Seven Obstacles to Financial Success

Moneyland lists seven obstacles to financial success as follows:

• Lack of discipline
• Materialism
• Debt
• Taxes (paying more than you have to)
• Inflation
• Investment mistakes
• Emergencies

It's hard to argue with these, but when I listed the ten worst money mistakes anyone could make (which I know is not exactly the same, but is similar), I approached it from a bit of a different angle. That said, we did have one the same (debt) and several that were close -- over-spending (on taxes in this case), not saving (emergencies), lack of discipline and materialism (over-spending), and putting off investing (which is a big investment mistake.)

Do you see anything that either of us missed?

Comments

[Lurker Carl]

Divorce.

[Lurker Carl]

Lousy career decisions.

[Matt]

Lack of common goals in life.

[Money Varta]

The above mentioned reasons are very much true to everyone. Although I find lack of discipline very important for anyone who wish to lead a comfortable life. Without financial discipline one cannot imagine to have a comfortable life.

[KH]

Lack of planning and strategic thinking, especially long-range.

Another big problem IMO:

"Magical Thinking"

ie when people take out too much debt to attend college, and they assume they'll be making lots of money a few years later without realistically considering what they can earn with that degree (they think it will work out their way "by magic!"). When women ignore their long-term finances because they assume they'll marry (or have married) some guy who will take care of that. When parents think they'll deal with college costs when the time comes. When people make high risk investments thinking only about the low chance of obtaining high potential rewards--and ignoring the high chance of losing everything. Basically, closing your eyes and jumping off a cliff and hoping it will all turn out OK anyway.

[Holly]

I second all of the above comments.

How about when emotion/relationships get in the way? i.e., someone who lets another person influence or take control of his money. A spendy spouse can put you in the poor house, don't you think?

Using emotion to guide your financial decisions can often lead to big mistakes.

[Old Limey]

I thoroughly agree with the 7 attributes stated and, as Carl mentioned, over the course of my life have seen firsthand how divorce has wrecked many couple's finances.

Young people also generally don't understand the power of compounding over a long period. This is easily demonstrated by running some simple computations of saving the same amount of money each month, earning a fixed return on investment, and then seeing how many years it takes to reach $1M if you start at 20, 25, 30 etc.

[Travis]

Lack of education!

Our school system puts a lot of emphasis on the basics, but we never teach people how to manage money! Society has made us think we need someone else help us with our money, so there is no need to learn the stuff. We need to start educating our youth on the importance of money management, debt, ect. and I think everyone would be in a better spot.

[BD]

Yeah, you missed the big one: PICKING THE WRONG CAREER.
It doesn't matter if you have all the financial sense in the world, and save like crazy....if you're always earning super-low wages, there isn't much you can do to obtain financial success. So many financial blogs seem to miss this one really big factor. Bottom line? Don't "do what you love" when you're young, if "what you love" is something like Art, Music, Acting or some other low-earning job. I keep trying to drill this message in on financial forums, but bloggers rarely pick up on it, sadly. I still hear people saying things like "Do what you love, and the money will follow" (especially in blogs like the Simple Dollar)......which in many cases, is a cruel lie and will destine you for a life of poverty.

[BD]

Old Limey: Compounding is worthless, if you're only able to invest small amounts.
This comic illustrates my point perfectly: http://xkcd.com/947/

I used to think compounding was some magical force, and if I only saved as much as I could, compounding would work for me, and I'd have at least six figures by the time I was middle-aged. I started saving diligently when I was around 15. You know what? I haven't even come close to six figures in savings yet, and I just turned 40 last week. In fact, my mutual funds are worth LESS now than they were 5 years ago. The mix of "earning low wages" coupled with "a horrible past 10 years for stocks/mutual funds" means that compounding interest hasn't produced anything, really. :(

The main key (as you know and have done) is to start off with a really good career that earns a super-high wage. That will propel you towards big savings faster then just "compound interest" or "being frugal". Young People need to shoot for careers that will pay BIG, and then worry about compound interest later.

[Old Limey]

@BD
My comment included the phrase "earning a fixed return on investment".
Your problem is no doubt not that you aren't saving regularly, it's that you aren't investing wisely. You are in the company of millions of investors that have been victims of the Lost Decade, soon to be the "Lost 11 years".

I have had winning years every year since I retired with 1993 being the first year. That year I made 81% because I had everything in FEMKX, Fidelity's Emerging Market fund, which had a meteoric rise in 1993 before peaking on 1/5/1994.
My starting annual salary in 1960 was $8,996. My ending annual salary in 1992 was $72,488 and along the way I raised three children and have ended up today with a home worth almost $1M, a beach condo worth about $500K, and an investment portfolio well over $6M. I never cracked the first level of management, my final position was as a staff engineer to a department manager where I was responsible for running an R&D project.

The biggest enemy of becoming wealthy is "Losing Money". In my atheistic view the 11th. commandment should be "Don't Lose Money". Losing money defeats the "Power of Compounding" and can completely ruin your life and that of your family. As you surely know, if you take a 50% loss you then have to double your money just to break even again. The only way you can avoid losing money on Wall Street is to become a well informed, skilfull, smart, active, investor that just doesn't sit on his holdings hoping that in a few decades they will grow to the sky like Jack's Beanstalk in the old nursery rhyme.

Once you reach the point where you have enough money you can move into the slow lane, become very conservative, avoid losses completely by holding fixed income investments to maturity and still continue to compound your money at a rate somewhere in the range close to 5%.

[BD]

Old Limey: I think you missed the main point of my comment, as illustrated by the comic I linked to. Even if you have winning portfolios that gain (say, a steady 8% each year), if all you can afford to save per year is $1,000, due to low earning power, compound interest won't help much. It's better to make a huge salary, than to rely on compound interest while earning a low wage.

You always had a large salary, so it worked for you. I never earned close to what you made, so compound interest never was that spectacular for me, even in the years that I had gains. A better strategy for me would have been to "earn more".

[Mark]

I think a lot of money problems people have are symptoms of emotional problems. People who grow up in raised by single parents are more likely to have emotional problems = more money problems. Same is true for those who have an alcoholic or drug addicted parent, etc. I think emotional intelligence is the key to improving many things in life and it's kind of ignored on personal finance blogs. Emotionally intelligent people sometimes don't really know how to help people who aren't.

[Old Limey]

&BD
You are correct that if you can only save $1,000/year and it is earning 8% per year tax free, after 35 years you will only have $186,102.
However if you can save $5,374/year, earning 8% per year tax free, after 35 years you will have $1,000,114.

It's not easy for passive investors to get 8% tax free, every year for 35 years so you are correct that you need an income that will allow you to save $5,374/year, under ideal conditions where you never have a losing year, in order to have a chance for a comfortable retirement.

In our case we started our retirement in 1992, with $320,000 mostly in our 401K's and IRA's, and that I never had a losing year after that and had a few fantastic years, the best of all being 1999 (dot.com bubble) when our portfolio increased by an amount equal to my total gross salary over the last 32 years of my career. During our retirement we haven't been big savers and have lived off our pension and SS checks, but when we were working we saved every penny we could and maximized our 401K contributions and employer's match.
In fact, once you reach a critical mass you don't need to save any more but what you want to do is to avoid losses and take as little as possible out of your portfolio.
I cannot overstress the CRUCIAL importance of avoiding losing years.

As for earning a high salary, my son never went to any kind of college but is making double what I ever did with an MS in engineering. He started off as an auto mechanic at a Ford dealer, then moved into repairing vacuum pumps, and is now a West coast representative and salesman of vacuum pumps used in Mass Spectrometry equipment for a Swiss/German conglomerate. He literally could sell refrigerators to eskimos and knows the inner workings of what he is selling.

[Elizabeth]

I agree TOTALLY with BD. I try and tell my children and friends this. It takes money to make money. You have to earn a high enough wage so that you have discretionary money to invest, save, etc. Even saving 10% per pay period will not add up to much if you earn a low wage. It will take years to catch up to someone who saves the minimum 10% but has a six-figure salary. Very big difference.