It’s hard to make good money choices all day, everyday. After all, we have our moments of overindulging or not being able to stick to the month’s budget but those are more about our habits. The mistakes I see all too often just require a quick fix and can divert you from a major financial disaster. If you have some time today, sit down and review your finances to see if any of these common money mistakes apply to you.
Many people assume that if they have a Will that there is no need to designate beneficiaries, but there is nothing wrong with reaffirming those choices on your retirement accounts. This is probably the most common mistake I see! Either you weren’t sure who you wanted to list as a beneficiary or you assigned the beneficiary “To The Estate” of yourself. When you leave your assets to a designated person, they inherit your retirement account and assume it as their own and avoid the probate process. When you leave your life insurance policy to a designated beneficiary, they receive the life insurance proceeds tax-free. On the other hand, when you leave assets to your estate, or in other words … with no beneficiary, your loved ones have to go through the probate process and will end up paying more in court in attorney fees since typically the larger the estate, the higher the fees will be. They can also lose out on favorable tax treatment. It’s also a good idea to review your beneficiaries every couple of years; I can’t tell you how many times I’ve seen an ex-spouse, or a deceased spouse listed.
Holding a large portion of your assets in one stock can be detrimental to your portfolio. Either you purchased a stock years ago that has just done very well or your company has an employee stock option plan (ESOP), but by putting most of your eggs in one basket it is going to go one of two ways for you. I’m all about taking unnecessary risk off the table so if you find that more than 10% of your assets are allocated to one position, take appropriate action to diversify some of the risk away. Just be cognizant of any capital gains built in to the position if you decide to sell. This is where you may want to call in a professional to help you determine the tax consequences or use equity collar options to protect your position.
Being Too Conservative
Cash is great to have on hand for short-term expenses and to keep in your emergency fund. It doesn’t fluctuate and it doesn’t lose value, which is exactly why it’s not a good idea to hold too much of that stuff in a long-term investment. Your retirement account is meant to grow for the next 20, 30, 40 years depending on when you started. If you’re in your 30’s, you have another 30+ years of growth that needs to happen in order for you to reach your goals. If you’re skimping on your allocation to stocks, which have historically outperformed cash and bonds over the long-term, you’re going to be required to save more over time to make up for the growth that stocks would provide.
Not Saving For Retirement
This is a common theme around 20-somethings and even those in their 30’s. The one advantage young people have over anybody else is time and the power of compounding over that gift of time. Even if you’re only able to do $20/month, which may not seem worth your energy, has a huge impact over the long-term and just means that much less you’re going have to save later on due to your inaction today. Take Jane who invested $1,000 at the age of 25 versus John who waited to invest $1,000 at the age of 35. If they left that investment in the market until they were 65, assuming that investment earned 7% annually, what would the impact be of waiting 10 years for John? Well, at 65 Jane’s investment would be $14,974 versus John’s investment of $7,612! Jane’s investment basically grew to be twice as much as John’s because she had an extra 10 years of growth on him. Just think of what that could be for you if you’re doing a little bit every month.
Investing and saving isn’t as over-complicated as my industry makes it out to be! If you have a 401(k) plan through work, especially if they match (hello free money), take advantage of that! Otherwise, start an IRA/Roth IRA with a reputable company that offers low cost investments such as Vanguard, Betterment, or Fidelity. Even if you can only start with 1% of your pay, just start! You can work on increasing that every 6 months to a year until you reach 15% of your pay. Many 401(k) plans, and investment companies alike, offer target date retirement funds which automatically adjust allocations based on your target retirement date or just a plain and simple index fund. If you just get started you’ve gotten the hardest part out of the way. So ready, set, start!
Disclaimer: I am a CERTIFIED FINANCIAL PLANNER TM (CFP®), but I am not your CFP® or financial advisor. The information in this article is for general informational and entertainment purposes only and does not constitute financial advice. This article does not create a financial planner-client relationship. The author is not liable for any losses or damages related to actions or failure to act related to the content in this article. If you need specific financial advice, consult with a licensed financial advisor, CFP®, or tax professional who can tailor advice regarding your specific circumstances. Additionally, sometimes I use affiliate links to support my website. This means I may earn a small commission, which is no additional cost to you, for referring and discussing products and services that I personally use, or have used and trust. Thanks for your support!