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Guaranteed Ways to Go Broke

February 1, 2021 By MelissaB 1 Comment

How to Go Broke

If you look, you can find plenty of material about how to create a budget, save for retirement, and live within your means.  What you don’t find are many examples of people doing just that and living a financially solvent life.  On the other hand, you don’t find much material about guaranteed ways to go broke, but you can likely find people from all walks of life who flaunt the steps to going broke.  Ironically, those are often the people of whom we are most envious.

How to Go Broke

There are many, many ways to go broke.  To most effectively go broke, utilize as many of these steps as possible.

Buy a House You Can’t Afford

One of the best ways to go broke is to buy a house you can’t afford.

When you qualify for a mortgage, you’re given a price range that you can buy in.  If possible, buy a house at the very top of your price range.  This will ensure that you will likely struggle with house payments, and that your monthly payment will be more than the recommended 28 to 36% of your take home income.  (Remember those percentages include not only the house payment but also taxes, insurance, and HOA fees.)

Also ideal is to pick a home with the highest HOA fees.  Then, even after you pay off the house, you’ll be paying hundreds a month in HOA fees.

Buy a New Car and Trade in Frequently

How to Go Broke
Photo by Jakob Owens on Unsplash

After buying a house you can’t afford, the next best way to go broke is to buy new cars frequently.

Buy a brand-new car and only drive it for two to three years.  Sure, you save yourself the headache of costly repairs as the car gets older.  However, you also ensure that you’re absorbing the depreciation that happens in the first year or two of brand-new car ownership.

Ideally, when you sell your car, try to be upside down on your loan so that you owe more than the vehicle is worth.  Go ahead and roll that difference into your next new car loan, and you’re well on your way to going broke.

Give Your Kids Everything They Want

If you have children, make sure to give them everything they want.  After all, kids are only kids once.

Make sure to pay for all the lessons that they want.  Buy them all the clothes that they want.  At Christmas, buy them as many presents as possible.  When they come to you for money, give it to them freely without making them work for it.

Stay Active on Social Media

Stay active on social media and follow as many people as possible.

This is the best way to see what the Jones’ are doing.  Try to do the things that they’re doing.  Book more travel than you can afford.  Get your hair and nails done.  Go out to eat as much as possible at the trendiest, most expensive restaurants.  Buy as much as possible.

After all, the point isn’t a happy, contented life, but one in which you look as impressive as possible.  Who cares that you’re actually broke?  No one can see that.

Don’t Save for Recurring Expenses

Of course, you have your regular bills that come due every month, which you try to pay regularly.  But then you have your irregular expenses like your car insurance and home owner’s insurance, which are due twice a year.  Property taxes also fall into those categories.  But don’t bother saving a little each month so when the bills come due you have money to pay them.  No, that’s no fun.

Instead, pretend like those bills don’t exist, and when they come due, panic.  For several weeks, worry how you will pay these large bills.  Try to cut your spending for a few weeks so you can gather enough money to pay them.  If you can’t manage gathering enough money, ask friends or relatives for a loan.  Six months later, when the same bills are due, repeat the process.

Don’t Have an Emergency Fund

Who needs an emergency fund?  How could you possibly set aside thousands of dollars for an emergency?  That’s too boring for you.  You could never stand seeing that money sitting there and not spend it.  No, enjoy the money that you have, and when an emergency comes, which hopefully it won’t, you will deal with it.

Have as Many Credit Cards as Possible

How to Go Broke
Photo by Avery Evans on Unsplash

Fill your wallet with as many credit cards as possible.  After all, how can you finance your lifestyle without credit cards?

Make sure to charge all of your expenses each month.  Ideally, only pay the minimum payment due.  When one card reaches its credit limit, just move on to spending on the next card.

Don’t worry about the 12 to 20% you’re paying in interest monthly.  Don’t worry that by paying the minimum due you,re only putting a few dollars on principal, so you’ll never get out of the financial hole you’re digging yourself.

Remind yourself that all Americans have credit card debt.  It’s just the way our economy functions.  Plus, you’re actually helping the economy by spending, right?

Don’t Invest

Investing is so boring.  Don’t bother saving for retirement.  After all, you only live once, and who knows how long you’ll live, anyway?  What if you save all that money, and then you don’t even live until retirement?  What a waste!  Take any money you have and spend it now.  Live in the moment!

Final Thoughts

Clearly this is a tongue-in-cheek post about how to go broke.  However, many Americans do try to live this way.  The path to going broke is clear; we’ve seen many Americans do it—from everyday people to professional athletes, singers, and actors.

What doesn’t get highlighted as much is how to be smart with your money and build a sound future.  Don’t worry about what other people are doing; focus on your own life and your own financial future.  You’ll be much happier that way.

Read More

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The Five Most Common Retirement Planning Mistakes

Filed Under: Financial Mistakes, General Finance, Home, Insurance, Personal Finance Education, Retirement, Saving Tagged With: broke, financial awareness, money mistakes

FIRE: A Cautionary Tale & Advice on How to Do It Right

December 22, 2018 By Kevin Next Level Finance 8 Comments

One of the biggest trends in the personal finance world in recent years has been the FIRE (Financial Independence, Retire Early) movement. At its best, it’s a passionate group of individuals seeking independence from traditional employment and a healthy work/life balance. At its worst, it’s a group of bloggers with unrealistic financial projections that are a bit too caught up with finding that perfect Instagram shot while traveling.

The movement seems to be more popular in the world of bloggers compared to the offline world of coworkers and neighbors. Personal finance and FIRE bloggers often tout the income their blog is generating, and how that has led them to financial independence. Some of these folks have quit the corporate gigs and now focus fully on blogging and deriving income from their online activities.

Let’s be clear: this is great! Entrepreneurial activities and finding independence outside of more traditional work arrangements can be a great thing. I’ve been in this camp for years, so I can certainly appreciate it.

However, I believe there’s a bit of a leap from generating enough side income to quit a job to the idea of early retirement, and I believe the messaging around it is faulty. So, I find it important to consider alternative views of the FIRE movement. Even if you’re pursuing early retirement, hopefully you still find this discussion fruitful.

Let’s dive into some specifics…

We’ve had a historic bull market in stocks.

It’s no surprise that the FIRE movement has taken hold in the latter stages of a historic bull market run in stocks. The decade long run in stocks has had a myriad of effects.

First, people feel wealthy. The values of their assets have gone up dramatically. With a larger set of assets in the bank or a brokerage account, it’s more tempting to pull the trigger on early retirement.

Second, we’ve had very low volatility. The bull market (the S&P 500) has nearly gone straight up since 2009, and naturally, this has made investors complacent.

Low volatility and consistent year-after-year returns makes everyone feel like an above-average investor, and it can be tempting to think that the party will go on forever.

Bull markets are great for everyone, but the prudent investor has a bit of skepticism and plans for worse days. If you’re considering early retirement, and the amount of assets you have exposed to the stock market is to be a major source of security and/or income, you should be asking yourself a number of questions such as: What if a quick, market correction of 20% or 30% occurs? How exposed am I to market fluctuations? If I had to, could I go a few years without touching the money in my stock market accounts?

A 401(k) shouldn’t factor into early retirement

FIRE: A cautionary tale
Should you Retire Early?

One of the strangest parts of the FIRE movement is when 401(k) balances are cited. Here’s an example from an article on MarketWatch:

Earlier in her 20s, she set a goal to “retire” from full-time work at age 35, but she later decided to move that date up to 27.
She wasn’t going to “retire” completely, but work flexibly after quitting her job. At that time, she planned to move to Minneapolis to be with her boyfriend. She saved more than $130,000 in a 401(k), about $25,000 in a Roth IRA and kept $20,000 in cash. She also had about $5,000 in a taxable investment account and $10,000 in a health savings account.

If you withdraw money from a 401(k) account before the age of 59 ½, you are not only taxed, but you get hit with a 10% withdrawal penalty. Withdrawing money early on a 401(k) and incurring the 10% penalty is viewed by just about everyone as a really bad idea.

As such, the above example becomes ridiculous quickly. The individual’s $130k in the 401(k) is now irrelevant for the early retirement scenario. Sure, that balance will grow on its own between the ages of 27 and 59 ½, but this person has 30 years until then to figure out how to get income.

So, the person basically has $20k in cash, $5k in an investment account and $10k in an HSA. You can early withdraw contributions from a Roth, so to be generous, let’s just say this person has $60,000 in savings across these accounts for her FIRE scenario. A 4% withdrawal rate on $60,000 is $2,400 per year.

It’s not really a surprise that you read the following later on in the article:

Now, she’s living with her parents until she finds a new, full-time job, back in the IT world where she started.

Withdrawal rates

Since we touched on the topic of withdrawing investment or retirement money, let’s discuss withdrawal rates briefly.

If you’re an investor, there are very few things you can control. They are things such as asset allocation or diversification, contribution levels and withdrawal rates. Everything else is pretty much up to Mr. Market.

In very serious market corrections that occur every so often (e.g. the 2008 crash), even asset allocation or diversification doesn’t hold up very well. In 2008, essentially everything got hit (there was nowhere to hide). While asset allocation is an important consideration, it needs to be held in its proper place.

As such, for a retired individual or someone considering retirement, withdrawal rate becomes the most important factor for your portfolio. Most often you’ll see the 4% number cited as the safe withdrawal rate for a portfolio. It’s reasonable, but even the 4% level can bring about risk. In a prolonged period of time, if your portfolio goes through a major correction due to a larger market event (such as 2008), the 4% withdrawal rate will severely hamper your portfolio survivability.

It’s important to always recall the mathematics of loss. Bear markets hurt your portfolio more than bull markets help your portfolio. If your portfolio goes down 30%, you then need a 40%+ gain to get back to even. If you’re withdrawing 4% through a down period in your portfolio, some losses become permanent.

How’s this apply to the FIRE discussion? Risk is a crucial element of any long-term financial planning, especially in a retirement scenario where regular income is either taken off the board or reduced. The amount of money you withdraw from a retirement portfolio is a major element of risk to consider.

If you want to retire early, be conservative in your estimations of withdrawing money from investments and think through in advance possible scenarios where you may need to cut back on the withdrawal rate in order to maintain the long-term viability of your portfolio.

Re-examining the idea of work

It seems like much of the FIRE mentality is about escaping a mundane work environment. That might mean getting away from a 9-5 job or getting away from being an employee where you’re at the mercy of an employer.

Whatever the reason behind the motivation for early retirement, a broader discussion of work seems important.

Here are a few principles I tend to embrace regarding work:

  1. Working simply for the ability to make a living and provide for yourself and your family is not only okay, it’s an admirable thing. One thing that can get lost in the pursuit of more fulfilling work is the idea that work in and of itself is still a worthwhile thing. The person who works a mundane job day in and day out while providing for his or her family is worthy of our respect just as much as a jet-setting entrepreneur managing his or her business from exotic locales.
  2. If you seek more enjoyable or fulfilling work, awesome! But realize that nothing is easy. There’s a misconception often in the FIRE community that it’s super easy to get a few passive income streams up and running, and then, you’re off! The real world doesn’t really operate this way. Other than things like simple index funds, there are very few passive income streams. For example, a friend of mine that derives his income from real estate rentals (often cited as passive income) works harder than anyone I know. You should always expect that generating income is going to require hard work.
  3. Beware the promise of online income streams. I’ve made a full-time living off of online audiences now for the last seven years, so I can say with first-hand experience that it’s not for everybody, and it’s likely much harder than you think. If online income is your goal, then go for it, but plan to work very hard for little to no money for years. Even if you get over the initial multi-year hurdle, for most people, it’ll likely never be any substantial money. Could it result in a hobby you enjoy and make a little extra cash? Yes! But for many, if they examine the hourly wage they’re earning for the time put in, they’d have been much better off working a second job elsewhere.
  4. I wish I had more patience when I was in my 20s. Since much of the FIRE conversation occurs around young people, I’d encourage anyone in their 20s (or maybe 30s) that is reading this to be patient. I was a very impatient 20-something always seeking the next thing, the next business, the next way to make a buck. While things worked out fine for me, I wish someone had sat me down and encouraged patience. You have a long career ahead of you. You will be able to do many, many awesome and fulfilling things. It’s okay to be patient, earn a paycheck and learn from your company, your co-workers, your bosses. Work your way up in your company for a few years and take on additional responsibility. The experience is extremely valuable and will aid you down the road when you want to be more independent.

Family considerations

I’ve observed that discussions of family are often missing in the FIRE equation. “Retiring” early on a relatively small asset base gets pretty difficult when you start factoring in children. Or, what about aging parents?

I can tell you from first-hand experience that kids are expensive! Even when you’re trying to “do things different” from maybe the wider culture, there are still a large number of expenses that can be difficult to avoid.

While many FIRE participants maybe don’t have kids, or plan to never have kids, I’d also remind folks that things change in life! Priorities change, circumstances change, and you might find yourself with kids ten years after you assumed that you’d never have kids.

Regardless of your situation, I encourage you to consider (at least to a small degree) the chance that your perspectives on family may change down the road. And if they do, having the flexibility to adjust financially will be paramount.

A better path for those looking for an alternative work/life situation

I’ve spent roughly 1500 words poking holes in the FIRE movement.

I don’t want to just throw cold water on a movement which has legitimate intentions and goals, so perhaps I can offer some suggestions for a better path forward for people looking to change their work/life circumstances? Here are 5 tips for those intrigued by the FIRE movement but want to consider alternative paths:

  1. Plan to work harder than anyone else. The first tip is a basic one, but it’s often overlooked. Spend a few years working harder than anyone else setting up a business or additional income streams. Don’t quit your job, but spend your free time working. There are no guarantees, but you CAN build something valuable in your spare time without destroying your current financial picture.
  2. Don’t dismiss your experience and skills. Use them! The best way to grow additional income streams is to leverage your existing skill set and network. An easy transition from traditional employment can often be consulting in the same space. This sort of transition has the following elements working in your favor: You have skills in this space, you have a network in this space, and you have a track record you can point to which should help you land clients (often the hardest part of being on your own).
  3. Expand your skills so you can wear multiple hats. When you go out on your own, you’re going to be doing everything yourself. You’re going to selling and trying to land clients, providing the service or building the product, creating invoices, managing the books, and handling things like insurance and taxes. While you’re getting a paycheck, why not try to expand your skills so that such a transition will be smoother? Ask your employer if you can help out in other areas. This not only makes you a more valuable employee (and maybe help land a raise), but it’ll give you valuable experience in a number of areas that will help you later.
  4. Always be more conservative in your projections. Almost every entrepreneur who “takes the leap” is too optimistic with regards to projections. Initial sales and revenues are almost always lower than you think. Whatever you’re projecting to make in your first year, cut it in half and then consider how that will impact things. Additionally, make sure you have a cash cushion for personal emergencies. There’s nothing more stressful than deciding whether to pay for fixing your car or funding your business. While you’re struggling to generate revenue, life is still happening. Things break, people get sick, etc.
  5. Don’t forsake saving for “real” retirement. Probably the biggest problem with early retirement is that it means you’re no longer saving for “real” retirement. If you’re under 40, the reality is that you might have 50 years of life left to pay for. Having enough money for all circumstances that life can throw at you over such a length of time is not a simple matter. If you transition out of traditional employment to a more entrepreneurial setup, make sure you’re still socking away money for later in life.

To conclude, if you’re someone drawn to the FIRE movement, congratulations! It means you want more for yourself. I encourage you to consider your future situation from a number of angles and remind yourself that what you’re doing now still has tremendous value. There’s no rush to escape it. Seek to find fulfillment in your current situation while you prudently pursue the next phase of life. Good luck.

Filed Under: Investing, Passive Income, Retirement, Saving Tagged With: financial independence, fire, retire, retire early

Are We Too Confident in the Stock Market?

August 22, 2018 By Shane Ede 4 Comments

Experts are fond of telling us all about the historic returns of the stock market. But, does our belief in that make us overconfident in the stock market?

You’ll have a hard time finding someone who won’t tell you that the market performs quite admirably over time.  It may have it’s ups and downs, but it performs at a rate that touches on double digits for longer periods of time.  And, it’s hard to argue with the facts.  Take the market for any given 10 or so year period and you aren’t likely to find too many periods where it hasn’t returned a pretty nice rate.  Especially when you compare it to the rates of savings accounts and CDs over the same period.

But, there’s  shady side to all of that.  Our confidence in the ability of the stock market to return those kinds of numbers can sometimes cause us to over-invest our portfolios.  Every time the stock market drops significantly (or crashes altogether) we hear stories about the person who was near retirement and now has to work for another 10 years because he/she lost it all in the stock market drop.  Invariably, you hear one of the reporters utter something about whether the stock market is as safe as we all make it out to be.

Charging BullAnd the truth is, no.  It’s nowhere near as safe as some would make it out to be.  In fact, it’s down-right risky.  And the less diversification you have, the riskier it becomes.  Hold all your money, or a significant portion of your portfolio, in one stock and you’re just as likely to suffer a tragic loss than you are to retire rich.  Ignore the more conservative professionals who suggest that you should move more and more of your money away from stocks and into something like bonds as you age, and you have a much higher chance of suffering a tragic loss.

Our confidence isn’t entirely misplaced, however.  The facts remain that the market does return a healthy rate over time.  And as long as you can weather a few down trends, you’re likely to come out on top if you just hold on for the ride.  The overconfidence comes when you keep your money in too high of a percentage of stocks as you near retirement age.  By the time you are 10-15 years from retirement (about age 50-55) you should have moved at least 50% of your portfolio away from stocks and into bonds.  Your investment adviser should be able to help you with that, or you should sign up with a stock advisor service (like the Motley Fool Stock Advisor, or Betterment).  When you’re 5 or so years from retirement, you should be closer to 90% in bonds and other safer investments.  Yes, these investments are less likely to have high returns, but they also are almost guaranteed to return something.  And, as the old saying goes, something is better than nothing.

The bottom line is this.  Be aware of the risk of the stock market and that you should begin playing it safer as you near retirement age and you should be ok.  Don’t get overconfident in the history of the stock market and it’s giant returns.  Most importantly, find an investment adviser that you can trust and, at the very least, get their advice on your portfolio and it’s allocations, and you should find yourself hitting retirement with most of the money you expected to be there.

Image Credit: Charging Bull by kdinuraj, on Flickr

This post originally appeared on Beating Broke on 10/25/2010, and has been refreshed.

Filed Under: Consumerism, economy, General Finance, Investing, Retirement, ShareMe Tagged With: bonds, bull market, Retirement, return, stock market, stocks

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