November 2017

Overcoming the Worst Enemy of Personal Finance

Author: Kent Thune

When it comes to money, who or what is your worst enemy?

The first culprits that come to your mind might include inflation, taxes or debt. While these have great potential to be formidable financial adversaries, there’s still a greater enemy that you need to know and understand. But before we get to the worst enemy in the world of personal finance, let’s address some of the lessor enemies you’ll need to face and defeat to ensure financial success in the long run.

Inflation is absolutely a financial enemy that is worthy of your respect. The average rate of inflation, which is the general rise in the cost of goods and services over time, is a little over three percent per year. For some perspective, at this rate, you could expect prices for the everyday items that you buy to double about every 20 years. Inflation is why you hear your parents say things like, “When I was your age, it only cost me $5 for a ticket to the movie theater.” Talk to your grandparents and they’ll recall much lower prices.

So instead of rolling your eyes when your elders complain about soaring prices, you can tell them that you don’t worry about inflation, because you know how to defeat it. The best way to stay ahead of this financial foe is to save and invest. But don’t just park your money in a bank account, and definitely don’t stuff it under your mattress. If you’re not earning at least three percent on an annual basis, you’re losing to inflation. To achieve returns like this, you’ll need to invest your money in stocks, bonds, mutual funds, or a combination of those investment securities. Keeping up with inflation also requires annual pay increases of at least three percent at work. If you’re not averaging pay increases like this or higher, you may need to consider moving on to another job in the near future.

Another financial enemy to stay ahead of is taxes. Although you won’t be able to ever completely escape taxation, you can find ways to minimize it. The biggest point here is to never pay more tax than you owe. This means you’ll need to do your homework at tax time, or hire a CPA to do the work for you, and find all the possible deductions and breaks you can get. For starters, the most common items overlooked on tax returns, according to, are state sales tax deduction, charitable contribution deduction (including donations of used goods to Goodwill or similar IRS-qualified charity), child and dependent care tax credit, and earned income tax credit.

And before taking the standard deduction, be sure you don’t qualify for itemized deductions.
Although still not the worst when it comes to your money, debt is definitely high on the list of financial enemies. The downside of debt—interest charges, late penalties and other fees—needs no introduction but a surprising minority aren’t aware of the best uses of credit. The use of loans to finance purchases is often referred to as financial leverage in the collective world of personal and business finance.

Leverage can be generally defined, in the physical sense, as an assisted advantage. The ancient philosopher, Archimedes, once said, “Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.” As a verb, leveraging means to gain an advantage through the use of a tool. For example, a heavy object is more easily moved with a lever than it is unassisted. Think of a hinge that assists in opening a heavy door or a pulley that helps lift large objects otherwise unmovable. Financial examples of leverage include loans for vehicles and mortgages for homes.

A general rule of thumb to remember for using debt wisely is to only use debt for appreciating assets, such as a home. That’s financial leverage at its best. If you’re not able to purchase a vehicle with cash, only borrow for financing a pre-owned car that has already significantly depreciated. With credit cards, be sure to pay the balance every month to avoid interest charges.

So, by now, you may be wondering what in the world of money could be worse than inflation, taxes and debt? It may come as a surprise that your worst financial enemy may be yourself.

If you’re normal, you have about $8,000 in credit card debt, you have too much stuff and too little savings, and you live paycheck to paycheck. People don’t find themselves teetering on the edge of financial ruin because of bad luck; they get there because of poor behavior. They hurt themselves.
The fact that you have a brain tends to get in the way of your best judgment. This means that your human nature will have you buying things you don’t need, spending more than you earn, procrastinating retirement plans, thinking you can predict the stock market, denying that you’re one lost job away from homelessness, and refusing to believe that you could die at any time.

While it is true that you may be your worst enemy when it comes to finance, you can also be your own best friend if you apply the best financial behaviors. Just because you’re human doesn’t mean that you are doomed to a life of greed, materialism, selfishness, and over-confidence.

With a little practice, mindfulness, and determination, you can turn your poor financial behaviors into positive ones. This financial transition will take more than reading a 1,200-word magazine article, but you can get a good start with a few simple but healthy financial behaviors.

Remember to pay yourself first. Since we are all fundamentally selfish, this is a good financial foundation to build upon. To pay yourself first, automate your savings. If available at work, have your paycheck automatically deposited into two accounts—one for spending and one for saving.

This way, no one touches your money, not even you, before it hits your savings or retirement account. You can’t overspend if the money isn’t in your hands (or at least not easily accessible).

When it comes to investing, do it passively, which means you’ll use mutual funds that track an index like the S&P 500, rather than picking your own stocks. Rather than losing to the market, like most active investors do in the long run, you’ll match the market by passively buying and holding the index.

To balance your need for rewards with responsible money habits, allow yourself small pleasures, such as a night out on the town, something nice to wear, or your favorite latte, but only after you’ve succeeded in sticking to a budget that works for you.

Above all, remember that wisdom is the awareness of your own ignorance, and humility may be the greatest of financial virtues. To prevent yourself from becoming your own worst financial enemy, remind yourself that you don’t know everything. As William Shakespeare said, “The fool doth think he is wise, but the wise man knows himself to be a fool.” Don’t be a fool.

Kent Thune is a freelance writer and the owner of a Hilton Head Island investment advisory firm, Atlantic Capital Investments. He is also a personal financial counselor to service members on Parris Island. You can follow his musings on mind, money and mastery of life at or on Twitter @ThinkersQuill.

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