By Jim Shellenberger, CFA, CFP®
Have you ever made a mistake with money? Don’t worry, no one is looking…you can raise your hand. When it comes to handling finances, some of us are better at this than others; but we all have made some financial blunders at least once in our lives. A 2019 study revealed that an estimated 126.5 million American adults have made a money mistake in their lifetime. (1) While that number may seem high, it’s not surprising. While we all may have some financial regrets, I want to share the biggest money mistakes I see that can have a huge effect on your overall financial health—and how you can avoid them.
Failing to Have a Comprehensive Estate Plan
There is so much more that goes into being financially secure than just how much money is in the bank. Estate planning is a crucial aspect of a comprehensive wealth management plan, especially if you want to pass significant assets to the next generation, or properly plan for the succession of your business. Through the proper use of trusts and other estate documents, you can feel confident that what you’ve built over your lifetime is properly passed on while minimizing taxes and probate expenses.
Many high-income earners often overlook the full scope of a comprehensive estate plan, and it can have devastating effects on your accumulated wealth. Making sure you’re adequately covered now can save you time, money, and energy in the future.
Taking Too Little or Too Much Risk
In finance, every single investment made and penny saved comes with risk. If you buy stock in a new up-and-coming tech company, that comes with more risk than buying short-term Treasury bonds. Even a savings account comes with risk; although your savings accounts are likely insured, leaving your money in a savings account prevents your wealth from keeping up with inflation.
A big mistake I see people make is having too many debt securities like bonds when they should be considering having more equity securities like stocks. A less common one I see is when people have too much of their wealth in risky investments, leaving their retirement savings vulnerable to high volatility. Proper asset allocation concerning your time horizon, income, and future plans allows you to balance making gains from riskier assets and safeguarding your wealth as much as possible.
Not Planning for Unexpected Risks
Very few people, if any, predicted COVID-19 or the Great Recession. However, these two events have made it abundantly clear that unexpected economic downturns must be considered when building a comprehensive wealth management strategy. People often think that an emergency fund (2) is enough to ride out unforeseen major life events, but it usually takes more than that. Proper risk management is key to staying afloat during uncertain times. This can be accomplished by considering unexpected risks that are personal, such as divorce, disability, accidents, and illness, and by making sure you are properly covered.
Not Knowing When to Take Social Security
If you are not using a customized strategy for Social Security, you are most likely leaving money on the table. The earlier you take it, the lower the monthly benefit you will receive. Everyone will be different, so considering when to take Social Security should be a decision based on your goals, needs, and preferences.
For example, if you wanted to retire next year at age 65, you’d be faced with the decision of whether to collect your benefits right away or to defer to some point in the future. If you decide to collect at age 65, you will receive less of a benefit than if you waited until your full retirement age (typically age 67 for most); and if you delayed to age 70, you would receive the maximum Social Security benefit available to you due to Delayed Retirement Credits.
Although for some delaying your Social Security benefits could mean delaying your retirement date, for others it may mean that they need to determine how they will fill the gap that is left between their fixed income and their expenses in the years before collecting their benefits. The solution in these cases could be as simple as taking larger withdrawals from their investments in the early years of retirement or working part-time for a few years to cover that gap.
Another consideration in determining when to collect your Social Security benefits could be whether anyone else is dependent upon you or has an interest in the benefits you will receive. Specifically, are you single, married, divorced, or widowed? For each situation, there may be a different strategy available to you when it comes to Social Security. It is important to be aware of this and make sure to customize how you go about utilizing Social Security during retirement.
Paying Too Much in Fees and Taxes
It’s not how much you make, it’s how much you keep. We often speak to investors who don’t fully understand the cost or fee structure of the investments they’re in, or how the taxation of their investment accounts works. It is important to be mindful of these items as they can take a big bite out of any potential returns you could receive.
These costs include things like commissions, deferred sales charges, 12b-1 fees, and mutual fund expense ratios. Many of these expenses are simply “priced in” to the share price of the underlying asset, but it is important to know what those expenses truly are. Some may very well be justified by the work of the management team and the performance they can achieve, but some may not. Taking the time to analyze or inquire about these costs could be time well spent.
Additionally, some advisors don’t pay enough attention to the tax consequences of changes made to clients’ accounts, which can cause undesirable tax liabilities for you (both capital gains tax and ordinary income tax). When deciding things like what trades should be made or where to take a distribution from when you need cash, it is important to have a strategy in place that can help to manage your taxes both in the short term and long term. A plan to always minimize taxes today could leave you experiencing far more significant tax consequences down the road.
Not Reaching Out for Help
While this is by no means an exhaustive list, it’s a good place to start when looking to avoid some of the most common money mistakes. Another one I see all too often is failing to reach out for help. Many reasons may hold someone back from working with a financial advisor, which are usually based in fear or a lack of knowledge. That’s why I hope to encourage you with this information so you have more confidence in asking for help. Having a financial professional in your corner can not only help you avoid the mistakes mentioned here but can make a huge difference in strengthening your confidence in your financial future.
At Elevate Wealth Management, we take a holistic view of your life and finances so we can provide comprehensive wealth management that accurately reflects your values, goals, money mindset, and personality. This planning process puts an emphasis on education, trust, and unbiased advice. To get started, schedule an introductory meeting by reaching out to us at jshellenberger@frontierasset.com or 307.673.5675.
About Jim
Jim Shellenberger, CFA, CFP® is a financial advisor at Elevate Wealth Management, an independent, fee-only wealth management firm serving young professionals, pre-retirees, and retirees in Sheridan, Wyoming, and surrounding areas. With the mission of serving and educating, Jim is dedicated to providing comprehensive, top-notch services that not only help his clients reach their goals, but also empower them to make the best financial decisions for their lives and walk toward their future with confidence. Jim is known for going the extra mile, not only offering valuable knowledge in investment management as a former investment analyst, but building long-lasting relationships so he can give honest, customized advice and strategies that make an impact on their lives.
Jim has a bachelor’s degree in business administration with a minor in finance from the University of Wyoming. He is proud to be a Wyoming native and loves exploring the outdoors with his family—hiking, fishing, hunting, and backpacking. Faith is an integral part of Jim’s life, and he always looks forward to attending church on Sundays, Bible study on Fridays, and being part of his church community. He’s also an avid sports fan! Fun fact: Jim owns shares in the Green Bay Packers. To learn more about Jim, connect with him on LinkedIn.
The views expressed represent the opinion of Frontier Asset Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness. While Frontier Asset Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. The use of such sources does not constitute an endorsement. Frontier does not have an affiliation with any author, company or security noted within. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and the Frontier Asset Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. Past performance is not indicative of future results.
Frontier does not provide tax advice. Please consult with a CPA for recommendations pertaining to individual circumstances.
Elevate is the financial planning division of Frontier Asset Management. Frontier Asset Management is a Registered Investment Adviser. The firm’s ADV Brochure and Form CRS are available at no charge by request at info@frontierasset.com or 307.673.5675 and are available on our website www.frontierasset.com. They include important disclosures and should be read carefully.
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