After working in the financial industry for over 30 years now, I have worked with hundreds of people from different backgrounds and life stages. Despite their differences, many people tend to repeat the same financial mistakes.
So, how do you know if you are making good choices when it comes to managing your wealth? While no one is perfect, you can avoid making some of the most common mistakes that have a significant impact on your finances. Here are the biggest financial mistakes I see and how you can 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 feel confident 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’re adequately covered now can 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 comes 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 prevents 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 concerning your time horizon, income, and future plans allows 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. However, 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, 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 to age 70, you would receive the maximum Social Security benefit available to you due to Delayed Retirement Credits.
However, 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 before 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. I often speak to investors who don’t fully understand the cost or fee structure of the investments they’re in, or how the taxation of their investment accounts 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 can 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 can 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.
How to Avoid These Financial Mistakes
If you’re reading this article, you’re already miles ahead of most people. But between all the responsibilities you have and the busyness of life, it can be difficult to manage your finances wisely. So, how do you avoid making the mistakes I mentioned here? Working with a financial professional is the first, and wisest, step to helping you preserve and build your wealth so you can have confidence in your financial future.
As an experienced financial advisor, my mission is to provide trusted advice and exceptional personal service to those I serve. Through comprehensive wealth management, I help clients create a strategic plan to get—and stay—on the path to financial freedom. To get started, email me at firstname.lastname@example.org or give me a call at 916-967-3208 to see if I am the right fit to help you pursue your ideal financial future.
James Callens is a financial advisor at GLH&C Financial Services, a full-service, comprehensive wealth management firm. Jim has over 30 years of experience in the financial industry and uses his extensive resources and knowledge to help his clients experience simplicity and clarity in their financial lives. Jim spent more than 20 years working for GE Financial Advisors, both in its insurance services department and as a regional manager and financial advisor. He took part in GE’s Six Sigma Quality Training program and completed the National Association of Life Underwriter’s four-year LUTCF course. Jim also earned his certificate in financial planning from the University of California at Davis. In 2011, Jim combined his own firm, Callens Financial Group, with GLH Financial Services, creating GLH&C Financial Services, so he could provide even more value to his clients.
Jim lives in Folsom, California, with his wife, Melissa, and his four children, Jacob, Kristen, Grant, and Andrew. Together, they enjoy outdoor activities like kayaking, bicycling, and vacationing at Lake Tahoe. To learn more about Jim, connect with him on LinkedIn.