wisdom states that no more than 30% of your salary should be allocated to housing. Unfortunately, in many metropolitan areas, due to skyrocketing rents, this guideline has all but been abandoned by those who can least afford to make this mistake. Those who pay more than 40% of their salary on rent or a mortgage severely hinder their ability to stay financially afloat. If they have a sizable car payment on top of their housing expense, then they’re in big trouble. Each paycheck disappears into their debt, leaving nothing for their savings.
This is a crisis.
If they have no savings, they’re one missed paycheck away from a major financial setback. It’s an unforgiving position that doesn’t offer hope down the road. Sadly, many are blind to the fact of how dangerous their situation is until their car gets repossessed, or worse, they get an eviction notice.
The one silver lining in all of this is that if you know you’re living paycheck-to-paycheck, then this is your wake-up call. Now is not the time to live in denial and wait until it’s too late. Begin the work of restructuring your finances so that your money can support you when an emergency strikes. Finding a less expensive apartment might be tricky, but it’s considerably less difficult to do before you have an eviction on the record.
When you know your financial situation is on shaky ground, be proactive, not reactive. From a proactive standpoint, your results will be a lot better for the simple reason that you maintain both your sense of control and composure. Those who are forced to respond to an emergency are at a noticeable disadvantage. Choice is limited or non-existent at that point, and then you're at the mercy of the current as it sweeps you off your feet.
Indebtedness is the enemy of financial well-being.
To be fair, not all debts are equal. A mortgage, a business loan, and manageable student debt can serve as the basis for lucrative assets that pay remarkable dividends throughout your lifetime. But credit card debt, auto loans, and crippling school loans fall in the opposite column, often impinging on your overall financial health.
For those eager to get ahead but who are overwhelmed, I’ll leave you with this bit of advice: Focus on paying down your debts with the highest interest rates first, or at the very least, look at your smallest debt, and commit to paying double its payment every single month until it is paid off in full. Then repeat the process for your next smallest debt, and so on, and so forth. When tackling your debts in this fashion, you make it a game, and you build significant momentum in the process. Typically, in less than a year, you’ll have proven to yourself that you assert much more control over your money than you previously gave yourself credit for, and in another year, your financial picture will have improved so drastically that it will likely appear unrecognizable to you.
Mark B. Murphy is a registered representative and financial advisor of Park Avenue Securities LLC (PAS). In addition, he is the CEO of Northeast Private Client Group.
Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). OSJ: 200 BROADHOLLOW ROAD, SUITE 405, MELVILLE NY, 11747, 631-5895400. Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly owned subsidiary of Guardian. NORTHEAST PRIVATE CLIENT GROUP is not an affiliate or subsidiary of PAS or Guardian. CA Insurance License Number - 0B36048, AR Insurance License Number - 741545. The opinions expressed are those of the author and not necessarily those of Guardian or its subsidiaries.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.