Tags: financial | suicide | wealth | houses

Author Holcombe: Avoid 'Financial Suicide'

By    |   Friday, 18 October 2013 01:22 PM

People are prone to make bad money choices and part of the problem is faulty financial advice, says Russell Holcombe, certified financial planner and author of “You Should Only Have To Get Rich Once.”

Protecting people from bad decision-making led to a certain level of exhaustion, Holcombe told US News & World Report. So he decided to give the masses some advice on avoiding “financial suicide.”

Focus on 'Lifestyle Cash Flow'

He said when people try to track their net worth and all their spending, they're engaging in “totally meaningless” tasks.

All they really need to consider are fixed expenses, which are items that do not readily change, like mortgages and loans. Then, compare “lifestyle cash flow,” which is money required to cover those costs each year.

When there's enough earnings to cover the expenses, Holcombe says people can feel relatively financially secure.

Get an Income Stream

Everyone should take a cue from businesses and develop a streaming cash source, he advises.

“Perpetual income streams are the holy grail in business, from Comcast to Netflix. Everybody is trying to move to that model because they get paid whether you tune in or not,” he told US News.

Make Modest Home Purchases

Holcombe advises people to handle their income more wisely, especially when it comes to investments. A home is the largest investment many people will ever make, and Holcombe suggests that too many people over-invest. He urges people to buy cheaper houses.

A mistake people commonly made during the housing boom was buying the most expensive homes their incomes allowed. Only a fraction of the couples decided to base their decision on one income, but Holcombe says those who did came out ahead.

Put Retirement in Proper Perspective

Holcombe says it's senseless to invest in averting problems in the future if you cannot handle those that arise today. He urges people to avoid ignoring savings while plowing excessive cash into retirement accounts.

“The ability to survive is based on the ability to adapt,” he told US News. And tying up money in restrictive accounts reduces a person's flexibility to invest in other things or pay bills.

Don't Dwell on the Stock Market

Contrary to the advice of many of his peers, Holcombe says people should avoid getting too caught up in the stock market.

“For financial advisors, all roads lead to stocks,” Holcombe says, adding that this one-track mindset is a problem. “For the people that I know who are successful and endure financial traumas, the market is irrelevant to them. It's not the reason for their success. It's a tool,” he told US News.

Will Americans Learn?

When the financial crisis struck, the middle class had too much of their net worth tied up in homes and they were too exposed to stocks, says a Businessweek article.

A paper by economist Edward Wolff reported that from 2007 to 2010, the median American household lost 47 percent of its wealth.

The recession should have taught Americans the importance of diversifying risk, Businessweek said. But that does not appear to be the case because many are still relying on houses as the mainstay of their wealth, the article noted.

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People are prone to make bad money choices and part of the problem is faulty financial advice, says Russell Holcombe, certified financial planner and author of "You Should Only Have To Get Rich Once."
Friday, 18 October 2013 01:22 PM
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