Advisors Resource Group, Inc. top 10 most common financial mistakes
In the course of everyday activities you will make many financial decisions. From a financial perspective, we would like to think they are all the best decisions we could make. In reality many are not and those “mistakes” could be depriving you of thousands of dollars every year. Below are the ten most common reoccurring mistakes I have observed in my 20 years of being a financial planner (these are in no particular order).
1. Failure to maximize Employer “matching” contributions
If your employer provides “matching” contributions on your investment, be sure you are contributing whatever amount is required to the maximum match available! No where else can you get this guaranteed 50% or even 100% return on your money.
2. Failure to develop a Financial Plan
This is the first area where a good financial advisor adds value. An advisor can help identify goals, and then identify, based on your time frame, the target savings amount needed to accomplish each goal. Additionally, a planner may uncover some inefficiencies in what you are currently doing that may save you both time and money.
3. Lack of discipline in funding the goals set forth in your Financial plan
Once you set your goals, your mantra should be “pay myself first.” Our basic human nature compels us to spend whatever we make. If you get a raise, you increase your standard of living. Unless the money is really necessary for basic survival, fund your goals first and don’t even look at that money as “spendable income.”
4. Not fully utilizing available tax breaks
For example, did you know you can cut your medical, optical and dental expenses by 40% or more, simply by participating in your company’s “Flexible Spending account?” Consult your Benefits administrator for complete details and disclosures.
5. Failure to diversify your portfolio
Nobel prize winning research on Modern Portfolio theory indicates that allocating your investment across multiple asset classes can be responsible for up to 91% of total portfolio return, regardless of the specific holdings. Additionally, a diversified portfolio can reduce your risk of loss annually and over time.
6. Delaying Retirement or other goal planning because you think you’re too young.
Remember the effects of compounding. Time is a vital factor in accumulating wealth. For example, using a rate of return of 8%, a person 25 years old needs to save $335 per month in order to have $500,000 by the time he is age 55. Using the same 8% rate of return, a person who waits to age 35 to begin saving, needs to put away $849 per month to have $500,000 by the time he is age 55!
7. Carrying high interest Credit Card debt
Everyone needs a little help now and then, but excessive credit card debt can lead to financial and emotional disaster. Extreme diligence is required in monitoring the rates you are paying (watching when “Promo” rates expire) and in insuring you are truly eliminating versus building debt, on an ongoing basis.
8. Being underinsured, overinsured or just paying too much!
Did you know rates on term life insurance have continually fallen over the past five years? Disability insurance is also often overlooked. For someone age 42, they are 3 1/2 times more likely to suffer a disability lasting longer than 90 days than dying. Additionally, did you know that a disability policy paid for with your own funds would pay you tax-free benefits, whereas a policy paid for by your employer will be subject to ordinary income tax. This is important consideration when calculating your benefit need.
9. Not investing for the Long-term
Chasing returns, selling out when you suffer a short-term loss. These are typical instincts of non-sophisticated and non-disciplined investors. This is a key indication of not having a well thought out financial plan. Invest for the long term through growth investments. Try systematic investing also known as “dollar cost averaging” to contribute the same amount each month to an investment. By doing this, you limit the number of shares when prices are higher and buy more shares when the price per share is lower.
10. Thinking I don’t have enough money to have a relationship with a financial planner
Many financial planners today are fee-based. It is not uncommon for planners to uncover savings through the planning process that more than recoups the fee they charge.
In summary, although no one is ever going to go through life mistake free, avoiding the most costly and in some cases most obvious mistakes can add thousands to your bottom line. According to a 1997 survey, conducted by the Consumer Federation of America and NationsBank, households with annual income below $100,000 who had a written financial plan had more than twice the amount of money in savings versus those with no written plan. “He who aims at nothing will surely hit it.” This study confirms the fact that those with a definite direction fair better than those who have none. If you have not taken advantage of the opportunity to meet with an ARGI professional to discuss how a financial plan can help your situation, consider calling and setting a time to do so today. We can be reached at 502-426-3433 or 800-452-4553. Ask for Ron Butt.
Copyright Kentucky Nurses Association Jul-Sep 2003
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