Long Time Coming
Long Time Coming
By Jonathan Clements – Humble Dollar December 12, 2020
IF MONEY ISSUES had the urgency of a broken air-conditioning system on a 100-degree day, we’d all be in great financial shape.
But all too often, financial troubles are years in the making. We bumble along, vaguely aware that things aren’t quite right. Sure enough, one day, the red lights are flashing and the alarm bells are ringing. But by then, it’s usually way too late to fix the problem—because the fix required taking action years earlier. Consider seven examples:
1. Living precariously. This may not be an issue for HumbleDollar readers, but it’s a big issue for most Americans. All too many families live paycheck to paycheck, with little or no financial safety net. We’re talking about folks such as the 37% of Americans who can’t handle a $400 financial emergency. One result: When the economy shut down earlier this year and unemployment spiked to 14.7%, millions of Americans immediately found themselves in dire financial straits.
I appreciate that those on the lowest incomes find it hugely difficult to save. But for everybody else, I wish there was greater thought given to the tradeoff between spending on baubles today and not spending so we’re better prepared for tomorrow. The baubles will provide only fleeting pleasure, while money in the bank can deliver an enduring sense of financial security.
2. Punting on retirement. Paying for retirement may be our final financial goal, but we should make it a priority from the day we enter the workforce. Why? If we’re aiming to retire at, say, age 65 with today’s equivalent of $1 million and our portfolio earns three percentage points a year more than inflation, we need to save an inflation-adjusted $11,700 every year if we start at age 22. What if we wait until 35 to begin saving? The required annual sum soars some 80% to $21,000.
3. Failing to diversify. Risk isn’t what happens, but rather what could potentially happen. If we own a lopsided portfolio—one that’s heavily skewed toward our employer’s stock, or to health care companies, or that includes only U.S. shares—perhaps all will be fine and we’ll roll along merrily for years with no ill effects.
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