How Fear Disguises Itself as Financial Responsibility While Undermining Your Goals: 6 Financial Traps
Are you letting fear drive your decisions?
This is an important question to reflect on periodically. Fear has a way of sneaking into the driver’s seat without us noticing. Fear often dresses up in ‘Responsible Financial Decision’ clothes.
Six Common Financial Traps Disguised as Responsibility:
All of these seem on the surface to be sound financial decisions. They seem like the safe option, when in reality, each one of these is a financial trap.
Buying a home to build financial security
Owning a home feels safe, but it can actually make your future much more precarious if it’s not properly planned for. A primary home is a lifestyle investment, not a cashflow asset. Owning your home can actually reduce your financial security, particularly if a large portion of your net worth is tied up in it (a single, illiquid, non-income producing asset). What’s more, owning a property comes with costs: taxes, fees, maintenance, and general upkeep require cash flow. A house cannot pay your bills, put food on the table, or fund your healthcare.
So prioritize securing your retirement cashflow before you invest in your forever home. This doesn’t mean wait until you’re already FI to buy a property, but rather have a financial plan in place for your future, before you add the additional expense of buying a home into that plan.
You can have both, but you need to plan for your INCOME before you plan for your property.
Don’t let your fear of not having a place to call home prevent you from implementing a plan that will allow you to keep a roof over your head AND meet your other essential needs for the rest of your years.
Keeping more than a year’s worth of cash on hand
Cash feels safe, but it comes with risk. Cash loses to inflation over time, so instead of growing your money, you’re actually losing purchasing power (even in a high interest savings account). If you live internationally you also need to consider currency risk with cash and other fixed income assets. What’s more, you’re also losing out to opportunity cost. Every dollar you keep in cash is necessarily not invested elsewhere, so you lose out on the opportunity for growth.
If you’re afraid of losing money, holding too much cash guarantees that you will.
This is why cash should always be used for short term needs, not long term purposes. Think monthly expenses, upcoming holidays and other large outlays, and of course, your emergency fund.
Holding back on investing due to the ‘Bubble’
The AI Bubble is ALL OVER THE MEDIA. You can’t avoid it. AI is sneaking into every aspect of our digital lives, it’s hard to ignore. While this disruptive technology is absolutely changing how we use our devices and how we conduct our online lives, it’s not unprecedented. The world has had disruptive technology before. I was recently reflecting on how disruptive standardizing time zones was around the world (we changed our clocks last week from summer to winter time here in France).
Humans lived for millenia with time governed by the sun, then suddenly, to keep the trains on time, we were asked to let a circle with numbers control our lives. We no longer really notice this absurdity, but if you live in a region that adjusts the clocks for summer, then you get hit in the face with the reality of it twice a year.
I imagine that AI will take a similar path (as disruptive technology typically does). At first it will be highly visible, and frustrating, and disruptive, but over time it will fade into the background of the fabric of how we live our lives (remember the time before smart phones?).
Speaking of which, the iPhone was introduced in the middle of the ‘lost decade’ in the financial markets. We’ve done this before. We’ve had bubbles and survived them. In fact, if you have a financial plan based on index investing using the math of the 4% rule your financial plan ALREADY accounts for bubbles and recessions and disruptive technology. So stick to your plan. Invest on schedule, knowing that the ride will be rocky.
The stock market has always been a roller coaster, now is no exception. It’s expected, the market fluctuations are exactly why we make financial plans to begin with. If we had an instrument that guaranteed 10% returns every year, we wouldn’t need to go to the trouble of making projections and working out asset allocation and developing a long term financial plan, we would just put all our money in that magical unicorn investment and call it a day. But that’s not the world we live in, so in order to build financial security we need to have a plan and we need to stick to our plan over the long term. If you don’t have a plan, now would be a great time to schedule a free call with me, so I can help you get started building your financial future.
Investing for your child’s future before your own financial house is in order
Children are the greatest blessing and the greatest burden all at the same time. Parents instinctually fear for their child’s future, and with education costs skyrocketing, planning for university fees is often top of mind as soon as the first little one is born. But just like on an airplane, you have to ‘put your oxygen mask on first.’ Your children need parents that are emotionally and financially secure. If you are planning their college fund before you have a plan for cash-flowing your retirement you’re setting up a scenario where you will be dependent on your kids for your security, rather than the other way around. There’s nothing wrong with wanting to fund your child’s education, but you need to ensure you have your own financial security in place first.
In my home we think of all money as ‘family money.’ When we grow the pot it benefits us all. As our family portfolio grows, we use it to care for everyone in the family. If you fund your child’s education, but not your own life, you’re leaving a huge liability on the table. Your children need a safe place to land, and if you can’t be that for them, where will they be? I don’t mean wait until you’re retired to help your kids, quite the contrary, I’m saying make a plan that includes the whole family and prioritizes covering basic living expenses for the future before adding in college funding to the mix.
Building up cash savings for intermediate term goals
Intermediate term goals, 3-5 years out, are almost always a cover for indecisiveness and a fear of ‘what if”. If you have a goal around this timeline it’s likely it’s more of an idea than a concrete plan. And what I see very often is that these mid-term goals tend to stay mid-term for decades, the timeline never shortens. It’s always just an idea that you're afraid to either comit to or rule out for the time being.
The time to start setting aside cash and actually planning is when it becomes a firm plan, think 1-2 years out, that you are actively working towards. So if you want the thing that you say you want, put it into action. If you just want to preserve possibilities for the future, then you’re better off buying more shares of your global index ETF in your taxable brokerage account now, and then when the plan is firmed up, you can divert future savings to that goal.
Front-load investing for the long term, and delay cash savings for shorter term goals as long as possible.
This will maximise your flexibility. Holding cash for years actually reduces your options through opportunity cost and inflation.
Making decisions based on tax consequences
Lastly, and this is a big one:
Don’t plan your life around taxes. Plan for taxes around your life.
The same can be said about finances in general. But here I want to specifically address tax. There is a massive cultural fear of tax consequences that’s overblown and largely unfounded. This fear of tax drives people to make self-defeating decisions based on a vague idea of how they might be taxed in the future.
Here’s the reality. Taxes are complicated, specific to your unique situation, and tax laws change over time. You cannot know what the tax consequences will be in 5, 10 or more years, because we don’t yet know what the tax laws will be then, we don’t yet know what your income will be then, and we don’t even know where you’ll be living then.
The time to plan for taxes is the year before you move countries. That’s when tax planning is necessary, but it’s only possible if your plans are concrete. You have to know WHERE you’ll be living, what your sources of income will be, and roughly how much income you will have in total. If you don’t know those three things, there’s no tax planning that you can do. So instead of letting your fear of taxes dictate your decisions, build a life that you want to live, and plan for taxes responsively based on the life choices you made freely.
Personal finance is actually a relationship problem. Too often we treat it as though it’s just a math problem. If you don’t confront your relationship with fear, you’ll end up doing math that feeds your fears instead of funding a future you want to live in.
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