The Ten Financial Danger Zones

The following excerpt was taking from the book, Financial Fitness, written by co-author, Chris Brady.

There are some financial problems you need to beware of: the danger zones of personal finance. Specifically, there are ten things that are probably the most dangerous moments in someone’s financial life. Whenever you get near any of these ten things, stop, think about it, disengage your emotions, and engage your logic because all of these are thin ice.

1. Taxes – Make sure you get a good tax adviser because the tax code can be pretty complicated. Never break the law. Never skate the edge. But make sure you understand the tax laws so you don’t waste a bunch of money that you’re not required to pay.
2. Home Ownership – We have been taught that homes are great to own. Maybe that is true for some people in the right circumstances, but being a homeowner is one of the most expensive things you will ever do. Not only is the upkeep a significant expense, but property taxes and insurance are very costly. In societies with weak or struggling economies, increased property taxes will be one way that cities, municipalities, and other local governments attempt to stay afloat. And despite popular myths, homes do not always go up in value. This was the big idea that got popped during the last housing bubble. Many people have found themselves upside down on their homes, meaning they owe more than the home is now worth. This is a bad place to be. It is not our advice to own a home, or to avoid owning a home, but rather to be very wise. Do not make the mistake of seeing your home as a major investment, and think through the financial ramifications before you buy.
3. Divorce – Don’t divorce him! Don’t divorce her! Work it out! If you don’t, it is going to cost a lot of money. Of course, you need to do what is right for you and your family. Our point is simply that this can be a very dangerous financial move, so think it through from all angles. It might be the most expensive thing you ever do.
4. Credit Cards – Many people need to stay away from credit cards. We discussed this earlier in the book, several times in fact, but if you have not yet followed our advice, then (for crying out loud) put the plastic back in the wallet. Cut them up. Get rid of the things. Freeze them. Lock them up. Just stop using them. Credit cards are fine for people who have proven their ability to be disciplined with their finances. But for those with challenges in this regard, this warning is properly aimed.
5. Lawsuits – They are very expensive, and they can distract from your work, business, family, and other important facets of life. If you are living the principles of financial fitness, you will have the best and only real preparation for lawsuits: savings and financial discipline. Avoid lawsuits whenever possible, and never look at them as a way to gain something financially.
6. Uninsured Accidents and Sickness – Look, we know this is a tough world. But we have literally seen people cancel their health insurance because they “can’t afford it.” Yet they have tons of credit card debt, a flat screen TV, recreational vehicles, fancy cars, boats, etc. Get yourself some insurance. Sell some stuff. Walk around in a barrel in you have to! Get insured, even if it is just major medical insurance that kicks in if you have a big emergency. Protect yourself and your finances. Too much insurance is a waste and too little is a risk. Avoid both extremes. It is wise for people to look into getting the following kinds of insurance: home/rental, car, major medical, life, disability, long-term care, and identity theft protection. Also look into what insurance is needed for your kind of business. Protect your assets.
7. Status Living – Having to keep up with the Joneses (or the Zhangs, as they increasingly say in China) can really kill your financial fitness. If you haven’t noticed, the Joneses are probably broke. Following their example is bad for your finances. Actually, to tell the truth, the Zhangs are spending only a little and saving a lot. Keeping up with the Zhangs, and not the Joneses, is a really good idea. To repeat what we already said: Stop buying things you don’t need with money you don’t have to impress people you don’t even like.
8. College Education – We use the word “education” kind of lightly, depending on what college and where you go. College has become ridiculously expensive, partly because of all the scholarships given out, but mostly because of the ease with which kids can get government loans. This tends to drive the whole market price up. Be very careful that you get what you pay for. Take some time to think it through before you plunk down all that hard-earned money on a college just for reputation. Turn on your analytical brain, and treat it like an investment. Either make sure you (or your kids) get trained in something that will really bring the return you want, or focus more on getting a great education and less on getting a degree. To be clear, we think you should get a truly excellent education. This is one of the most important investments you will ever make. We just don’t believe this happens in college as often or as well as many people expect it to. If you do choose college, be sure you get the education you really want—or go and find it elsewhere. Note that the costs of college rise about 8% annually, while statistics show that the cost of a college education isn’t a very good investment anymore. A large percentage of people never work in the field of their degree, but they leave school with thousands of dollars in student loans. Ironically, as schools focus increasingly on narrow job training instead of broad education, people are getting less in the way of education and also using their expensive degrees less after graduation. For example, 85% of people who graduated from college in 2011 were unable to find a job and moved back in with their parents. Even more stayed away but still could not find good employment. It is increasingly common to find people with prestigious college degrees working in menial or fast-food jobs. Peter Thiel, the billionaire co-founder of PayPal, recently offered a number of $100,000 grants to students who were willing to drop out of college and start a business. Many top leaders are increasingly seeing college as a waste of time. As college becomes more expensive and less valuable, we expect to see more such alternatives that work for people better than college. Again, if you do go to college, focus on your education— not the conveyor belt requirements of the system.
9. Addictions – Very often when we talk to people and they have some serious holes in their finances, we find out there is some type of addiction behind the scenes. Fight those off. Get professional help. Get treatment. As tragic as these things are personally and to the family, they are also just as bad financially. Clean up your life.
10. Investments – The rule on investing is “buyer beware.” If those seeking your investment need your money, they do not qualify for it. If you don’t retain 100% control of your money, you are going to lose a whole lot of it; we promise. We have learned this through sad experience. The best investments are found on the YOU, Inc. Investment Hierarchy. About 95% of North Americans should not be in Kiyosaki’s “I” quadrant, which is investors only. Most should be in the “B” (business owner) quadrant. Those who try to become investors too soon are usually trying to invest like millionaires while earning like the middle class. This is the opposite of the real goal, as discussed earlier: to earn like a millionaire and live like the middle class. Also, amateur investors generally get slaughtered by the professionals.

Be very, very careful as you make decisions about the danger zones: taxes, home ownership, divorce, credit cards, lawsuits, insurance, seeking status, college, addictions, and investments. Get good advice from your financial mentors, and study things in detail before taking action.

As you become financially fit, do your best to avoid the financial danger zones, and be extremely careful as you make decisions when they do present themselves.