The Top 5 Most Common Financial Mistakes
Having offered financial services to clients for years, I have witnessed many things go right—and many things go wrong—with the investment decisions they make. It can be easier than you think to make financial mistakes, especially when you’re not sure of the best steps to take. However, there are several things you can do to help protect yourself from the consequences of those costly mistakes. Read on to understand the 5 most common mistakes I see that can have a large impact on your financial future—and how to avoid them.
Failing to Have a Comprehensive Estate Plan
There is so much more that goes into being financially secure than just how much money is in the bank. Estate planning is a crucial aspect of a comprehensive wealth management plan, especially if you want to pass significant assets to the next generation, or properly plan for the succession of your business. Through the proper use of trusts and other estate documents, you can ensure that what you’ve built over your lifetime is properly passed on while minimizing taxes and probate expenses.
Many high-income earners often overlook the full scope of a comprehensive estate plan and it can have devastating effects on your accumulated wealth. Making sure you are adequately covered now will save you time, money, and energy in the future.
Taking Too Little or Too Much Risk
In finance, every single investment made and penny saved comes with risk. If you buy stock in a new up-and-coming tech company, that will come with more risk than buying short-term Treasury bonds. Even a savings account comes with risk; although your savings accounts are likely insured, leaving your money in a savings account will prevent your wealth from keeping up with inflation.
A big mistake I see people make is having too many debt securities like bonds when they should be considering having more equity securities like stocks. A less common one I see is when people have too much of their wealth in risky investments, leaving their retirement savings vulnerable to high volatility. Proper asset allocation with regards to your time horizon, income, and future plans will allow you to balance making gains from riskier assets and safeguarding your wealth as much as possible.
Not Planning for Unexpected Risks
Very few people, if any, predicted COVID-19 or the Great Recession. But these two events have made it abundantly clear that unexpected economic downturns must be considered when building a comprehensive wealth management strategy. People often think that an emergency fund is enough to ride out unforeseen major life events, but it usually takes more than that. Proper risk management is key to staying afloat during uncertain times. This can be accomplished by considering unexpected risks that are personal in nature, such as divorce, disability, accidents, and illness, and by making sure you are properly covered.
Not Knowing When to Take Social Security
If you are not using a customized strategy for Social Security, you are most likely leaving money on the table. The earlier you take it, the lower the monthly benefit you will receive. Everyone will be different, so considering when to take Social Security should be a decision based on your goals, needs, and preferences. For example, if you wanted to retire next year at age 65, you’d be faced with the decision of whether to collect your benefits right away or to defer to some point in the future. If you decide to collect at age 65, you will receive less of a benefit than if you waited until your full retirement age, typically age 67 for most, and if you delayed all the way to age 70 you would receive the maximum Social Security benefit available to you due to Delayed Retirement Credits. Although for some delaying your Social Security benefits could mean delaying your retirement date, for others it may mean that they need to determine how they will fill the gap that is left between their fixed income and their expenses in the years prior to collecting their benefits. The solution in these cases could be as simple as taking larger withdrawals from their investments in the early years of retirement or working part-time for a few years to cover that gap.
Another consideration in determining when to collect your Social Security benefits could be whether anyone else is dependent upon you or has an interest in the benefits you will receive. Specifically, are you single, married, divorced, or widowed? For each situation, there may be a different strategy available to you when it comes to Social Security. It is important to be aware of this and make sure to customize how you go about utilizing Social Security during retirement.
Paying Too Much in Fees and Taxes
It’s not how much you make, it’s how much you keep. We often speak to investors that don’t fully understand the cost or fee structure of the investments they’re in, or how the taxation of their investment accounts really works. It is important to be mindful of these items as they can take a big bite out of any potential returns you could receive.
These costs include things like commissions, deferred sales charges, 12b-1 fees, and mutual fund expense ratios. Many of these expenses are simply “priced in” to the share price of the underlying asset, but it is important to know what those expenses truly are. Some may very well be justified by the work of the management team and the performance they are able to achieve, but some may not. Taking the time to analyze or inquire about these costs could be time well spent.
Additionally, some advisors don’t pay enough attention to the tax consequences of changes made to clients’ accounts, which can cause undesirable tax liabilities for you (both capital gains tax and ordinary income tax). When deciding things like what trades should be made or where to take a distribution from when you need cash, it is important to have a strategy in place that will help to manage your taxes both in the short-term and long-term. A plan to always minimize taxes today could leave you experiencing far more significant tax consequences down the road.
Trying to Do it All Yourself
If you are reading this article, you’re likely the type of person who cares about your financial decisions enough to take steps to ensure you come out ahead. We all have busy lives and it can be challenging to prioritize your work and family demands on top of managing your financial plan. Having a financial professional in your corner is a great way to offload the burden of this task while building your wealth and confidence.
At Wealth Builders, we can provide you with a personalized financial plan that is tailored to your specific needs and values. You have the control to change your plan as you see fit with the ability to see your results instantly. To learn more about us and how we can help you, please call 715-386-3735 or email info@wealthbuilders.financial.
About Dan
Dan Olsen is the president, founder, and wealth advisor at WealthBuilders, an independent financial services firm based in Hudson, WI. Before becoming a financial advisor, Dan had a nearly 25-year career as an on-air radio personality and spent several years in corporate America.
Dan helps clients build and manage their wealth to create a specific plan for retirement and loves teaching them that being wealthy is about more than just money. Through his distinct collaborative approach, he provides the financial guidance and resources necessary to help clients move forward in life and put their values into action. He loves knowing he has a purpose and that his work and effect on people and their lives matters. Through his education and 20-plus years of experience in the financial world, he has gained extensive knowledge and expertise in the financial industry, including obtaining the Series 7, Series 66 held with LPL Financial, and Life/Health & Accident insurance licenses.
Outside the office, Dan enjoys visiting the Great Lakes with his wife, spending time with his grandchildren, fishing (and ice fishing), listening to ’70s and ’80s music, and supporting charities that address food insecurity, especially with children. To learn more about Dan, connect with him on LinkedIn.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
All performance referenced is historical and is no guarantee of future results.
Stock investing includes risks, including fluctuating prices and loss of principal.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.