Are you in denial?
So much in our lives is connected to money. If we choose to ignore it or downplay its importance to our wellbeing, we might soon discover devastating consequences down the road.
If you have a financial problem, the best thing you can do is confront it as soon as possible. Granted, that's not always easy – especially if you're a generally optimistic person.
You need to be real with yourself. In what areas of your life are you in denial? Here are some common denials that can utterly ruin you financially.
1. "I Need to Buy a Brand-New Car"
Uh, no. You don't need to buy a brand new car.
You might say, "Well, I need reliable transportation!" Listen, reliable transportation does not equal a brand-new car. Let me let you in on a little secret: there are plenty of reliable used cars for sale.
I once had a client call me telling me he needed to cash out his IRA to buy a brand new truck. I wasn't enthusiastic, to say the least. He then said he could gamble at a casino, win the money back, and put that back into his IRA.
The likelihood of this actually working? Close to zero.
We all know how brand-new cars lose such a huge chunk of their value once their new owners drive them off the lot. So why not buy a used car, even if it's just a little used, and save a whole lot of money?
I actually bought a 2007 Tahoe in 2008 that was previously owned by the dealer. It had 12,000 miles on it and I saved $14,000 off the sticker price just because it was used for a little bit. And guess what? Even though it's used it's still a reliable car!
The last thing you want is an expensive car payment because you decided to buy new instead of used. That car payment will eat away at your ability to save and invest that money – and you can imagine how much money you could have made investing it instead of spending it.
Don't be in denial. You really shouldn't buy that brand new car.
2. "I Have Enough for Retirement"
Retirement is expensive. I mean, very expensive. And the scary part is, it may be difficult to determine exactly how much you'll need during retirement.
There are many factors that go into determining how much you'll need to invest to have a comfortable retirement:
- Assumed future rate of return
- Assumed future tax rates
- Assumed future inflation rates
- Assumed future cost of living
The list actually goes on and on. And notice, many of the factors are assumed because they are factors that may change over time.
With that being said, financial advisers such as myself can use some good rules of thumb to help you determine how much you'll need to save for retirement from now until you retire. But remember, there are a lot of assumptions here, and a good financial adviser will tell you that.
Now that you've heard the disclaimer, how do you know if you're in denial when it comes to saving for retirement? If you're starting to feel like you're in denial, you probably are. Most of my clients should be investing on a regular basis what they're able. More is usually better.
I'm not telling you to abandon other important financial goals like paying off debt and giving. But I am asking you to be realistic about future unknowns and to prepare – it's hard to over-prepare for retirement.
Don't be in denial about the cost of retirement. It's huge!
3. "My Employer's Life Insurance Is Enough"
If you're telling yourself that you probably have enough life insurance through your job, think again.
I had a friend once tell me that he had $10,000 of life insurance through his work, and he reasoned that it would be enough to bury him should he pass away. That's probably true, but I couldn't help but think of other expenses life insurance could help his family with should he leave the planet.
His mortgage: How would his wife pay for that once his income was gone?
The kids' college education: Would they be able to afford school with the increasing cost of tuition?
The cost of just raising kids: Clothes, food, soccer games, braces . . . it all adds up.
With each child my wife and I had, we started realizing the importance of life insurance. That's why I have a very sizable life insurance policy on myself.
Don't be in denial about life insurance. Your family will hopefully never have to depend on it, but if they do, they'll be glad you had plenty. While a sizable life insurance policy may seem financially out of reach, get a set of term life insurance quotes and you will probably find them surprisingly affordable. A 40-year-old man in good health can get $500,000 of life insurance for less than $50 a month. Since there are expenses that either spouse will incur if the other were to pass away, make sure your spouse gets plenty, too!
4. "I'm Sure My Credit Score Is Fine"
When was the last time you checked your credit score? Never? You might want to check.
Your credit score can affect a variety of factors in your financial life — including your ability to get a mortgage, a loan, lower rates on car insurance, and even a contract on a cellphone.
I remember one of my interns whose parents taught him to never get a credit card out of fear that he would run up debt. Unfortunately, it was bad advice. When I convinced him to check his credit score, it wasn't what he wanted – but thankfully he was able to raise his credit score 110 points in five months.
If you haven't checked your credit score lately, I encourage you to take a look and start taking some steps to raise it if it's low — like my intern did. Sometimes, loans are necessary and having a good credit score is a great way to get them. You can start off by getting two of your credit scores for free on Credit.com.
5. "I Don't Need an Emergency Fund"
If you're living paycheck to paycheck, by definition you cannot pay for emergencies. Now, you can certainly borrow for emergencies – but that's a situation you want to avoid if at all possible.
Don't be in denial. If you don't have an emergency fund (most financial advisers recommend three to eight months of expenses), you need to start building one up as soon as possible.
How do you build up cash when you're living paycheck to paycheck? Slowly, over time.
You do that by starting a budget and sticking to it. Pay attention to where you're spending your money and cut back recurring expenses like cable television and expensive smartphone bills. Do what you can to save money and throw it into your emergency fund.
Remember, the first step to avoiding financial ruin is to admit you have a problem. Once you do that, you can start opening your mind to some steps to change your situation for the better. Do it! Many people have before you, will you join them?
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