After many decades of working with individuals and families, there are clear differences between people’s habits and their long-term financial success. Certain patterns show up again and again. Below is a list of common pitfalls that, if not addressed, can keep you from reaching your financial goals.
No Financial Plan
First and foremost, not having a financial plan can have a major impact on your financial success. Having no plan is like going on a trip with no destination, no map, no luggage, and no place to stay. I guess it could work out, but with careful planning and a roadmap, your chances of success increase dramatically.
Financial planning allows you to build a strong foundation and consider both short- and long-term goals so you are better prepared to handle potential financial challenges ahead. Periodically reviewing and adjusting your plan as life changes can put you in a much better position to accomplish your objectives. Working with an advisor can also help keep you accountable and focused on your long-term goals.
Procrastination
Getting started may be the hardest part for most people. It’s easy to ignore planning and, before you know it, you have lost several years of potential savings and progress toward your goals.
Time becomes your worst enemy when you keep putting things off. The longer you wait, the more likely you are to face difficult lifestyle decisions later. Meeting with an advisor can help motivate you and keep you moving toward your goals.
Unrealistic Expectations
How many people do you know are spending more than they should? You might be surprised how many people believe they will somehow maintain the same lifestyle in retirement without focusing on saving during their working years.
It is unrealistic to assume everything will simply work itself out. A comfortable retirement takes years of discipline, diligence, and planning. Without preparation, drastic lifestyle changes may become necessary.
Too Much Debt
Like putting on weight, debt can accumulate quickly and take a long time to pay off. It is a huge drag on financial success.
It is not enough to simply make the minimum payment. You should have a realistic plan to pay off debt as quickly as possible. Trying to build retirement savings while carrying significant debt is an uphill battle.
Not Budgeting and Saving
Many people do not have a clue how they spend their money. It’s very easy to overspend and live paycheck to paycheck. That approach can leave you working far longer than you expected instead of being able to retire comfortably.
It is important to get a handle on your spending and determine how much you can realistically save. You also need to identify the best places to save and establish meaningful savings targets.
Not Having an Emergency Fund
Too many people fail to plan for the unexpected, and it is one of the primary reasons people go into debt.
As part of a solid financial foundation, it is important to have cash reserves available for emergencies. These funds should be easily accessible and not subject to market fluctuations. Generally, you should maintain anywhere from three to twelve months of reserves depending on the stability of your income.
Only Contributing What Your Company Matches to Your 401(k) Plan
Everyone likes free money, and most people will take advantage of an employer match of 3-4% in their 401(k) plan. While that is a great start, it is important to consider contributing significantly more of your own money as well.
Higher contributions can reduce your taxable income today while also allowing more money to grow on a tax-deferred basis for retirement. In most cases, contributing only enough to receive the company match will not be enough to build adequate retirement savings.
Being Underinsured
Unexpected events can happen at any time — accidents, illness, disability, and death, just to name a few. Insurance is a key foundation of any financial plan.
Making sure you are properly covered for unexpected life events can help reduce the impact on your long-term plan. A lack of insurance can derail even the best financial strategy.
Falling Victim to Fraud
Ongoing vigilance is necessary to avoid scams. Scammers are becoming increasingly sophisticated, so it is important to follow some basic rules.
Do not answer calls from numbers you do not recognize. If it is important, the caller will leave a message. Never click on links in emails or text messages. Instead, go directly to the provider’s website to verify the message. Change your passwords regularly and set up two-factor authentication whenever possible. While this is not an exhaustive list, these basic steps can help significantly.
Co-signing Loans
Sometimes people feel obligated to help family or friends by co-signing loans without fully realizing the responsibility they are taking on.
It is important to consider why someone needs a co-signer in the first place. Typically, it is because they cannot afford the purchase or may be reaching beyond their means. There may be other ways you can help without taking on the financial risk of co-signing a loan.
Investment Risk Not Considered
Many investors focus almost entirely on returns while ignoring investment risk. They often concentrate their investments in a few areas and overlook the importance of diversification.
Investment gains can be wiped out quickly during significant market downturns and may take years to recover. In many cases, you can still accomplish your objectives without taking unnecessary risks. Matching your investment strategy to your goals and risk tolerance can improve your chances of long-term success.
Trying to Time the Market
In my decades of practice, it still amazes me how many people believe they can time the market. Looking at market history, there is little evidence that anyone — including professionals — can consistently predict market movements.
Market returns come from different asset classes at different times, and much of the market’s upside is often concentrated in just a handful of trading days. Investors generally need to stay invested, remain diversified, and rebalance periodically. Financial success is not about achieving the highest possible return. It is about earning an appropriate return for the level of risk needed to accomplish your goals.
Making Investment Decisions Based on Emotion
Daily news, short-term events, and politics constantly compete for our attention, and emotions can easily influence financial decisions and investing.
One of the keys to financial success is setting aside short-term emotions and focusing on long-term fundamentals. Emotional decisions often lead people to make costly mistakes. A disciplined investment approach can help remove emotion from the process and position you more effectively for long-term success.
Summary
A thorough review of your current financial situation and the ability to clearly quantify your goals are some of the most valuable services a financial planner can provide. Working with an advisor can help coordinate and prioritize all of these issues and, in many cases, help you avoid pitfalls that could derail your long-term financial success.
