The 6 Biggest Mistakes You May Be Making With Your Wealth

We all make mistakes.  There is no shame in making a mistake.  However, in regards to your wealth it could be costing you significant money.  The shame is not making the mistake but rather not correcting it as soon as we recognize the issue.  I wanted to address the 6 biggest mistakes I see people make in managing their wealth.

1. Over-funding 401(k)s. A 401(k) is an effective savings tool but not necessarily the best. There are very few reasonable excuses not to at least fund the amount to maximize the company match.   After that there might be better ways to save depending on your age, tax bracket, expected wealth at retirement and at death.  This gets back to the mountain climbing analogy.  Mountain climbers, or at least the successful climbers, do not just plan the climb up the mountain.  They plan the climb down.   Most couples or individuals have a plan or maybe just a figure on how much they need to retire (the climb up the mountain) but no idea how to climb down that hill in the most tax efficient way, i.e. maximize wealth.  A 401(k) may not be a very tax efficient means to climb down the mountain.

2. A lack of disability insurance. I found the following statistic to be interesting: one of every four 20-year-olds will be disabled before reaching retirement age (source: Social Security Administration: Disability Facts).  Also, the average social security disability payment in 2019, per the Social Security Administration, is $1,234 per month.  Which would be $14,808 a year.  The U.S. poverty level in 2018 was $12,000.  For most people, social security disability payments will not cut it.

3. A lack of a financial plan. Would you start a business without a plan?  Per a Palo Alto Software study in 2016, a business is twice as likely to be successful if it has a written plan.  Most successful people I know understand the value of a written plan.  Why am I writing about business planning?  Your retirement is your business.  Make no mistake, you are the CEO of your retirement.  You can leave it to luck or you can have a written plan.   Based on what we know regarding the benefit of a plan for a business, I find a lack of a plan is one of the top 6 biggest mistakes people make with their wealth.

4. Moving to cash and trying to time the market. There are times to get more or less aggressive.  We have three levels: risk-on, risk-par, and risk-off.  That doesn’t mean moving to cash.  I don’t care if a retail investor does it or some financial advisor has sold you on their “system.” Research, like the DALBAR study in 2016 on Investor Behavior, shows that trying to time the market by moving to a significant amount of cash underperforms the benchmarks.  There are some pretty charts like the one that shows if you miss the 25 worst days of the markets since 1970, your return would have been 11%, which beats the S&P 500.  The key word there is if.  If I knew the correct lotto numbers before they are called out, I would also be rich. In my 30+ years of investing, I have yet to see a system that can correctly predict the worst days before they happen.

5. Debt, debt, debt. Understanding the difference between good debt and bad debt (not the accounting type of bad debt) is extremely important if you want to maximize your wealth.   Credit card debt equals a bad type of debt.  A mortgage can be good debt if interest rates are low.  Eliminating horrible debt (credit cards), minimizing bad but sometimes necessary bad debt (auto loans) and utilizing smart debt (low interest fixed mortgages) may be the difference between financial freedom later in life versus pinching pennies in retirement.

6. Adults with minor children but no will. First, a will, if not a trust, is important for most every adult with assets. Second, wills are really simple to establish.  Considering both of those, why put it off any longer?  Not wanting to deal with the emotions of thinking about you or your spouse dying? A lack of understanding of the poor predicament you put your children in if you pass away?    Procrastination?  Believing you are invincible?  The more important question is, if you die while your children are minors who do you want you to make the decision on who will be the children’s guardian: you or the State?  If you (and your spouse) dies without a will, the children are the most probable beneficiaries.  In most states, minors cannot own or manage assets.  Once again, the state will determine who will manage the assets until your children reach legal age.  I don’t know many people who want the State making important decisions like these.  As a final note, please make sure your minor children are not the beneficiaries of assets like insurance.

There are other mistakes so this list is not meant to be all inclusive.  These just happen to be the biggest mistakes I have seen based on my experience in the business.  I hope this may help in improving your financial wealth or that of someone you believe it could help.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. This information is not intended to be a substitute for individualized legal advice. Please consult your legal advisor regarding your specific situation.