How reverse planning can help avoid going broke

Identify possible financial pitfalls and chart a path to steer clear of those perils

A lot of people have the tendency to delay putting their finances in order. They slip further into chronic debt that leaves them trapped and with no monetary cushion.

In a world that seems to be spinning out of control with Covid-19, economic shocks and environmental disasters, stoicism is having a pretty big moment. If you’ve managed to avoid it so far, stoicism is a school of philosophy that goes back to the ancient Greeks and Romans and focused on living virtuously in the moment, and not being caught up in pleasures such as food or spending money. They focused on staying calm in the face of distress, which is something we all could use more of now.

One stoic exercise that has caught on around the world and could help keep us from disaster is called the “premortem” or negative visualisation: thinking about the worst result, then working backwards from there to see the steps to avoid.

Basically, if you figure out what is the worst thing that can happen and think through what would have to happen to end up there, you can avoid the negative outcome by refraining from the steps leading to that result.

As I’m a personal finance writer, I wanted to focus on a terrible financial outcome that I’ve seen many people face in the UAE: working hard but still ending up broke.

Now, I understand that some things can’t be controlled, such as certain health conditions – not heart disease, diabetes or lifestyle diseases, which can be controlled by better choices – accidents, getting sued, and just plain bad luck. Sometimes, life is a gamble and the universe decides a whole lot of terrible things need to happen all at once.

Covid-19 has taught this to a lot of us. But by going through this premortem process, we can figure out a path that avoids pitfalls and leaves us with a much better chance of success.

So, disregarding things that I can’t control, how would I end up broke?

1. Developing a taste for luxury, which can never be satiated because there's always more to buy
2. Buying as much property and cars as I can afford, leaving me with no margin for savings
3. Not figuring out how much I can spend in a day
4. Not tracking my spending
5. Unhealthy habits that lead to chronic lifestyle illnesses
6. Not buying income-producing assets and investing wisely
7. Going with a financial adviser who is only there to sell me things that benefit him

These are not theoretical factors. I’ve seen many friends in Dubai and around the world fall into such traps. These are often people who will always get their financial house in order next year, after they just get through this one thing. But next year never comes, and they stay on the hamster wheel of spending as much as they make or even more than they make, going into chronic debt that leaves them trapped and with no monetary cushion.

Any financial success I’ve had here (and I’m no millionaire, but I’ve increased my net worth seven-fold in the five years I’ve lived in Dubai as a teacher, most of that coming in the past three years after I learned about financial independence) has come from doing the opposite of the seven steps above.

1. I've realised that luxury is a trap that just makes you want more, and I avoid it. Every now and again, I'll do something fancy just for the novelty of it, but once you get used to it, it's very hard to stop.
2. I've lived in accommodation that costs less than my housing allowance, giving me a raise for doing no extra work. My car was reliable but not flashy, and easy to afford
3. I worked out how much I can spend in a day and still hit my savings goals. I've made it a game, so I get a little burst of happiness every day I'm under my spending target
4. I track my spending with a Spending Tracker app, so I know exactly where my money is going and only spend about 30 seconds every day doing it
5. I've fixed my eating patterns and weight and started some moderate exercise, reversing my pre-diabetes, sleep apnea and other health problems that were caused by terrible eating habits and being obese
6. I've invested regularly and intelligently and learned about index fund investing from groups such as SimplyFi in the UAE
7. I've avoided financial advisers, so have not been stuck with under-performing financial products that have huge fees, are difficult to get out of and only benefit the person who sold it to me

None of these steps require you to do anything crazy or unobtainable. I’m a pretty average person in a lot of ways. But if you figure out what your financial traps are and focus on financial success instead, you can avoid them.

Dubai schoolteacher Zach Holz (@HappiestTeach) documents his journey towards financial independence on his personal finance blog The Happiest Teacher