Whether you like the sport of tennis or not, you are probably familiar with the face of a former world champion Boris Becker. A flamboyant career winning 49 singles titles and 15 doubles titles paved the way for his $29 million net worth in the year 2017.
So, how do you go from a multi-million dollar net worth to bankruptcy where you are forced to auction all your trophies and awards to pay off one’s debts ?
The answer is simple — Bad Financial Planning.
While Becker didn’t turn bankrupt overnight, his riches-to-rags story is a much needed wake up call to reevaluate our finances and strategically plan for the long term. Before you lay flat on the turf, helplessly declaring your bankruptcy, let’s understand how you can avoid this massive debacle.
1. Curb Your Borrowing
50X bonus points if you sign up for our latest credit card !
A brand new SUV at only $200/month !
Personal loans at the lowest interest rates ! No Questions Asked !
Of course there will be no questions asked, because the more you borrow, the more interest you pay. In my post Plastic Money – when debt comes disguised as wealth, I have elaborated on the calculation of interest payments on the amount borrowed and how it can lead to a huge pile of debt.
Just because you can borrow money instantly through some online portal, does not mean you can use the money to travel to the most exotic destination this summer. Live within your means and only a maximum 40% of your monthly income must be allotted to paying EMI’s towards your loans. Therefore, if your monthly income is $3000, your EMI payments should be no more than $1200.
2. Do You Know Your Savings Rate ?
If your savings rate is below 25% off your monthly income, you need to start budgeting right away and cut down on unnecessary expenses. Avoid impulse purchases the moment you receive your paycheck and plan your finances for the long term.
Accounting for the following future expenses in your budgeting strategy will help you better understand attributing your savings to short term and long term goals.
Short Term Saving Goal examples :
- New car
- House repairs
- Expensive gifts for an upcoming wedding
Long Term Saving Goals examples :
- Child’s education
- Retirement planning
- Health care costs
Once you are able to visualize the amount you need in order to fund each of the above needs, the likelihood of saving more today will drastically increase.
3. Where’s Your Emergency Fund ?
If Becker had allocated only 10% of his net worth to an emergency fund earning a meager 5% annual return, he would earn an annual interest of nearly $150,000, preventing the current state of affairs.
Life can be unpredictable and unless you are sure of striking a hidden treasure in the course of an unexpected event demanding some heavy expenditures, you need to start saving for that safety net.
While every individual has their own set of rules to building an emergency fund, ranging from 6 months of living expenses to 2 years, I recommend having at least 1 year of living expenses saved in a secure interest-earning account. If your monthly living expenses are $2,000, you must start building an emergency fund towards $24,000 right away !
4. Get Rich Quick
If you are one of those who simply invests money because a friend, colleague or a good looking anchor on CNBC ensured a 20% quick ROI, you are making a huge mistake. Listening to trade tips and analysis is important, but acting on them without your personal due diligence will only lead to the black hole you never wish to foresee.
Don’t fall for the next big thing and educate yourself by reading up on companies and world economies. Invest your money based on your risk appetite and the goals you wish to accomplish.
For example, if you only wish to be able to live comfortably through your golden years, without having to worry about the volatile market fluctuations, you will be better off with a low-risk hybrid fund. However, if you are young and have many years ahead of you, investing in multiple asset classes can prove to be a good strategy.
There is no get-rich-quick scheme and no way you can time the market. Steer clear of such claims and take control of your finances. I have written a FREE Beginners Guide to Stock Market Investing that will allow you to make informed decisions in your investing journey.
Financial planning is often an overlooked area in our lives, where instant gratification takes precedence over a stable and secure financial future. It is for this purpose, that I am offering a FREE consultation to review your finances and draw a plan that best fits your needs.
Simply email me through the contact form and I shall work with you one-on-one to build the right plan for you.
Be Frugal, Be Smart, Be Rich !