If you read my previous post about the rule of thumb to become wealthy, you probably know the simple pattern to follow to avoid getting stuck in the expense and liability trap.
Here is another obvious tip I wanted to share that most people seem to completely ignore. I see that human behavior all the time:
The most common mistake we do:
It is the end of the year and time to file our income taxes for the year. John realizes he didn’t put any money in his registered account throughout the whole year because his money was busy handling the tons of bills coming in every month. He decides to get a loan to have some money to put into his RSP or 401k to get an income tax deduction. He then has a brand new shiny loan to repay throughout the next year. Things get even worse from here. John gets up one morning and open the mailbox or bank account and sees that big fat stack of cash sent to him as a tax return from the government because he has put that loan into his registered account. Then he starts thinking about that new iPhone or laptop he could buy with that money! John decides: Man I’ve worked so hard this year, I deserve this!
When reading this, we all know what’s gonna happen the next year. The same scenario happens whenever we get a bonus, a raise or any unexpected income. Just think for a second, do you know anyone who is doing this every year?
What’s wrong with this scenario, can you guess it?
There is actually two major problem with this. First, is our mentality to upgrade our lifestyle as soon as we see the income coming in. We have to think long-term on this. Don’t get me wrong, in some cases, it is totally ok to upgrade your lifestyle, I would even recommend it, but you got to always make sure that you keep your wealth balanced (income/expenses/assets/liabilities).
What’s the second major problem with this scenario? Did you guess it?
John missed an opportunity. He waited a whole year before putting money aside. This costs him a year of interests he could have made if he had invested a small chunk every week or month throughout the year. He could have made hundreds or thousands of dollars.
When reading that, it seems so obvious, but even I went through these situations. Educating ourselves is our best bet to avoid this kind of trap.
I’ve put up a great guideline for you to study if you want to learn more about ways to manage your personal finance: