7 Ways To Kill Your Net Worth
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If you’re interested in seeing your bottom line decrease each month, here are a few tips courtesy of CNN Money. Personally, I’d rather see my number go up each month, but perhaps that is just me.
- Ignore your money. Buying and holding doesn’t have to mean “owning and ignoring.” Asset allocation is one of the best examples of this. If you are 5 years into retirement, and you haven’t changed your asset allocation since you were 30 years old, it may be time to determine what your goals are and change you asset allocation to reflect that. If you invest directly in companies, understand that they change over time.
- Buying too much house. “As a general guideline, it’s best not to spend more than 2-1/2 times your income on a home. Your total housing payments should not exceed 28% of your gross income. Total debt payments, meanwhile, should come in under 36%.” According to the first quoted rule of thumb, to afford a $200,000 condominium, in New Jersey or anywhere else, your income should be $80,000.
- Driving too much car. “Chris Cooper , has suggested as a rule of thumb that you don’t spend more than 8 percent of your monthly gross income on a car payment…” I think this isn’t looking at the big picture. It’s much more important to find a car that’s reliable and whose life will extend far beyond the time you stop making payments.
- Paying the IRS, not yourself. CNN Money strongly suggests self-employed individuals — and anyone can be a self-employed individual — lock away 25% of their self employment income after expenses into a SEP IRA. I recently opened my 2006 SEP IRA, and I think it’s a great idea.
- Always getting what you want. Wait, isn’t it a good thing to get what you want? Nah, accumulating things just ads to clutter and can lead to spending more than you earn, which leads to uncontrollable debt. Delay gratification, maybe.
- Letting your assets linger. CNN Money begins to channel Robert Kiyosaki, and stresses the importance of *income-producing assets* and their benefit over *expense-generating assets.* Net worth is not always the best indicator of financial health. Cash flow is more important in some cases, so assets that assist your cash flow are ones to hold and assets that send money out the door should be eliminated.
- Letting your debt lie. If you have debt, pay it off. Try to take advantage of better rates whenever you get the chance. CNN Money suggests switching an adjustable rate mortgage to a fixed rate and moving credit card balances from a high-interest card to one with lower interest.
Interesting how now that the housing market is stagnating or going down in many regions there are all these articles saying “don’t buy too much house” 🙂
#8 Skipping Insurance
If you don’t have the proper home, automobile, health, disability, & liability insurance, your net worth may take a big hit when bad luck comes your way.
I would use the “True Cost to Own” setup they have over at edmunds.com to look at all costs of car ownership, not just the financing fee. One of the mistakes people make (including Matt) is to assume that once they pay off their car, it’s free. If you paid cash, you still have to look at the opportunity cost of doing so. Remember, you could have earned 6%-12% on that money, but instead you dumped it into a car.
We all need cars (well, most of us anyway), so there’s no need to feel bad about paying for them, but to think that once you pay it off it’s “free” is wrong.
I agree with your take on #3. That may make a good rule of thumb, but that’s not really looking at the big picture. For instance, I spend somewhere between 25% and 30% of my net income on my car payment. While this may seem like an absurd amount on the surface, it means I’ll have it paid off within the next 6 months. Right now, it only has 14,000 miles on it, so it’s likely to last me close to 7 or 8 more years after I’ve paid it off and I’m avoiding a lot of interest by paying it off so early.