How to avoid being your own worst enemy when it comes to your money and long term goals.

We all want to be better off, right?  Ideally, we would always make decisions that result in our best interest and help us reach our goals.  However, I think we know that isn’t always true.  Sometimes people sabotage themselves – eating that extra doughnut, hitting the snooze button when we are supposed to work out, letting Netflix keep playing the next episode, the list can go on and on.  Why we do this usually has to do with short term wants over long term well-being.   

Sadly, we also tend to have this problem when it comes to how we use money.  There are some obvious ways we hurt ourselves financially (i.e. getting in credit card debt as the easy example), but there are some ways that aren’t quite as clear to the average person.  We tend to look at the short term reward while being blinded to the long term effects.  Here are three ways we hurt ourselves financially in the long run that people often overlook.

1. Lifestyle Creep

Congratulations, you just received a raise at work!   While you should be happy to get more money, most people see this as a chance to spend more now.  It’s a very natural feeling to go get things they have wanted but couldn’t afford and to see that they can now buy the things they were putting off.

While making more money is extremely valuable to fulfilling your long-term financial goals, if your lifestyle constantly keeps pace, or outpaces, your income, you are always going to be in the same financial situation when you were making less money.  I recently met someone who made over $300,000 per year but had less than $100,000 in savings and had trouble with cash flow month to month.  Because of this situation and prioritizing the short term, we didn’t see a way for him to reach all his goals in retirement – he had to make some tough decisions.

2. Mental Accounting

Often times we save for a specific goal like a vacation and create a separate account for it.  This can be a very motivational tool and can be very helpful in reaching a savings target.  But, if you keep that money isolated with your goal and not your whole financial plan, it can set you back significantly.

For example, let’s pretend you have a separate account where you are saving up for a boat that has $15,000.  But, unfortunately you need to have the HVAC replaced and that will cost $8,000 that you don’t have savings for.  If you put the HVAC on credit and keep the money for the boat separate, the unit will end up costing much more than $8,000 (perhaps as much as $12,000 if the interest rate is 8.25% and you pay it off in five years).  It’s important we make sure that we use our money in a way that doesn’t make us poorer in the long run.  Doing things this way will reduce the opportunity to take trips and do other things with our money we would like to do.

3. Going It Alone

No one knows your money better than you, right?  Perhaps that may be the case, but the reality is we can be too far in the forest to see the trees.  It helps to have someone else come from an outside perspective to take a look at things.  In fact, if someone is a professional often they have solutions you didn’t realize existed.  Yes, up front it can cost some money, but in the long run it can cost much more to your overall financial health.

A great example is someone I met with recently who is ready to retire and take a pension.  She is set to retire next year and wanted to start taking the pension at that time.  Because I was familiar with state retirement rules I pointed out that if she waited one year to take the pension, she would be able to earn almost $6,000 more per year before cost of living increases.  In the long run, this could end up benefiting her in the six figure range in overall income and net-worth for the length of her plan.  If she hadn’t met with me and saw this, she would have missed out on this extra income and made it much more difficult to reach her goals in retirement.

Sometimes we make decisions that aren’t in our best interest, especially with our money.  But if you become more aware of your situation, put safeguards in place, and get some help you can reduce the chances of this happening significantly.  Bottom line, don’t sabotage yourself.