These 5 Dangerous Financial Assumptions Can Derail Your Future

financial projections

Whenever we make decisions, we make certain assumptions. This is true when making decisions about money. We make financial projections based on assumptions about how things will go with our money. It’s also common to make personal finance decisions based on economic assumptions.

Unfortunately, our assumptions don’t always bear out. In fact, sometimes our assumptions can lead to financial decisions that can be downright devastating.

Here’s how to avoid the most dangerous financial assumptions:

1. Debt will remain cheap

We’ve seen low interest rates since the financial crisis, which means cheap debt. I know I’ve taken advantage of it; I financed a car in 2011 at 1.9% APR.

The problem is it’s easy to fall into the trap of assuming debt will always be this cheap. What if you get used to buying on credit, rather than saving up? Plus, what if you have a relatively low variable rate on a loan now, but interest rates rise?

You can’t assume that today’s low rates are sticking around forever, whether you are looking at a variable-rate mortgage or special rate on your credit card. In fact, some Federal Reserve insiders think that additional rate hikes are coming.

That means more expensive debt down the road. Now is the time to tackle your debt – before you get slammed by higher interest charges.

Also, don’t get used to buying on credit. It can be tempting to use cheap debt to leverage your lifestyle. The right approach can be beneficial, but it’s a good idea to save up for what you want. That way, even if you use cheap debt to make a purchase, you can pay it off quickly if rates start to rise.

2. You’ll get 10 percent annualized returns on stocks

When making financial projections about your portfolio growth, it’s common to assume stocks will get you 10 percent annualized returns. This is a dangerous assumption for planning to build your portfolio.

MoneyChimp’s compound interest calculator offers an illustration of how devastating that assumption can be over a period of 30 years: If you invest $450 a month, you’ll end up with $977,094.49. That’s a pretty good chunk of change, and might actually get you through retirement.

But what if you’re wrong? What if you only see an annualized return of 7.9 percent? It doesn’t seem like a big deal, but over 30 years it adds up. Now you only end up $648,069.80.

MarketWatch points out that the S&P 500 had an average compound return of 9.8 percent from 1928 to 2015. But during one 40-year period within those 87 years, the return was only 8.9 percent. Your actual annualized returns depend on what happens during the time you build your portfolio.

There’s a good chance that you will come out ahead if you stick to a dollar cost averaging strategy. However, you might not get the returns you assume.

Instead, base your financial projections on a lower rate of return, like seven percent annualized. It means you’ll sock more away in the long run, or start saving earlier. These are not bad things. You should probably be doing both anyway.

3. Basing future expenses on today’s costs

One of the worst things you can do is assume that in 20 years things will cost the same they do today. Inflation will kill your finances if you make these assumptions.

The year-over-year inflation rate for the all-items index released by the Bureau of Labor Statistics was 2.1 percent in December 2016. Historically, the inflation rate hovers right around three percent. That’s why it’s often used as a rule of thumb.

According to the SmartAsset inflation calculator, it would take $243 in 2047 to equal what you could get for $100 today.

While inflation varies each year, the bottom line is that prices rise. You need to plan for it by investing in assets with higher potential returns. On top of that, just setting aside more than you think you’ll need can help you combat the ravages of future inflation.

4. Government benefits will always be there

Originally, Social Security was designed to supplement income in old age. However, when it was implemented, expected lifespans were much shorter. Just since 1950 life expectancy has risen.

According to the Centers for Disease Control, the average life expectancy was 68.2. In 2007, it had risen to 77.9. Someone who made it to age 65 in1950 was only expected to live another 13.9 years. In 2007, someone who made it to 65 could expect to perhaps live another 18.6 years.

As a result of changing demographics, economic projections, and longevity, there are concerns about Social Security. In fact, there’s already talk about changing Social Security benefits. Other government benefits like Medicare might also change.

Instead of planning on government benefits to help you meet your retirement income goals, set aside more now. If you get the benefits, it will be gravy.

5. Everything’s just fine

The world probably isn’t coming to an end, but many of us think things are fine when they aren’t.

The reality is that, according to the Federal Reserve, less than half of Americans have three months’ worth of expenses set aside. On top of that 46 percent of respondents to the Fed’s survey indicated that it would be challenging for them to come up with $400 for an emergency.

Your financial assumption that you are fine might be based on the fact that you aren’t dealing with an emergency right now. If you’re living paycheck to paycheck and not setting aside money for savings, everything is not fine.

Recognize you might encounter a hardship. The Fed data indicates that a significant number of people can expect to face financial hardship at some point:

Begin building a rainy day fund immediately. Don’t assume that just because you can handle your bills that you are in a good place. This is a dangerous financial assumption to make.

In the end, we have to make some assumptions as we plan our financial projections. However, we are better off erring on the side of things being slightly worse than we expect; you can plan for the worst while hoping for the best.

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1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Finance Lender Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
  2. Personal Loans: Fixed rates from 5.49% APR to 14.24% APR (with AutoPay). Variable rates from 5.29% APR to 11.44% APR (with AutoPay). SoFi rate ranges are current as of December 1, 2017 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 5.29% APR assumes current 1-month LIBOR rate of 1.34% plus 4.20% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

2 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Personal Loan Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of August 1, 2017, the one-month LIBOR rate is 1.23%. Variable interest rates range from 6.02% – 15.97% (6.02% – 15.97% APR) and will fluctuate over the term of your loan with changes in the LIBOR rate, and will vary based on applicable terms and presence of a co-applicant. Fixed interest rates range from 5.99% – 16.24% (5.99% – 16.24% APR) based on applicable terms and presence of a co-applicant. Lowest rates shown are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with Citizens Bank at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, Citizens Bank checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Benefit: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.
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