How to Kill Your Net Worth
A recent article on CNNMoney listed seven behaviors that are not going to help you in growing your net worth. Among the 7 net worth killers, I found the first one, ignoring your money, is probably the one mistake I could most likely make.
1. Ignoring your money
The beauty of lifecycle funds is that you don’t have to worry about the asset allocation of the fund. If you are a DIY kind of person, then the task of rebalancing your portfolio is upon you. Failing to act accordingly when the time and circumstance change won’t do any good to the health of your portfolio. Buy-and-hold is the right strategy for long-term investment, but it doesn’t mean buy-and-ignore.
For your longer-term money, it could earn much better returns in a broadly diversified, low-cost index fund. For emergency funds and money you’ll need soon for upcoming expenses like a down payment, at least make sure you’re getting a rate of 4.50 percent to 5 percent on it.
2. Buying too much house
When we were doing our taxes last month, one conclusion we reached was we didn’t get enough tax deduction from our mortgage payment because we don’t have a big house. If lowering our taxes is the only goal, we could achieve it with a bigger house. But does it make financial sense to get a higher monthly mortgage payment and a bigger property tax bill at the same time?
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.
3. Driving too much car
Driving too much car isn’t about you driving your car to work every day, but rather spending more than necessary on a tool whose value can only decline over time. A better option of driving a less expensive car is to invest the money that you could otherwise spend on monthly payment, insurance and fuel. The $10,000 you save now can make a big difference 30 years later.
A rule of thumb when buying a car is that “you don’t spend more than 8 percent of your monthly gross income on a car payment, less if you have credit card debt.”
4. Paying the IRS, not yourself
If you’re self-employed, you may contribute up to 25 percent of your self-employment income (gross income minus expenses) to a SEP (Simplified Employee Pension) and deduct the full amount. You can also set up SEPs for your employees and make tax-deductible contributions to them.
5. Always getting what you want
When it comes to accumulating your personal wealth, how much you earn doesn’t tell the whole story. What really matters is how much you got to keep at the end.
Living above your means and charging the difference is the financial equivalent of slow carbon monoxide poisoning. It makes pre-existing financial problems worse and can be the cause of headaches and shortness of breath until you address the source of your problem.
The solution: “Don’t always keep buying what you want. It’ll get you in trouble.”
6. Letting your assets linger
Do you believe one kind of asset is better than the other? At certain point of your life (like when you are in the retirement), you may want to convert your assets from one form to another in order to fund your daily living and reduce unnecessary costs. Your house, that you bought years ago, for example, could be one you can turn to a lasting cash-generating asset.
Net worth is a measure of your assets minus your liabilities. But all assets are not created equal. Hanging on to assets that don’t do much for you may hurt your net worth long-term.
7. Letting your debt lie
There are good debts and there are bad debts. While the former can help you grow your net worth, the latter will only do the opposite: Kill your net worth. If you have a bad debt like credit card debt, paying it off as soon as you can. If that’s not possible, then at least get a lower rate for your debt.
If you’ve got credit card debt, transferring your balance to a lower rate card can save you money … if you do it right. Make sure that there’s not an onerous balance-transfer fee; and if there’s not, move the balance to another card but be sure to pay it off before the low rate expires.
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