August 2013

The early Christian church identified seven sins as the root of evil. The sins were used as a teaching tool regarding recurring temptations. The seven sins are lust, gluttony, greed, sloth, wrath, envy, and pride.

In money matters, the affluent also indulge in sins. Here are the seven deadly money sins that will spoil your position. Some of the sins even have the same names.

1. Greed – It never ceases to amaze me how smart, affluent people will be suckered into fraudulent schemes in which major losses occur. Invariably, the lure is a promise to obtain returns that really are too good to be true. Affluent people are a successful target for the unscrupulous so long as the affluent are greedy.

Healthy markets will deliver returns in the long run. The wise investor takes advantage of this by having a plan, and investing in diversified holdings. Trying to time the market will work when you get lucky. But being lucky is not an investment plan.

2. Fear – Today’s financial news involves an uncertain stock market, and the excesses of sub-prime lending. Tomorrow’s news will catalog some other disaster. Fear causes investors to be whipsawed by the whims of the markets. Wise investors look at the long-term, and disregard short-term fluctuations. Concerns over short-term events tempt us to alter long-term plans that should often be left alone.

3. Sloth – Planning (which includes a budget) allows us to (i) see problems before they occur, and (ii) alter our conduct to help ensure we reach our goals. Often, the financial problems we face would be obvious to us if we just looked at the situation directly. However, this planning is work, and most would much rather do almost anything else.

Particularly for affluent individuals and business owners, there is a need to plan for the next generation. This means an up-to-date will and estate plan. The combined bill for estate taxes and probate are not as large as they once were, but still deserve attention.

4. Wrath – No one likes paying taxes. The anger over taxes sometimes causes businesses and individuals to enter into transactions that do not have economic substance, or whose economics does not make sense on an after-tax basis. Investments should be evaluated on their after-tax returns, not based on whether tax savings exist. Unfortunately, certain “investment” products offered by the insurance industry are “sins of wrath” that should be avoided.

5. Envy – Keeping up with the neighbors affects the affluent perhaps even more than others. Significant wasteful spending invariably results. There are other models for spending. Warren Buffett, one of the richest men in the world, is renowned for his unpretentious and frugal lifestyle, still living in a modest home that he purchased over three decades ago.

Envy also causes the affluent to incur excessive debt. Debt is appropriate when purchasing long-term assets that will allow your company to make money, or for larger personal asset purchases that do not decline in value with use. But, even otherwise wise users of debt need to consider the risk that a downturn will occur, or a celebrity career will flounder.

6. Pride – The affluent often need to diversify their investments. Too often, investors have too much in the company they own, the company they work for (usually through stock options), or their investments that have been successful. We may know and love these holdings, but we need to lessen our exposure to them anyway. Pride in the things that have made us wealthy can keep us from spreading investments into other positions that will diversify risks.

Related to this is the challenge of knowing when to take a loss. Even bright entrepreneurs and investors make mistakes. The really bright people do not become committed to their mistakes.

7. Delay – Albert Einstein once said compound interest was the “eighth wonder of the world.” To become affluent, saving needs to start early in one’s career. Putting money aside before you’ve paid the bills sounds backwards, but that’s the whole idea. The reason you’re not saving more is that you’ve already spent it. Saving first enforces sticking to a budget.

Avoid these financial sins and you will more likely stay in your financial heaven.

Fulcrum Inquiry is a financial consulting firm that performs forensic accounting, and business appraisals.