Surefire Ways to Lose Your Hard-Earned Money

Protecting your money should be your number one financial priority, but it’s easier said than done.

Too many people make financial blunders — some of which they can never recover from. Don’t fall prey to the same big mistakes that lose good people a lot of money.

Neglect Risk Assessment

If someone tries to sell you a no-risk investment, run far and run fast. There is no such thing as a risk-free investment. Of course, that’s the extreme. We don’t always have a solid grasp on the risks we’re taking on in any given venture. 

Assessing financial risks demands that we look at the individual opportunity and our current financial standing. For example, you must evaluate:

• Debt-to-Income Ratio ( DTI = Monthly Debt Payments / Gross Monthly Income)
• Debt-to-Equity Ratio ( Debt/Equity = Debt / Shareholder's Equity )
• Interest Coverage Ratio ( Interest Coverage = EBIT / Interest Expense )
• Combined Leverage ( DCL= %Change in Earnings per Share / % Change in sales = DOL  x DFL)
• DOL = Degree of Operating Leverage
• DFL = Degree of Financial Leverage

These calculations help us understand our position (or the position of companies we want to partner with) and thus, our acceptable risk tolerance.

Before you invest in anything, ask yourself:

• How much money am I okay with losing?
• What will happen and who will be impacted if this doesn’t work out?
• How can I diversify to reduce risk exposure?
• What measures can I take to ensure the quality of my investment?

Remember: hold your partners to the highest of standards. 

That means that you scrutinize what they promise. Ignoring risk means ignoring red flags. It means blindly believing too-good-to-be-true promises.

Don’t let your desire for success cloud your judgment! A short-term decision can have a long-term impact on your finances.

Ignore Inflation

If you’re letting your money sit in savings, you’re actually losing value over time. Even accounting for savings interest rates, inflation will eat into the value of your nest egg. For example, $50,000 in 2000 has the buying power of $79,103.67 in 2021. 

 You need more money now to accomplish the same things. 

 Instead of hoarding money passively, put a portion of that money to work. 

Real estate is the ideal investment for battling financial erosion due to inflation.

 Real estate is known as a hedge against inflation because its value increases with inflation rather than remaining stagnant. Combined with equity over time, owning real estate creates more wealth.

Savings alone don’t cut it. Bottom Line: Put your money to work!

Act on Emotions

Emotions cloud judgment.

Reaction vs. Response

A reaction is acting on emotion. It’s instantaneous and does not consider the desired outcome. Reactions are made on a sense of anger, fear, or excitement.

A response, though technically a reaction, is carefully calculated. Responses are designed to produce the desired outcome. 

You can avoid reactionary financial decisions by:

• Setting clear investment and business goals.
• Analyzing hard data.
• Using the news for information, not advice.
• Diversifying your portfolio.

Examine your feelings about an investment and recognize when either greed or fear are pushing you towards a decision. Step back and evaluate every opportunity based on numbers, facts, and risk — not on how you feel about it.

How do you keep emotions out of my finances?

• Don’t listen to fear-mongering.
• Recognize that this opportunity isn’t your only opportunity.
• Don’t put all of your eggs in one basket.

Live Beyond Your Means

When things are going well in business and investments, it’s easy to loosen your purse strings. There will be temptations to upsize your home, buy new cars, and grow in extravagance.

People who have significant wealth — and wealth that lasts — are people who live within their means. These are the “invisible rich,” people indistinguishable from the Average Joe apart from the number in the bank account.

They’re wise with what they have. While they enjoy their financial security and its benefits, they live in a way that means their wealth will always outweigh — and outpace — their costs.

Losing money is easy. Keeping it is hard. Growing it is harder.