Personal Dividends

Source: sxc.hu Photo: Penny Mathews

When we are young, we often hear about how we need to work hard to reach our potential. We may also hear some bright, young professional referred as someone with great potential. But how often do we think about our wealth potential. We all have the ability to reach our dreams and achieve financial freedom. Some of us may even achieve financial freedom with out maximizing wealth potential. And that’s because there are some things that will keep you from reaching your potential that you need to address. Here are 6 things that can keep you from reaching your wealth potential:

1. Paying interest

The most obvious impediment to reaching your wealth potential is debt. Any time you are paying interest, you are giving money to someone else for no other purpose than to pay for the privilege of borrowing money. You get almost no benefit from paying that money. Even worse, you are paying that money to someone else, instead of using it yourself to build your own financial success. Get out of debt as soon as you can, including taking some steps to pay your mortgage off as quickly as possible. The less money you pay in interest to others, the more you have to put to work on your own behalf.

2. Making interest-free loans to the government

In a very backward way, many of us get excited about receiving a tax return. This is because we think of it as “free” money. The truth is, unless you are eligible to avoid paying taxes altogether, this is actually your money — it’s just being returned to you. Basically, you’ve just provided the government with an interest-free loan. The government gets to use that money, and then returns it to you. Check your tax withholdings to make sure that you are claiming the proper number of exemptions, and stop holding out extra. This sort of “savings plan” doesn’t put your money to work for you. The IRS estimates the average tax return to be at more than $2,000. Consider the interest you could earn if you invested that instead?

Along those same lines, make sure that you handle your investments in the most tax efficient way possible. If necessary, get a tax professional to help you figure out the best way to structure your assets so that you get the maximum tax efficiency. It’s usually well worth the cost.

3. Failure to factor inflation into your plans

Often, when we plan for the future, we forget about inflation. Inflation is the erosion of your money’s spending power. The fact that costs increase each year means that it takes more dollars to buy things. You don’t get any more of these items (sometimes you get less), but it takes more money to make your purchases. You may need $12 in 15 years to by something that costs $10 today. You can see how it can quickly add up, keeping your money from going as far as it could. As a result, it is vital that you take steps to prepare for inflation, and arrange your finances so that you have investments whose returns beat inflation.

4. Focusing too much on the small things

We’ve heard about the “latte factor” and how making small changes to live more frugally can help you save money in the long run. This is true. However, sometimes it isn’t always efficient. Especially if you are so focused on clipping coupons that you miss the fact that you might be spending more money in paying interest on your auto loan or on some other large purchase. Those tiny savings probably won’t overcome the larger amounts of money bleeding out in other areas of your finances. In the end, you need to see the big picture, and realize that focusing too much on small savings can limit you.

5. Getting too emotional

Money inspires all sorts of emotions. Fear, enthusiasm, greed and pleasure are all emotions that can come out as a result of how you are involved with money. While it is probably impossible to completely separate your emotions from your finances, you can tone it down a little. Try to avoid making decisions (like abandoning your 401k) in the heat of the moment. Probably the worst times to make financial decisions are when you are fearful and when you are overly optimistic. Both mind states can lead to poor decision making that can limit your earnings in the future.

6. Spending and saving without a plan

You need to have a plan in order to reach your wealth potential. Without a clear idea of what you are doing with your money, it is impossible to shepherd it in an effective manner. You need to have clear priorities as to what you want to spend your money on, so that you are able to live the lifestyle you want. Just as important, you need to have a plan for saving and growing your money. Choosing the best investments (including where you put your cash savings) is a vital part of maximizing your wealth potential while preserving your future. Having a plan can also help you maintain some objectivity and check your emotions.

This list is by far not the most complete list and us human beings invariably find new ways of sabotaging our own financial well being. Do you have other examples of how we hinder our progress towards our wealth potential? Let’s hear them and we will update this list with your suggestions.

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