How to Identify & Avoid Common Financial Mistakes
A decision not to do something can be just as impactful as a decision to do something.
Sometimes, the best action is inaction.
“All I want to know is where I’m going to die so I’ll never go there”
Don’t go where you’ll die so you don’t die - makes perfect sense (with the exception that we all must die - Charlie is just funny).
When I think about this through the lens of financial decisions:
All I want to know is where I’m going to lose money so I never do that.
Here’s some common mistakes to avoid:
Purchasing a whole life insurance policy as an “investment”
If I had a nickel for everytime a client sends me over some permanent insurance policy from an insurance salesman asking me for my opinion, I would be retired (JK I’d have a few dollars but you get my point).
Whole life insurance is not an investment.
At best, it’s a savings account.
Whole life insurance isn’t bad, what’s bad is that it’s sold to people who don’t need the policy for a purpose that doesn’t suit them.
Let’s take a step back:
There are a few reasons why someone would want to buy life insurance:
They want a death benefit for their family in the event they’re no longer here
They want to earn cash value
They want to help pay for their future estate tax
While all valid answers - there’s better solutions for ⅔:
Whole life insurance is expensive, term life insurance is cheaper. If you’re looking to solve for an income deficit your family would suffer in your absence - term is the best route.
Whole life insurance cash value is generated from an overfunded return of premium dollars. Meaning, whatever isn’t paid for the cost of insurance plus your salesperson’s commission, is given back to you as cash value (read that again).
Paying your estate taxes is one of the more valid reasons for having whole life insurance. An estate value above $12.58M in 2023 is taxed at 40%, so having a way to pay for that (not having to force liquidity from an estate sale) can be helpful.
Purchasing an annuity for "protection"
Being shown an illustration of how this policy is going to explode in appreciation (& never lose value) may make this seem like a great idea, but few policies live up to their non-guaranteed value. So, while you may be sold on the idea of protection - it's a poor vehicle to capture the market's returns. You’re just transferring your risk to the insurance company.
Holding too much in cash
Cash is great to have but horrible for generating long-term wealth.
Have an emergency fund set - then place excess cash in accounts that generate higher expected returns.
Buying high fee investments (&/or paying a high fee advisor)
Investment costs matter.
Be mindful of what you're paying for. Some funds have front-loaded and back-loaded sales charges, 12b-1 fees, and charge high expense ratios to underperform benchmarks (tip: stick with a low-cost index fund).
Some advisors do amazing work & charge for that - others charge higher fees for less - make sure you know what value you're getting for what you're paying.
Not saving enough
Your savings rate single handedly is the biggest contributor to your long-term financial success.
Look to save as much as you can that doesn't diminish your quality of life. More on savings rates HERE.
Never evaluating your personal finances
If you don't have a direction, how can you ever expect to arrive at your destination?
Be sure to check in on your personal finances to make sure you're on track.
Some metrics to consider would be:
Savings rate
Investment return
Cash flow surplus
Spending rate
Insurance risk relative to coverage
Estate planning completed?
Do I have 2-3 tax planning strategies I’m employing?
Uncontrollable spending
Your circumstances aren't the cause of your overspending - it's on you.
You can step off the hedonic treadmill at any time.
Getting estate planning done - but never coordinating the estate plan with the assets
Communicating with all parties involved with your estate plan is critical to your estate planning success.
Do the executors of your estate know where your estate planning documents are? Do they know they’re the executor? If not, they should.
If you have a revocable trust, are your taxable accounts titled in the name of the trust? If not, your trust is nothing more than a piece of paper (unless you have a pour-over provision in your will) in that case, your trust failed in avoiding probate (which is one of the bigger advantages of having a trust).
Do you have an updated net worth statement that your executor could easily access so they know who to call? Nothing is worse than an executor who has no idea the depth of complexity associated with your estate - having this laid out in a folder in a safe or having a number of someone to call to be able to help will make their life a lot easier.
Missing beneficiaries (old beneficiaries)
Your brokerage account and retirement accounts should have assigned primary and contingent beneficiaries. If not, your investments go through probate and could be subject to being contested from those who you may not wish to collect on your assets.
Checking and savings accounts can also have payable on death (POD) and your brokerage account can have a transfer on death (TOD) - to avoid these assets having to go through probate.
I’ve also seen scenarios where ex-wives and ex-husbands have been beneficiaries from divorices from years ago (likely not who you want to get those assets if you’re no longer here).
Thinking diversification is the number of funds you hold.
Diversification can be done within one fund.
You don’t need to hold a little bit of every fund inside your 401k to be diversified.
Holding too many funds is like cutting a pizza into 50 slices instead of 8 (& thinking you get more pizza).
You’re likely annoyed with how tiny the slices are and would have a better experience if you just made the slices bigger (you’re getting any more pizza by cutting more slices).
Never asking for help
There's plenty of ways to make sure you're at least on the right track without paying thousands of dollars.
If that’s you and you’re looking to be pointed in the right direction, shoot me an email and I’ll make sure you’re moving in the right direction.