10 Assumptions That Can Lead to Financial Ruin

2. There will be no setbacks.

The assumption is “I will always have a job.” When the economy slows, the logical way companies cut expenses is to shed jobs. The economy moves in cycles. There are laws against age discrimination, but people still use the expression “finding yourself on the wrong side of 40.”

Experts recommend an emergency fund with three to six months of living expenses.

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3. I will have good health forever.

I will have good health forever. If that were the case, no one would ever die. Life expectancy has actually been falling in the U.S. Various studies have shown spending in the final year of life is about $80,000.

Insurance doesn’t cover everything. Policies might have lifetime caps. Assisted living can be expensive. It’s a grim thought, but the money has to come from somewhere. This requires planning.

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4. The stock market will always go up.

The stock market has traditionally averaged a return of about 10% a year over decades. If the S&P 500 averaged 14.8% from 2012 through 2021, isn’t it reasonable to expect it will have several down years to bring the returns back down to the average?

Stocks should represent only a portion of your total wealth. Investors need to diversify.

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5. Real estate only goes in one direction.

First of all, it makes sense to own your primary residence free and clear. You always want to have someplace to live regardless of your financial circumstances or the economic cycle. However, there are no risk-free investments. Rental property can sit empty. It requires maintenance. Sometimes tenants don’t pay rent.

If your investment properties are leveraged, you are taking on additional risk. This needs planning.

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6. If I make a mistake, I can always recover.

Ever hear the expression “Easy come, easy go?” Some people assume if they start a business and it fails, they can always start another one. If they make bad investments and lose money, they can make it back again. This might be true in your 20s, but the older you get, the less time you have to recover.

An investment that declines from $100 to $66 has suffered a 33% drop. A $66 investment needs to appreciate 50% to reach $100. The older you get, the less risk you should be taking.

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7. My family life will work out just as I planned.

Wouldn’t it be great if couples stayed married, their children graduated from college, got good jobs and left the nest? This happens for some people, but not everyone.

Divorces happen. Your parents might come to live with you. Boomerang children might return to the next. All these possibilities require planning.

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8. I will always be able to borrow.

Many people consider credit card debt like spending their own money. It might come from a bank, but it is not yours. Credit card companies charge rates of interest several times higher than the rate depositors are paid on savings. If you owe a lot and a large amount of your income goes towards paying interest, banks might decline to lend you more or reduce your credit line. Debt requires management, too.

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9. The rules of physics no longer apply.

Newton’s second law makes the case: “What goes up, must come down.” Before the dot-com crash, people were talking about The New Economy. Companies didn’t need earnings anymore; they just needed a good idea. You know what happened next.

Today we hear about banks that lent to people and businesses larger banks wouldn’t lend to. Why are we surprised when they get into trouble? Companies you invest in still need earnings and risk management.

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10. The IRS does not consider me rich.

The U.S. government handed out a lot of money during the pandemic. This was done for good reasons. They will need to get it back somehow. Most people tend to think “tax the rich” is a good idea, but most people find it hard to define who “the rich” are, with the exception, “that’s not me.”

The tax laws might get rewritten to make paying estate taxes a real possibility or to raise income taxes in your tax bracket. The IRS might classify you as “rich.” You need to plan for this eventuality.

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