Most IT professionals are not getting the most effective use of their money. I have learned that it is more important how we use our money than how we earn our money. The first steps towards your success is to learn what are the common 12 blunders that IT professionals make with their finances.
1) Most IT professionals never decide what they want to accomplish in their life or with their money. Nothing happens until we set specific financial and life goals and by doing this we direct our thinking and actions towards the realization of our goals and dreams.
2) Most IT professionals have no specific plan for accomplishing their life and financial goals. Most people spend more time planning vacations and car purchases than they do their careers and financial future.
Average IT professionals work 90,000 hours in their lifetime and will spend less than 48 hours asking themselves what they really want out of this trip we call life. No one would ever think of building an office tower without first creating a blueprint. Yet most people try to reach financial and career objectives without an organized financial and life plan.
3) Many do not consider the impact of inflation in their planning. We often plan for education for our children or retirement from our work and think in today’s dollars. Very few people ever consider the possibility of the cost of living increasing. Inflation over the past century has moved at about four per cent and that means $1.00 today will have the buying power of $0.50 in 18 years.
4) Most IT professionals procrastinate about making financial and life decisions. Procrastination can be the greatest deterrent to reaching one’s financial and life goals. In today’s fast changing world too many people are waiting for the time to be right before they start their investment plan and take the necessary steps of putting it into action. History has shown that the time will never be right for these people. Time is our most valuable asset, and once spent it is gone forever. If we do not take the steps to plan our future now, time will become our enemy tomorrow. For most people time will make their important decisions for them. Remember, not making a choice is making a choice.
5) Too many IT professionals look for guarantees of their dollars rather then the preservation of their buying power. When we lend our dollars to the bank in saving accounts or GICs, or to the government within T-bills or bonds we are guaranteeing that our dollar amount will be returned to us with some interest. What many miss is that our lenders usually fail to give us back the same amount of purchasing power we gave to them in the first place. When I was in grade school in the 1970s I could buy a bag of potato chips for $0.25. This afternoon I bought a similar bag and paid $1.25. This has all happened within 25 years. How much will your financial goals cost you in the future?
6) Most IT professionals don’t take advantage of the methods available to legally avoid taxes. In Canada income taxes can often be avoided or deferred through the use of trusts, tax shelters, universal life insurance, pensions, profit sharing, RRSPs, Registered Compensation Agreements, limited partnerships, flow-through shares and, for independent consultants, by incorporating.
7) Most IT professionals take unnecessary risks with their investments by either being too conservative or too aggressive. Since 1992 when the mad rush to equity/stock investing began in Canada, many Canadian investors have tried to obtain high returns on their money, while at the same time not realizing that they dramatically increase the chances of losing a large portion of their capital. Others risk losing some of their purchasing power by being too conservative with their investments by seeking out guarantees, and guarantees that do not exist in life. It is important for all of us to find a balance between both approaches to investing our life savings.
8) Most IT professionals don’t protect themselves against the loss of their earning power. This year one in eight working Canadians will become disabled for more then three months and half of these disabilities will last two or more years. When asked what is a person’s most valuable asset, the usual responses are their homes, cars or other material possession. Usually people don’t think of what enables them to buy and own their material objects, which is simply their ability to earn a living.
A computer professional age 35, earning $120,000 per year who is planning to work until 65, using the historical inflation rate of four per cent, will earn $5.7 million. One’s earning potential is the asset people should protect first for themselves and their families, but this is usually forgotten or ignored.
9) Most IT professionals make decisions and investments on the basis of emotion rather than logic. Most people do so because they do not have a plan for their lives. By having a life plan and financial plan one will have looked at three possible scenarios that can occur in their lives and found their own answers. Have you asked yourself these questions?
What are the worst things that can happen to me?
What is the status quo? If I keep doing what I am currently doing, where will I be in the future?
What are the best-case scenarios?
Once you have prepared a financial plan that addresses these three scenarios you can then confidently select a path, jobs and investments based on logic rather than emotion. Once one has created a life and financial plan, all they need to do is continuously ask themselves one question to keep them on their chosen track when deciding to make any life decision, purchase or investment. They will ask themselves: “Does this decision, purchase, job or investment move me closer to achieving my financial and life goals or could it move me further away?”
Keeping on course by making well thought-out life choices and selecting the right investments to finance one’s life goals is key for one’s success in life.
10) Most IT professionals fail to diversify their assets. Recently, many IT professionals have become excited about investing their careers and dollars in technology companies where they have committed almost all their investment time and assets to. Historically it has been found to be wiser to diversify into many different types of investments outside the area where one earns their livelihood. Lindon Johnson, the former president of the United States, once stated, “The only things not known is the history not studied.” As the old adage goes, “Don’t put all your eggs in one basket.”
11) Most IT professionals don’t allow enough time for success to happen for themselves. In our consumer culture people are taught from an early age to want things now and technology is only speeding up this desire for a quick fix. People quickly become dissatisfied with what they are doing and their investments when they do not achieve great returns in a short period. In life there is no such thing as a quick fix, all great things happen for those that plan, take action and allow time for their goals to materialize into their lives.
Bill Gates once said “We usually over estimate the present and under estimate the future.” When planning for one’s life, it should never be about timing, it should first be about having a plan and then working that plan. I have learned to define luck as the point in time when preparation meets with opportunity. If one wants to catch a big fish they will first need to have a fishing rod and some bait. One will never catch a big fish if one is not prepared to go to the water.
12) Most IT professionals don’t seek objective professional advice on their overall financial plan. I am regularly asked, “Why should someone employ a certified financial planner?”
Why can’t they simply study the fundamentals and execute their own financial plan by using the tools that are readily available?
These same questions could be asked of other professionals – doctors, lawyers, engineers and accountants. Today there is very little knowledge that cannot be found in a book or on the Internet, awaiting those that have the time, interest and desire to learn. However, no one person can understand and successfully apply the total of this human knowledge.
A certified financial planner can provide you with sound information and effective advice to ensure your financial health.
Life is too short to find the right financial way through trial and error. Most people do not notice the symptoms of their financial illness until it is too late to alter their financial health. We are told that those who fail to plan, plan to fail. People would do well to get advice from someone experienced in helping others with their financial planning.
Merrick is a senior certified financial planner with LMS Prolink in Toronto and the creator of IT Universit-e, a bi-weekly independent-consultant seminar series. He is at peterm@lms.ca.