The seven deadly sins of personal finance
I’ve been reading and writing about personal finance for more than thirteen years. In that time, I’ve consumed a lot of books about money. Lately, I’ve found that it’s fun to revisit old favorites.
Recently, for instance, I’ve been re-reading Brett Wilder’s The Quiet Millionaire [my review]. It’s different than most personal finance books. It’s targeted at those who are farther along their financial journeys rather than at those just starting out. Still, there are bits and pieces in The Quiet Millionaire that are applicable to everyone.
Ten years ago, I wrote that I particularly like Wilder’s list of the seven enemies to financial success (which is my phrase, not his). I still like them. He writes:
If you want to become and stay the quiet millionaire, you must plan and manage your financial way of life…You must be proactive in order to obtain the financial life you want. By doing this, you will overcome the seven major obstacles to financial success.
Wilder is saying that we know there are certain common barriers to wealth. These obstacles arise for everyone. Because of this, it’s possible to plan in advance to cope with them. First, however, we have to be able to name these enemies so that we can prepare the proper weapons to fight them.
The Seven Enemies of Financial Success
According to Wilder, the seven enemies of financial success are:
1. Lack of discipline
Without discipline, it’s difficult to build wealth. In fact, it’s impossible to get rich — slowly or otherwise — if you spend more than you earn. The math just doesn’t work. Wilder also warns against compulsive spending, and he urges readers to track where their money is going.
2. Materialism
Stuff will not enrich your life. It’s so very easy to find yourself “keeping up with the Joneses”, succumbing to lifestyle inflation. But materialism breeds discontent. Instead, Wilder says, focus on intellectual and spiritual pursuits to obtain fulfillment.
3. Debt
Not all debt is bad, of course. A reasonable mortgage on a sensible home is fine. But consumer debt — or a bad mortgage on a big house — is an enemy to financial success. In fact, bad debt may be the biggest enemy to financial success.
4. Taxes
It’s our responsibility to pay the taxes we owe, but we’re under no obligation to pay more than that. “It is not unpatriotic to reduce paying your taxes,” Wilder writes. We should instead actively work to keep our tax burden as low as possible.
5. Inflation
Inflation is wealth’s silent enemy. It will not destroy you all at once. But it’s always there, nibbling at the corners of your life, consuming a little cash every year. It’s impossible to keep inflation completely at bay, but you can learn to mitigate its effects.
6. Investment mistakes
Poorly structured investment portfolios can be a killer. This enemy is fought through education, through an understanding of diversification and asset allocation, by taking the emotion out of investing.
7. Emergencies
The final enemy to financial success is the unexpected: unemployment, death, illness, and legal complications. Without a plan for emergencies, you leave yourself at the mercy of the fickle fates. Carry adequate insurance and maintain an emergency fund!
I’ve fought all of these enemies at one time or another. I still fight some from time to time. I feel like I have a good handle on investment mistakes and saving for emergencies, but my tax bill this year was onerous due to my own poor planning. And, of course, I’ve always struggled with discipline.
The Seven Deadly Sins (and the Last Four Things) by Hieronymus Bosch
The Seven Deadly Sins of Personal Finance
Wilder’s seven enemies to financial success always reminds me of Catholicism’s traditional list of seven deadly sins. This catalog of transgressions has a long, complicated (and intersting) history. Today, the seven deadly sins are considered to be:
- Vanity (or Pride). An inflated belief in your own abilities.
- Envy. The desire to have what others have.
- Gluttony. Consuming more than you need, especially with regards to food and drink.
- Lust. A passion or longing for bodily pleasure.
- Wrath (or Anger). The tendency toward indignation and the desire for vengeance. Hatred toward others.
- Greed. The desire for material wealth or gain.
- Sloth. The avoidance of work. Laziness. A failure to act or make use of your talents.
What would happen if we combined Wilder’s idea — seven enemies to financial success — with this list of seven deadly sins? If we were to make a list of seven deadly financial sins, what would those be? Off the top of my head, these seem like good candidates:
1. Sloth
The avoidance of work. Laziness. A failure to act or make use of your talents. Procrastination. Expecting others to solve your problems.
2. Envy
The desire to have what others have. Comparing yourself to others. Keeping up with the Joneses.
3. Gluttony
Consuming more than you need. Succumbing to lifestyle inflation, the endless desire to have more. Never being satisfied with what you already have. The inability to defer gratification. Impatience.
4. Aimlessness
A failure to plan for the future. A lack of purpose or direction. Failing to track your progress is also a form of aimlessness.
5. Improvidence
A lack of prudence or care in managing your resources. Spending mindlessly. Wasting what you already have. Not taking care of your possessions. Replacing the things you own before they need to be replaced.
6. Myopia
Making decisions without considering greater implications. Focusing on small, easy steps that make no real difference (clipping coupons, maybe) while ignoring the big things that destroy your financial future (paying too much for housing, for instance).
7. Ignorance
A lack of financial education. Putting blind faith in outside advisors — or the news. Failing to do your own research.
Although this list is spontaneous, I like it. These really do feel like seven barriers that prevent people from succeeding with money. But I’m sure it’s possible to come up with other (possibly more grievous) sins.
What do you think? If you were to list the seven deadly sins of personal finance, what would you include? And why?
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There are 27 comments to "The seven deadly sins of personal finance".
JD, as I’ve said before, my biggest enemy is fear.
Fear that if I invest in the market, the federal deficit will cause inflation and reduce the value of my investment in stocks.
Fear that if I invest in bonds, interest rates will rise and my bonds will be worth less.
Fear that if I invest in gold because of future inflation, the Chinese will stop buying commodities and gold will crash anyway.
Fear that if I save, the value of the dollar I save will be eroded by inflation.
Fear that if I spend, I’ll have to work longer regardless of my health or ability to work.
The way I try to overcome fear is to spread my risk around through diversification. I spend on things that will make me happy today, but I save to prevent having to work when I’m less able. I buy some stocks, some gold, and put some into savings accounts. I reduce or eliminate debts at higher than the minimum rate.
Most importantly, I try to continue to learn about the reality surrounding money and finances. Never stagnate! 🙂
Early on in my life is was an overestimation of my ability to pick stocks and a willingness to use leverage (bad debt) to jack that risk up even further.
Once I got that under control, it is working to maintain consistency in your plan. I have worked on that one by creating a vision for my life. Writing down what a perfect day looks like and what needs to happen for me to get there.
Creating and focusing on that vision gives you a purpose so every decision is measured against it. If the decision helps you get to the goal, then go ahead. If it doesn’t, toss it aside and work towards the next one.
Great list of obstacles we all need to plan to overcome.
Great article, should we expect the seven Allies next? Equally important in my opinion. I guess this is pretty basic stuff but I like this approach and it next hurts to hear it again.
Here’s what I’ve come up with…
Enemies of Wealth: Debt, Inflation, Materialism, Taxes, Waste, Complacency, Greed (this covers investment mistakes)
Allies of Wealth: Knowledge, Patience, Purpose, Preparation, Thrift, Discipline, Support (from others)
The biggest enemy is COMPLACENCY. People have this idea that they will just do whatever has worked before, for the parents, will also be true that the next 30 years will be the same as the last 30 even though the world is experiencing unprecedented acceleration of change. Anything which can be distilled to a simple formula (e.g. retire off 10% interest on bonds as quoted by YMOYL) can and will be repeated by everyone to the point where you just can’t do it any more. You can look at Japan (probably the most complacent country on the planet, at least outside of Europe) where they had to raise retirement age to 77 because too many people were retiring, retirement became too easy for the masses. Now they don’t have any workers left, the only hope for the future of their civilization is to build robots to take care of themselves. You have to be smarter, tougher, and stronger than the average person if you really want to get and stay ahead.
In 10 years, you will be able to buy a ticket to the Moon as easily as you can go to Cancun today. Maybe in 30 years, To Mars. What does this need for personal finance? Projecting your financial needs/wants into the future, when the opportunities which will be available to us and propelling our quality of life to unimaginable heights are unknowable, is futile at best; just like 15 years ago you wouldn’t know you would need internet or cell phone (and their corresponding monthly bills), or 100 years ago, that you would ever need running water and electricity and an automobile.
Investment mistakes is my biggest enemy. I lost a bundle in my late teens, so I’ve been ultra conservative ever since. Even though I have another 30+ years to retirement, too much of my money is in guaranteed accounts. I’m slowly reversing that, but my stomach actually cramps up every time I click that transfer button.
May I put forward another Enemy which isn’t on the list?
All these other Enemies are predicated on the person initially having a sufficient income stream to manage or mismanage.
On a river, one can sail a riverboat, in a lake a rowboat, in a stream a canoe — but all your skill is no help paddling a canoe in an inch deep trickle or a dry wash that holds a navigable flow only a couple times a year.
These are all very useful points, but not for all Americans — 10 or 20% cannot benefit in the way money managers would like, from prudence alone.
Noni
Here is one thing I think we could add to the enemies list lack of self-confidence or the belief that the financial world is so big it cannot be conquered. This is quite similar to the suggestion of fear. However, we fear that which we do not know. I might be a fearful investor, but if I am confident person I will learn what is necessary to be a successful investor. If I believe that is impossible from the start I’ll just stay where I am.
To me the one thing has always been a lack of discipline, particularly for the small things. We’ve always been great on the big purchases, but the daily things for the wife and the kids just eat us alive. This is particularly the case for me in that the most difficult part is getting my spouse and kids on board, because if the spouse fights you, it’s a fair bet the kids will as well. It’s been, and continues to be, a long slow slog in working through these issues. I’m guessing I’ll finally get my spouse on board around the time we retire.
The second enemy, materialism, seems contradictory. If one wants to overcome this enemy, the desire to be “rich” does not become virtuous simply because one pursues financial wealth “quietly” or “slowly.”
As we’ve discussed, JD, materialism is certainly an enemy but is arguably best defeated by contentment.
I’ve not read this particular book but anything with the word “millionaire” in the title does not have a firm foundation to speak out against materialism.
“We tend to forget that happiness doesn’t come as a result of getting something we don’t have, but rather of recognizing and appreciating what we do have.” ~ Frederick Keonig
My biggest nemesis is ’emergencies’ coupled with ‘low earning potential’. I’ve always had an emergency fund, but it can only tackle so much. 4 years of partial unemployment isn’t going to be helped by a single emergency fund (i try to just be as frugal as possible and not tap into it except for things like car repairs, medical emergencies, etc). I’ve pretty much conquered the first 6 foes, so my biggest goal in life right now is to increase my earning potential from ‘near poverty wages’ to ‘a real living wage’.
For me it is taxes. Last year we diversified some stocks while saving for a new baby. Well, I didn’t take into account taxes and got to see a huge chuck of our savings whipped away to pay for the taxes due to the diversification. It was so devastating to write that check to the IRS just because I took money from one account and put it in another!
I learned from that mistake, but still do not regret the reason for diversification: we had some old stock in only two companies! I put the money in some index funds.
Minimizing taxes at all costs isn’t always a good idea. I could take out a bigger mortgage and write off more taxes with the increase in interest.
Then again, I could just pay Uncle Sam the 33 cents in taxes and not pay the bank and extra dollar in interest.
One needs goals otherwise what’s the point? When I was 26 years old, I had about $230,000 in cash sitting in the bank from a fortunate stock purchase, and 4 years of bonus savings.
Another bonus was around the corner, which would add to that figure. But, by then, I was VERY wary of work, and started questioning what the meaning of work and life is to just save cash in the bank. It was boring. And so, I put 25% ($140,000)down on this two bedroom, two bathroom condo overlooking the park and lit a fire of fear under my arse to make work purposeful again.
The funny thing about debt or a mortgage is that it gave me the motivation to work again. The place still has a mortgage, but it’s much smaller now and is a cash flow rental.
One needs a purpose to work, especially if you don’t require a high standard of living.
RB
Re: taxes. While I don’t think one should pay more than they owe, I think scrupulous citizens benefit from actively engaging in the debates that decide how our tax dollars are spent. When I hear folks talk about how they want to cut their tax burden, I often wonder what they are including in their calculations. For me, I look at things like the cost of replacing a set of tires, if my roads weren’t repaired. Or, the cost of private education if my public schools weren’t quality (which thankfully they are). The health care debate has me paying attention to this as well. How much am I paying in health insurance premiums and deductibles? Would an increase in my taxes lead to less costs in the health insurance category? I guess I just don’t think the tax discussion should end at “keep your taxes low.” We owe it to ourselves to dig deeper than that.
On the debt side, I think that’s become a real hidden land mine in our society. People today don’t have the fear or at least respect of debt and the havoc it can wreak, the way previous generations did.
People are far too casual about using credit cards or taking on gargantuan mortgages, crippling car payments or outsized student loans. The real problem I think is that once you get on that treadmill you can’t get off. It becomes difficult to save or to even be objective about what you do for a living. Then debt begets more debt, and you’re floating hopelessly.
I knew a successful business man who had no savings, but considered the unused portion of his home equity line of credit to be his “savings”. When it gets to that point, there’s no turning back.
I like the article but based on my personal experiences, I would put a far greater emphasis on saving money. When we think about it, isn’t the real issue of our lives based on future income? The problem is we do not know what is ahead. A debt will be paid in future income. Do we really know what the future holds for us?
Too little information exists for individual investors. We can’t possibly know enough to make really intelligent decisions. This is why we end up being wiped out–we are the last to learn the truth. Look at the Blue Chip stocks today.
Save your money and focus on your goals. Enter into investments very carefully. There is just too many lies and corruption that are waiting to ensnare us.
This article originally appeared at Get Rich Slowly on 25 August 2009. This version has been substantially updated and revised. This marks the dividing line between old comments and new.
I’m definitely hitting the Sloth and Aimlessness sins right now, after 2 decades in the same field. Good article. I like these “blast from the past” articles to keep the content rolling.
These are not really most people’s problems and in some cases are just plain wrong.
1) Wasting money. Most people’s problem is not that they spend too much, but that they spend it on things that have little value, even to them.
2) Shopping for entertainment. This leads to number one. But, perhaps even worse, it causes you to spend money without considering how it might be spent better. You end up buying things because they catch your fancy while shopping and having to sacrifice more important things you could have bought instead.
3) Watching TV. It is there to sell you stuff you didn’t even know you “needed”. Its a bit like 2, but its force fed and often misleading. Members of the opposite sex won’t flock to you if you buy it, even if they do in the ads. You won’t suddenly find yourself at a great party or sitting on a deserted beach either.
4) Failing to consider the future. Some purchases will last you for years. Others will be gone before you pay the credit card bill. Think of it this way. When you go to buy plants for your house, do you buy perenials or annuals. One will beautify your house for years. The other will become an annual expense. The longer stuff lasts, the cheaper it is.
5) Buying new. Replacing something you own that is serviceable with a new version just to have something new is one aspect of this. The other is buying new, when a used version is both cheaper and more serviceable. Cars and houses being two good examples of where this is often true. And even for less expensive purchases, garage and estate sales are your friend, just watch out for number 2 above.
6) Deflation. For most people who own things or owe money, inflation is our friend. It makes the stuff we own worth more and it makes the cost of paying off our debts less onerous. Deflation makes everything we own worth less and the money we use to pay off our debts worth more. Inflation is your enemy if you are on a fixed income or living hand to mouth.
7) Investment costs. The biggest drag on people getting wealthy is paying the finance industry’s various fees. Many of these are hidden and when combined with the “magic of compounding”, they can cut your total assets in half over time. If you invest your inheritance at age 30, pay the industry average 2% in fees each year, you will have half as much at age 66 as you would have without those fees.
The problem with most money advice is that it is combination of moralizing and marketing. There is nothing morally superior about delayed gratification. Living within your means does not require self discipline, any more than living beyond your means does. Either way, you don’t have unlimited funds. Focusing on what you want to spend your money on and maximizing the benefits you get from it is not a discipline, its just common sense.
Great points here…but hmmm. Deflation versus Inflation?
Inflation is your friend if you live on credit and have debts.
Inflation is your enemy if you are a saver and have investments.
But…I totally agree on Investment Fees.
YES! J.D., you need to add that into “investment mistakes.”
There is a lot of ignorance around about how much fees cost you over time. There is NO reason to pay high fees for investments if you are with Vanguard or Fidelity or Schwab, all trustworthy firms that charge little to NO fees for index funds (so-called “passive” investments) that consistently track the markets and that consistently beat the vast majority of “active” managers (who get greedy or fearful just like the rest of us when the market goes up and down and make mistakes, buying high and selling low). If you don’t know what I’m talking about here, check out bogleheads.com, a place where such investment issues and index funds are (endlessly) discussed!
Investment fees? What a waste of hard-earned money!
Enemies: moving frequently, divorce, picking the wrong career (social work, psychology, teaching for elementary or high school), thinking that major talent will transfer into wealth: for example, you can have the talent of Brando, JD, or Michael Jordan, yet it’s *still* one in millions that you will make it as a pro actor, blogger, or basketball star.
I would say “aimlessness”, “improvidence”, and even “ignorance” kind go with “sloth”. They are all about not taking responsibility for your finances.
I think “Lust”/”Wrath” belongs in there. Many decisions we make are based on unhealthy, often destructive, emotions: adultery, divorce, spoiling our kids, etc.
I think “Greed” and “Vanity” also deserves a place. Day trading, get rich quick schemes, and believing we know more, understand more, and have a higher risk tolerance than we do.
I like Wilder’s list. It’s really good. It covers a lot of grounds in 7 rules.
The sins, I don’t know what to add there. It’s hard for me to think in those terms.
The sins are countered by Virtues
These seven virtues are:
Chastity, Commit to one companion and live not in betrayal
Temperance, to practice restraint and behave with good sense
Charity, The ability to give for free
Diligence, the energetic application of perseverance
Patience, The ability to tolerate without perverse emotional response
Kindness The ability to exercise your power benefiting another less fortunate
Humility The ability to be congruent to the truth in regards to one’s position.
The seven deadly sins and heavenly virtues of personal finance lie at the intersection of our neanderthal brains and reptilian brain stems. May the virtues triumph over the sins as we mind this gap very carefully and stay the course!
Wow, most of the comments stole my thunder on some of the enemies I was going to include on this list!
Awesome post and I couldn’t agree more. As an aspiring minimalist, I find it fascinating how removing “materialism” alone can take out a whole host of others, and also have a PROFOUND impact on one’s own financial success.