3 Ways To Avoid the ‘Financial Vortex’ That Could Ruin Your Retirement
Written by
Peter Burns
Edited by
Jenna Klaverweiden
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Making a bad decision or poor investment can hurt financial health and negatively impact retirement plans, but most don’t realize that one bad move can easily lead to others. Additionally, having competing financial goals can impact individuals’ ability to save for retirement.
Detecting the patterns that lead to a “financial vortex” and learning how to remedy the situation are essential for improving finances and having enough for retirement.
What Is the Financial Vortex?
The financial vortex, according to Goldman Sachs, is a term that represents a cycle of competing financial priorities that can negatively affect one’s ability to save and plan for retirement. According to Goldman Sachs, a variety of economic and personal factors can combine to create a financial vortex of challenges that can inhibit saving for retirement.
For example, someone may take out a loan for a car that is a bit more expensive than they can afford. Let’s also say that interest rates were high when they took out the loan. Therefore, the monthly payments, along with auto insurance costs, gas and repairs, could divert funds from other areas, like retirement or savings. As a result, they might end up leaning on high-interest credit cards to afford basic needs like groceries, which could put them further in debt.
These economic and personal circumstances can lead to a financial vortex, which could cause them to continue to incur debt or minimize savings opportunities. By the time retirement rolls around, they could be in a difficult position.
“Competing priorities and limited financial resources make it difficult to balance multiple goals,” according to Goldman Sachs.
How To Avoid the Financial Vortex
Understanding the financial vortex is the first step to avoiding it, but that isn’t the entire solution. Steering clear of it requires keeping a long-term perspective, attaining achievable goals and making productive financial decisions.
While you can’t control all of the economic factors that can contribute to a financial vortex, there are some things you can do. Here are three things that can help you from falling into a financial vortex trap.
Get Out of Debt
For those in debt, getting out is easier said than done. Regardless of the amount owed, finding an effective method for dealing with it is important. Two of the most popular methods for getting out of debt are the snowball and avalanche methods.
The snowball method has you list your debts from smallest to largest. While you’ll have to pay the minimum balance on all of them, put more toward your smallest debt until you pay it off completely. Next, you’ll be able to put the minimum balance and extra money that you had been allocating to your smallest debt to your next-smallest debt.
The idea behind this is to eliminate your debts one by one and build momentum. Always paying only the minimum payments or haphazardly putting money toward debts can feel like you’re not making any progress.
The avalanche method is similar, but with this strategy, you’ll list your debts by interest rate. Tackle the highest interest rates first, which are often credit card balances. By eliminating debts with higher interest rates, you’ll pay less over the long run and have more money to put toward your other debts.
Live Within Your Means
Getting wrapped up in what everyone else has and trying to keep up can contribute to the financial vortex. Understanding what you can afford and budgeting to make sure you live within your means is a way to avoid it.
At its core, living within your means is spending less than you earn. Doing this can help you prioritize other financial goals, like creating an emergency fund and saving for retirement.
Get Financial Help
When it comes to finances, there are many ways to get help to make sure you don’t wind up in a challenging situation. Professionals such as financial planners, investment advisors and credit counselors can all help you with your finances and prioritize your goals.
Downloading budgeting apps, taking online courses and listening to podcasts can also assist you in reaching your goals.
By using the resources available to you to improve your personal finances now, you’ll enjoy the benefits of more retirement savings years down the line.
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