I recently had dinner with a client who is the CEO of a Fortune 500 company. Although he is now a multimillionaire and no longer worries about money, his path to fortune was full of setbacks. He made countless financial mistakes along the way and did not learn from his mistakes for a long time. In retrospect, he wished he had been taught money management skills while he was in high school or college as it might have avoided a lot of financial suffering. He made many of the financial mistakes that will be addressed in this article. I am addressing the 10 worst financial mistakes and how to avoid them so that you can steer clear of these obstacles and achieve financial success (and be the CEO of a Fortune 500 company, too, if this is your goal.)
1. Not Saving
Most people budget (whether in writing or in their head) for their monthly expenses, but completely ignore savings. If you are not saving, then you are not making any financial progress. The sooner you get started, the more you can save and the more it can grow over time.
The rule of thumb used to be to save at least 10% of your income. While you can initially begin with this percentage, over time, your goal should be to increase to a savings rate of 17-20% of your income. The reason for this increased rate is because we have a higher life expectancy than we had in the past and rates of return on investments are lower than they historically have been.
In our consumer driven society, the constant barrage of marketing tends to make us lose interest in what we currently possess and desire the “new and improved” item.
Two types of overspending can occur:
Overspending on little things
spending money on little items may not seem like a big thing in the moment, but over time, these small expenses add up
Overspending on big things
overspending on homes, motor vehicles, vacations, jewelry, or children’s education is another mistake many people make
To get a handle on your expenses, make a list of every expense you incur for 60-90 days and reduce or eliminate items that are excessive or frivolous. The best way to keep from overspending is to create a budget and stick to it.
3. Being deep in debt
Related to the mistake of overspending is being in over your head in debt.
The solution is to develop a plan to get out of debt and diligently follow the steps until you are debt free. If you are not in debt, avoid getting into debt, unless it is for the purchase of a large item that has potential for appreciation, such as a home.’
4. Not having an emergency fund
An emergency fund is something that can help pay for maintenance, repairs and replacement of things.
Saving three to six months of living expenses is a great way to weather the storms that will undoubtedly occur from time to time, such as vehicle expenses, medical expenses and house repairs. If you and your partner have steady jobs, three months of expenses may be sufficient. But if you are the sole breadwinner or someone in your household has chronic medical issues, then six months of living expenses is more prudent.
5. Not seeking to maximize your earning potential
One of the ways to create your own wealth is to earn a higher income. While this might seem obvious, if you have not maximized your earning potential, you could be losing hundreds of thousands of dollars over the course of your career – even millions!
Develop and execute a plan to make the most of your earning potential. Do you need additional schooling or training? Do you need a mentor or a mastermind group to help you? What areas can you work on to become more useful and valuable to your business or clients? Are you ignoring additional income opportunities because you want to have more personal time?
6. Not having enough insurance
Although paying insurance premiums may appear to be counter-productive to accumulating wealth, it is better than the alternative of not having any insurance or not enough insurance when catastrophe strikes.
You should have adequate insurance to cover these areas to protect you from a major accident, injury or death:
- Homeowner’s or renter’s
- Long-term disability
- Key-person (life and/or long-term disability) for a business setting
- Long-term care/chronic illness
- Umbrella coverage for those who need additional insurance coverage
7. Trying to time the financial markets
By reacting to the media or making impulse decisions, many people jump into the financial markets when it is too late and get out too early. Others put off investing until it is the “perfect time” to invest and delay so long that they never wind up investing.
The three factors that determine how well your investments will perform are:
- The amount of money that is invested
- The rate of return on the investment
- The length of time of the investment
The third factor (length of time invested) is the most important factor. Please remember it is not market timing, it is time in the market that most influences the value of your investments. Compounding of interest is an amazing benefit that radically increases the amount of your investments over time. To reduce the risk of the volatility of the market, it is better to continually invest over a long period of time.
8. Marrying the wrong person
Marrying someone who is incompatible with your financial goals can thwart your progress.
The best time to determine whether a partner is “marriage material” is before your actually “tie the knot.” Determine whether you and your potential partner are financially compatible. In addition, make sure you are suitable in all other characteristics. If you are married, make sure to make financial decisions together as a couple. Avoiding divorce should be foremost in your mind, not only due to the heartache and expense a divorce entails, but also because of the negative effect it can have on your finances and financial goals.
9. Not preparing your heirs for their inheritance
Are You Successfully Preparing Your Heirs for Wealth? Did you know that 70% of wealth transfers from one generation to the next are doomed to fail?
You can beat the odds by effective communication. Talk with your children to help them develop healthy attitudes toward money and responsibility. Educate your children about your core values and what you would like them to accomplish with their inheritance. Make sure your children know what your expectations are and make those expectations realistic. A wonderful tool that we use to begin this dialog is a “Letter of Intent.”
10. Not having your estate documents in proper order
This mistake will impact your spouse, children or other beneficiaries.
Estate documents may include a Will, Living Trust, Advance Health Care Directive, and Financial Power of Attorney. Not only do you need to have all these documents drafted but you also need to periodically review them to make sure they still reflect your current intentions and are valid under the law.
As you can see from all the information above, financial mistakes can stymie even the most well-intentioned person. Learn from other’s mistakes. While there are more than ten ways to fail or stumble, avoiding the ten financial mistakes above should leave you very comfortable in the journey of life! If you wish to brainstorm your situation or discuss another matter of concern, please don’t hesitate to contact me to discuss your planning needs or goals.
Financial peace of mind over the long term …
Imagine That™! is a complimentary monthly newsletter provided by Wealth Legacy Group®, Inc. that addresses various topics of interest for high-net-worth and high-income business owners, professionals, executives and their families. To be added to our monthly list, please click here.
Written by R. J. Kelly – January 2018