5 Wealth Killers
So, I was at a wedding reception not long ago, grabbing some food when a friend approached me and suggested I use the line on the other side of the room (it was a big reception).
“Why?” I asked.
“You see that kid over there?” He replied.
“Yes,” I said, looking at a boy who looked to be about 4 years old in a very dapper suit.
“Well, he was over here by the cheese straws a minute ago and let out this enormous sneeze, mouth and nose totally uncovered, all over the food.”
I looked back at the boy to survey how well or sick I thought he might be as if it would somehow excuse me from eating snotty cheese straws.
“Thanks,” I said to my friend.
Then, I cleverly slipped out of the line and drifted to the other side of the room where I grabbed what I assume were snot-free cheese straws, among other culinary delights.
No one I know enjoys talking about snotty four-year-old boys, but sometimes getting undesirable information is helpful.
How’s that for a segue into things that are toxic to building wealth?
There are an endless number of ways to get off track financially, but a few are particularly common, destructive, or both.
Without further ado, here are five things that are exceptionally devastating to building personal wealth.
1) Car Debt
If you’ve read many of the posts on our website or watched many of my videos, this probably isn’t the first time you’ve known me to harp on car debt.
I’m really not exaggerating when I say it may be the single most destructive force on personal finances there is.
Instead of preaching at you, why don’t we walk through an example so you can see just how impactful automotive debt is?
Below, you will see a comparison of three different car purchases.
- In the first column, we have a new car purchased with a loan using the average monthly payment, loan amount, interest rate, and term for new cars to calculate the total cost of ownership.
- In column two, we have a used car also purchased with a loan using the average monthly payment, loan amount, interest rate, and term for used cars to calculate the total cost of ownership.
- Finally, in column three, we’ll buy the same used car with cash.
I doubt the outcome is that surprising to you. Naturally, the new car is the most expensive option.
It may surprise you to see that the total purchase cost is almost $10,000 higher once interest is factored in. That means interest alone accounted for an additional 20% in cost.
As interesting as all of this is, it fails to capture the opportunity cost of tying up your money by paying off debt instead of investing it.
Below, I’ve added a few rows that capture what would happen if you invested the difference in monthly car payments in lieu of having to make monthly car payments.
If you bought a used car and paid cash, you would have $45,048.41 at the end of 67 months, assuming an 8% annual rate of return.
For the record, that’s $36,563.85 ahead of the used car purchased with debt and $71,967.66 ahead of the new car purchased with debt.
That is a lot of money for a refreshing new car scent.
For kicks and giggles, I calculated the total value of investing $738.00 for 68 months (the new car payment value). It came out to $63,651.50 which is another $18,573.09 ahead of investing $532 monthly.
These are significant differences in the overall impact on your net worth in a span of less than six years. Repeating good or bad car purchasing behavior over the course of your lifetime will make monumental differences in your wealth or lack thereof.
And I haven’t even pointed out that all of this assumes you’d buy a car for at least $33,356.25.
You really don’t have to try very hard to find a vehicle much less expensive than this, so there’s even more opportunity than our little example accounts for.
I don’t see any need to belabor the point further. It should be clear that it is not an exaggeration to suggest that borrowing money for a car could be the most financially destructive decision we make as Americans.
If you want to do a deep dive into the real cost of car debt, I invite you to read our post about the true cost of owning a car or watching the YouTube version.
2) Overwhelming Student Loans
This next one is a bit difficult to discuss.
I prefer to avoid characterizing one’s self as a victim. It rarely changes circumstances and actually tends to enable apathy which can take a challenging situation and make it impossible.
However, I empathize with student loan debt holders for several reasons:
- Culturally, we tend to encourage people to follow their dreams without any consideration for the costs. Impressionable high school graduates tend to get caught up in that.
- The cost of college tuition in the United States has more than tripled since 1963 (counting for inflation). That means a dollar spent on a college education will carry you only one-third as far as it carried a student in 1963.
- The government has made promises to forgive student loans, then not forgive them, then forgive them, then maybe some of them, then maybe not…ugh, I don’t know.
- We expect freshly minted high school graduates to understand the impact of loan terms like subsidized vs unsubsidized, public vs private, interest rates, etc.
- Little regard is paid to whether or not the amount being borrowed has any correlation to the expected salary after a degree is received. (There is a big difference between a $200,000 medical school debt and a $200,000 art school debt.)
Personally, I graduated from college in 2003 and thought I went through school at an expensive time. Unfortunately, the costs have accelerated, and done so much faster than wages making student loans even more of a challenge, and burden, to clear after school is over.
The saddest thing of all to me is the fact that this information is too late for almost everyone reading this.
“Now you’re telling me,” I can feel you say to your screen.
Welp, there’s no use crying over spilled milk. If you have student loan debt, do your best to get busy paying it off.
It’s not as if it’s going to be forgiven.
Or maybe it will, or maybe not, or, who knows?
If you happen to catch this before going to college, then by all means, please take notice, the loans you burden yourself with in college have to be repaid.
Think about your future self and all the fun things you’d prefer to do in your 20s and 30s instead of paying off student loans.
Practically speaking, be sure that the amount you take out in loans correlates to the value of the education you’re getting.
Find out what a realistic beginning salary is for your field of study and try not to borrow more than one year of that salary.
This will make paying off your student loans much more realistic, paving the way for more beneficial expenses like cars (but not on debt!) and maybe your first house.
3) Career Disengagement
When I first started MartinMoney.com I had some great ambitions for helping people with personal finance.
I spent a significant amount of time writing to readers with low incomes because I wanted them to understand that there is hope for anyone to build wealth if they just save, invest, and let compounding interest work its magic.
I’ve learned a couple of things since then.
First, low-income people aren’t reading my blog.
It’s true. The interaction I have with readers and viewers is all from the middle to upper middle class.
I might as well go to the beach and lecture to the sand as opposed to focusing on low-income financial counseling. It’s not that I’m against it, I just don’t have an audience.
Second, I’ve done the math and I have to admit that it would be very challenging to invest enough on a minimum wage income, to amount to any significant, lasting measure of wealth.
I won’t say it’s impossible, but you show me a path to wealth on a $15,000/year income without a lot of creativity or help and I’ll name my next dog after you, my friend.
Anyhow, instead of trying to make a case for reaching financial independence on minimum wage, it occurred to me that it makes more sense to encourage people to invest in themselves so they can achieve higher and higher levels of income.
After all, accumulating a pile of money gets much easier when you have a big shovel.
As you might expect, the most assured path to a bigger shovel is through education. Here is a graph illustrating the impact of education on both salary and job security.
This information comes from the Bureau of Labor Statistics’ 2023 Education Pays survey and it confirms that there is a correlation between educational attainment and income.
I won’t linger too long here, but I do want to point out a few quick observations I made.
- Note the big jump that occurs for those with a college degree. If you’re just looking at additional income per additional year of education, there’s a pretty good value in trading four years for a degree, and a few more for a master’s, and a few more for a Doctorate.
- A not-so-visible factor is the amount of time it takes to achieve a professional degree (like a lawyer or doctor, 3 extra years of school) vs a Master’s degree or Doctorate (2-5 extra years), and the boost in income one receives from that.
- Job security is also clearly tied to education, so not only will you make more if you go to school, but you’re quite a bit less likely to find yourself unemployed. That is no small issue, by the way.
Well, if there was ever a case for staying in school, there you have it.
If you would like to increase your salary through an educational advancement, I suggest you pursue it until it just isn’t practical.
Technology has made achieving educational advancements so much easier than it was for prior generations. This flexibility also means you can probably complete a course of study from nearly anywhere, meaning you can shop around for a program that is cost-effective too.
And, if you have an employer who is willing to invest in your education, you should absolutely take advantage of it.
Remember, it’s not just the cost of attendance that benefits you. You also receive years of improved income.
4) Buying Too Much House
On average, Americans spend $21,409 annually on housing. The median household income in the US is around $74,500.
This means Americans are spending about 28.7% of their income on housing.
Honestly, that isn’t all that bad, but it could also be a bit deceiving.
I recommend keeping your housing and transportation costs at or below 30% of your income so you have money available to save and invest.
If you factor in an average car payment of $620/month, we’re now up to 38.7% of median income directed into two items: a house and a car.
Honestly, after Uncle Sam has his share and one pays utilities and buys a couple of groceries, there probably isn’t much left for investing.
And I’m not trying to shame anyone. My first mortgage barely fit under this 30% threshold and houses were much easier to buy back in 2006.
Nevertheless, you need to be aware of the long-term costs of major purchases like these so you can begin making decisions to put some distance between your houses, cars, and the last dollar in your checking account each month.
5) Divorce
There is an ancient proverb that reads, “Marriage is grand, but divorce is fifty grand.”
Maybe it’s not that ancient, but there is a lot of truth to it. Divorce is one of the single most financially devastating events a person can go through.
To begin with, attorneys aren’t cheap. The average legal fees associated with a divorce are $11,300 per individual ($7,000 median), with more complex situations requiring even higher fees.
Next, negotiating the division of property will result in a reduction of your net worth. Not necessarily because it wasn’t already sort of half yours and half theirs anyway, but because many of the assets that can’t be split in half (like cars, boats, houses, etc.) will be liquidated for a portion of their value or…
Now you have the possibility of carrying the full cost of ownership for assets that were previously shared with a spouse. This additional strain often results in a reduced ability to focus on saving and investing for future needs.
Additionally, there is quite a bit of reduced efficiency when one household splits into two. There are now two households (paid for by half as many people) with two of everything that comes with that. Two power bills, two sets of insurance, two property tax bills, etc.
If you have kids, there’s also likely a need for space for them in each home which is, again, just less efficient.
Finally, taxes and opportunities for tax-advantaged saving tend to benefit couples who file jointly. That is a less costly, but noteworthy impact as well.
So, Curt, are you saying I shouldn’t get divorced?
Yes. Yes, I am.
It is like pouring acid on your finances. The outcome is rarely very pretty.
Additionally, I have personal views that lead me to discourage divorce, but I understand that it can be difficult to avoid at times.
I would be remiss, however, if I didn’t at least point out its devastating effects on personal finances.
Conclusion
You’ve been warned. These cheese straws are snotty. Avoid at all costs.
For more about wise financial decisions, I encourage you to visit our YouTube channel where we have loads of info about retirement saving, financial independence, tax strategies, and many other thoughtful topics.
