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Why Otherwise Smart Professionals Manage Their Money Badly

You know many professions and executives who are well paid.  They live comfortable lifestyles.  Yet many of them manage their money badly. There are lots of reasons why.

Buying into the myth –- They hold a great job with perks provided by the firm.  When traveling on business, a black car picks them up at home and drives them to the airport.  They can expense expensive meals if they are entertaining clients.  They assume they are born to this lifestyle and spend similarly in their personal life. Too bad that when these services are used in their personal life, they are paid with after tax dollars.

Confusing wealth with cash flow -– They have a great salary along with bonuses, stock options and deferred compensation.  They maximize contributions to their 401(k) yet don’t realize the asset base they will need to support their lifestyle in retirement.  They assume the good times will never end but without savings, they are “wealthy” only as long as they are collecting a salary.

Ignoring the difference between before and after tax dollars -– They are paid well, but a large amount of that money doesn’t reach the bottom line on their pay statement.  They are living a lifestyle based on the top line number, not the actual amount they earn.

Not repricing services –- Reviewing contracts, putting out requests for proposals (RFPs) and squeezing vendors is all in a day’s work.  Many people buy homeowners or auto insurance once and keep paying the escalating premiums year after year.

Underinsured -– They carry insurance through their job.  If they are killed by an exploding cappuccino maker on a business trip, their family will be comfortable.  That insurance may disappear if they leave the firm or are between jobs.  Staying away from cappuccino makers is only part of the solution.

Ignoring budgeting –- Lots of people's lives in the office revolves around comparing actual vs. targeted numbers on spreadsheets.  At home, impulse shopping is the norm.  That’s what credit cards are for.  Why don't more people think about running their personal life as a business, considering the savings they put away as their net profit?

Carrying revolving charge card balances -– The easiest way to get a 17% return on your money is to pay off a credit card charging 16.99% on outstanding balances.

Keeping up with the Joneses -– Why would competitive Type A personalities be any different in their personal lives?  If the neighbors got a new car, we need one too.  Oh, the kitchen is five years old?  It’s time to replace it.

Eating Out vs. Eating In –- It’s been said the grander the home kitchen, the less likely it’s ever used.  In April 2015 Bloomberg reported Americans now spend more eating out vs. eating in. Combined with the old restaurant adage that “The material cost of the meal served should not exceed 25% of the price," it’s easy to see money is being wasted.

Saving pennies not dollars -– People will shop for the best price on gasoline while spending far more than they should on goods and services.  Grocery shopping is an exercise in commodity market pricing, yet many people buy familiar brands regardless of cost.

Not realizing what things cost -– Paying by credit card instead of counting out currency disconnects people from the reality of what things cost.  Need proof?  Let’s assume you use an Easy Pass when driving.  What’s the toll on the highway?  The bridge?  You have no idea, do you?

Accumulating overhead costs -– It’s easy to pay for big purchases over time.  It’s the rationale behind mortgages.  People often choose to lease, not purchase cars.  They sign up for the deluxe bundle of cable TV channels.  If they were downsized, they are left with a group of built in expenses, many of which cannot be simply cancelled.  If you can’t afford the item without financing over time, should you be buying it at all?

Reward yourself –- Work hard, play hard makes sense.  The cruise industry is great at promoting tiers of accommodations that insulate you from the general population or surround you with luxury.  The persuasive argument these providers use starts with:  “Because you are worth it.”  Yes, you deserve a break.  Compare costs and benefits between entry level and top of the line accommodations.

As long as money keeps coming in, many successful people think the good times will never end.  The habits they have developed running a successful business don’t carry over into their personal finances.