After 30 years in the financial industry, I have seen five very common mistakes made by people that prevent them from attaining their financial dreams. Here they are in no order of importance:
Spending more than they make. This is a very simple mistake that I don’t believe anyone sets out to make, but it happens unconsciously usually by someone paying for expenses on a credit card. The card bill then comes in and they are surprised by how much they owe. This can become habit forming and before a person realizes it, they have dug themselves a deep hole. There is no way to save money if every dime is going to pay toward expenses. It becomes very important to correct this mistake as soon as possible. It may mean cutting some subscription services, changing to a less expensive form of transportation, or even moving to less expensive housing.
Waiting to enroll in a 401(k) at work. One year of delay in starting a 401(k) can cost tens of thousands or more at retirement. As soon as you are eligible, start contributing a minimum of 5%. The goal is to set aside 15%, but it may take many months or years to get to that level. Five percent will usually allow you to receive all of the employer match, which is critically important for the success of your 401(k).
Paying off low interest debt. Understand that when you pay off a loan the return on your money is exactly what the interest rate of the loan is. So, if you have credit card debt at 22% then you make a guaranteed 22% return on your money paying that off as soon as possible. I cannot think of anywhere you can get such a guarantee. However, if you have a 3% mortgage or a 5% student loan, I think your money can earn more somewhere else. If your minimum payment is $900 and you can pay an extra $500 per month toward this loan, don’t do it. Invest the $500 each month to rebuild your emergency fund or toward your long-term goals. Money funds are paying 5% or more right now so why settle for just a 3% return. My rule of thumb is if the interest rate is 6% or less I do not pay it off early. Most investments over the long-term will earn better than 6%.
Using the wrong financial instrument for the wrong function. Often, I see someone investing in the stock market either directly in stocks or through an exchange traded fund or mutual fund for a short-term need, like saving for a home down payment. Certificates of deposits, money markets, savings accounts and short-term treasury notes are useful for time periods of five years or less. Bonds are good for five to 15 years. Life insurance is good for 15 to 20 years. Mutual funds, Exchange Traded Funds (ETFs) and stocks are good for 10 or more years. Often, I have seen people get excited over stories about the investor who made a fortune on meme stocks or a new technology stock, like Nvidia, and then they invest money they need in a short time and lose their investment.
Trying to time the markets. Market timing does not work over the long haul. A stock portfolio is like a bar of soap, the more you handle it the smaller it gets. Missing just five of the best days in a year can reduce results by more than 25%, according to studies. Timing requires guessing two times, one as to when to sell and get out of the market and the other when to buy and get back in. Being able to correctly guess both ends of this transaction is almost impossible. Studies have shown that a “buy and hold” strategy works the best.
The good news about all of these mistakes is that they don’t have to cause permanent damage to one’s financial goals. We are able to quit bad habits and change our behavior when it comes to finance.
Like any problem, seeking some professional help is always a good step.
Find a fee-only registered investment advisor who is required to act as a fiduciary for their clients to assist with investment decisions. Also, working with a Certified Financial Planner® can help with behaviors. Several CFP®’s work as registered investment advisors. They can be found at the National Association of Personal Financial Advisors or the CFP board’s website, letsmakeaplan.org.
Wes Shannon CFP®is a Certified Financial Planning Professional for Brazos Wealth Advisors in Fort Worth.
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