fbpx
About Us | Customer Service | Contact Us | Blog
Reflection of a distressed man

Financial Mistakes That Destroy Your Net Worth

“Wealth is largely a result of habit.” ~ John Jacob Astor.

Your net worth is your wealth. Destroying your net worth, therefore, means you are destroying your wealth. It affects your financial security.

Much has been discussed on how to build wealth, but little is said about how you can destroy that wealth. We all know that it takes more to build than it takes to destroy. Building, and preserving, wealth is a painstaking process that takes years. But we are always one mistake away from destroying everything or slowing our progress. While we learn from mistakes, these mistakes are particularly costly. Here, it is better to learn from other people’s mistakes.

With that in mind, below are some of the best ways to destroy your net worth.

Uncontrolled Spending

To build your wealth, you have to manage your spending. It is a simple process of keeping your spending below your income and saving and investing the extra money. But some things are easier said than done and spending is one of those things.

Uncontrolled spending, especially when it’s constantly more than your income, leads to one thing, debt. And debt is a slippery slope.

The only way to tame uncontrolled debt is with a budget.

[Read More: Budgeting Strategies That Work]

Debt

Debt is often the consequence of uncontrolled spending. Personal finance experts will tell you debt is the biggest threat to your net worth and financial health.

While debt has a bad reputation, not all debt is bad. If you have a business, for example, and you can’t keep up with the demand because you don’t have enough capital to expand, the best thing to do is get a loan to expand your business.

Debt is only bad when it is unnecessary or unaffordable. For example, taking up an expensive mobile loan to buy designer clothes might be considered unnecessary and wasteful.

Avoid loans as much as you can. If you want a loan to boost your business, take a commercial loan through your business, don’t take a personal loan. Never mix up business loans with personal loans. If you have a loan, prioritize its payment.

Not Saving for Retirement Early

Personal finance management is a lifelong journey. And that journey continues even in retirement. When someone retires, they need an income. That income often comes from your investment or retirement savings. Since the return from investments can fluctuate, the only guaranteed source of income is from your savings.

[Read More: Getting An Income In Retirement]

That is why saving for retirement is important. However, many people think of retirement savings as something we do in our 40s. And that can mess your net worth. Evidence shows that individuals who start saving for retirement in their 20s and continue doing it consistently end up with a bigger nest egg to retire on. This is because of two things: compound interest and long-term investment performance.

So, if you don’t want your net worth to take a hit in retirement, start saving for retirement now.

[Read More: Why Retirement Planning Is Important For the Youths]

Open-Ended Risks

Calculated risk is necessary in personal finance. Risk and return even have a causal relationship. You cannot grow your wealth significantly without taking some risk. But risk can be managed. The two best ways of managing risk in finance is having insurance and an emergency fund.

An emergency fund protects you as you take risks. This fund will ensure that you don’t have to rely on debt if things go wrong. Insurance protects your wealth and health ensuring you don’t lose everything you have worked so hard to build.

Conclusion

It takes time and effort to build your net worth but if you are not careful, you could lose everything in an instant. We must do all we can to ensure our net worth remains in good health. This is all about balance and looking at both the advantages and disadvantages of the choices we make financially. You owe it to yourself to get it right.

________

Want to improve your financial literacy? Get one Personal Finance Blogs straight to your inbox every week. Sign up below.

WhatsApp chat