Seven Common Money Mistakes Advisors Have Seen Their Clients Make

“I will never financially recover from this”. If you have ever felt this way, you may not be alone. Financial planning is a complex process. It entails several strategies, styles, timelines, methods, and more. There are numerous financial instruments out there. Each of them serves a distinct purpose and caters to specific goals and risk appetites. Having in-depth knowledge or even a basic understanding of everything is practically impossible for the average investor already burdened with professional and personal responsibilities. However, this difference in understanding can sometimes lead to errors – some small and small catastrophic. 

Financial advisors have seen their clients commit many mistakes. These mistakes can range from undermining your risk appetite to investing in instruments on mere peer pressure. While most errors can be corrected with time and professional guidance, others may take a bit more effort. However, in order to correct financial mistakes, it is essential to identify them. One of the most significant issues that most investors face is not being able to recognize their mistakes. This can wreak havoc on their goals and ultimately bring down their lifestyle and standard of living. To learn how to identify potential common financial mistakes and manage your finances to avoid the same, you can consult with a professional financial advisor who can advise you on the same.

Let’s find out some of the most common money mistakes most financial advisors see their clients make, so you can avoid them on your end: 

 1. Not understanding the tax liability of your investments

A lot of investors may make decisions on the basis of returns alone. They tend to invest in instruments that offer a high yield. However, they end up undermining the involvement of tax in their returns. It is essential to understand that the capital gains you earn from an investment are taxed according to the latest tax laws prevailing in the country. It is important to be up to date with these laws. For instance, a lot of investors have invested in cryptocurrencies recently. In fact, some studies reveal that more than half of Bitcoin investors started investing in it in 2021 itself. The high-profit margins of Non-Fungible Tokens (NFTs) and cryptocurrencies can mask the tax liability you may owe on these investments. Selling cryptocurrency for fiat money, trading cryptocurrency for other cryptocurrencies, buying a good or service with cryptocurrencies, as well as trading, buying, or selling NFTs are all taxable events. 

Likewise, if you take the example of a 401k and an Individual Retirement Account (IRA), you may find a lot of tax discrepancies, if not planned properly. There are two types of each of these accounts – Traditional and Roth. The main difference between the two is on the basis of tax. A traditional 401k or IRA is taxed in retirement, while a Roth account is not. Moreover, traditional retirement accounts allow tax-deductible contributions, but your contributions to a Roth account will not be tax-deductible.

Understanding these differences is critical to ensure you make the best of the given situation. A Roth account is ideal if your income is relatively low pre-retirement, as your tax liability will be lower. However, if your income is higher now than what you expect post-retirement, you may want to consider a traditional account and avoid the financial mistake of paying higher taxes now.

 2. Assuming you have a lot of time to save for retirement

At the age of 30, it may seem like you have a lot of time before retirement, but every year you postpone planning takes you a step away from your goals. The sooner, the better approach may be the most ideal as far as retirement planning is concerned. It is essential to understand that saving for the future is not an isolated event. While preparing for your future expenses, you also have to consider factors like inflation, emergency expenses, health issues, the possibility of suffering from a market loss along the way, the possibility of losing your job or income source, and other similar situations. Any one of these things could go wrong and stall your growth. So, no matter how long the time to retirement may seem, starting at the earliest can never hurt you. 

In addition to this, the investment horizon for your retirement will also largely depend on your income and lifestyle. If you are in a high-income group, you may take a more relaxed route as you can bridge the gap with more flexibility. However, your lifestyle will play a crucial role here. Believers of Financial Independence Retire Early (FIRE) are able to live frugally and save up for retirement in a much shorter timeline. However, they may adopt extreme measures to do so. So, be realistic when deciding the investment horizon and then take a call. 

 3. Not having a financial plan

Having a financial plan can offer you a roadmap. It leads you to the right investment products, it helps you set realistic goals, and it enables you to monitor the performance of your investments, so you can correct any financial mistake you may make. Not having a plan can result in intuitive investing that may or may be right for you. It also makes you follow general financial advice that may not be suited to unique goals, risk appetite, income, and investment budget. Moreover, it can get you caught up in an investment fad or passing trend as you would lack the foresight to see how the investment would impact you in the future. This is why financial advisors also start by telling their clients to create a financial plan that reflects their wishes and expectations about their future financial situation. It is on the basis of this plan that other decisions are then made. 

 4. Going overboard with mutual funds

Mutual funds can be suitable for most investors as they simplify investing greatly. Instead of investing in stocks yourself, the mutual fund manager does it on your behalf. You do not have to time the market, make buying and selling decisions, or worry about diversification. All of this is taken care of by the mutual fund house. However, while mutual funds can be an excellent addition to your portfolio, investing in them too heavily and ignoring other investment avenues may stall your growth. If you invest in the same types of mutual funds, your returns will likely be the same. Additionally, if all your mutual funds are more or less investing in the same stocks, your returns will not vary much, and your portfolio will not be well-diversified. This, in turn, can increase risk. Instead of making this financial mistake, you can consider investing in individual stocks and mutual funds with no overlap, ETF’s, and more, depending on your risk appetite and financial objectives. 

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5. Restricting your financial planning to retirement

Retirement planning is a major component of financial planning. However, personal finance also involves other things like estate planning, tax planning, education planning, health planning, budgeting, debt control and reduction, and more. All of these are critical to ensuring a financially stable life. As mentioned above, tax planning can help you lower your tax output and maximize your returns. Estate planning ensures that your hard-earned money is preserved and reaches its rightful, legal heir. Estate planning includes creating a will that states the division of your assets. Further, it can consist of setting up a trust to protect your children in your absence. Trusts can also be set up to maintain control over how your money is utilized, when it can be accessed, and who can access it. Health directives are another critical part of estate planning. 

If you have children, you may have to use a 529 savings account to accumulate funds for their higher education. If you fall short, you may have to apply for a Financial Application For Federal Student Aid (FAFSA). All of these things require planning and strategizing that can take years. Being prepared for any health expenses with adequate health insurance is also crucial. And so is being in charge of your money and not being burdened by debt. If you have a lot of debt, you can find it hard to concentrate on your future goals as most of your time and resources can go into repaying what you owe. Lastly, finding ways to increase your income, keeping a steady savings rate, making sure you invest every month, and keeping your expenses in check are all equally important. 

A lot of investors make this financial mistake and tend to ignore these minute details and solely focus on retirement. However, you may not be able to achieve proper financial security unless you look at all components cumulatively. 

 6. Not having an emergency fund

An emergency fund is a must-have at any age and stage in life. It can help you in your hour of need. Emergency funds help you stay afloat in times when you may not have any other source of money. For instance, if you lose your job, you can rely on your emergency fund for the months you do not receive your income. Likewise, if you need money to carry out urgent, unexpected house repairs, an emergency fund can be of use.

Having enough liquid savings that can be easily accessed in your hour of need is vital. This ensures that you always have a safety net to rely on and do not end up taking debt. Typically, financial advisors recommend keeping at least the equivalent of your six months paycheck in your emergency fund. This can be adequate to deal with most contingencies. 

Many people choose to not keep their savings liquid, thinking they may never meet a pressing financial need. Doing the same can be a financial mistake and may put you through a lot of stress. A lot of people keep an emergency fund but with a low value. This is another grave financial mistake. A low-value emergency fund will only be able to help to a limited extent. However, you may eventually still have to depend on debt. Many investors use up their emergency fund for other goals and then do not replenish it. This would put you at risk later if you were to have an urgent financial need. Lastly, some people maintain an emergency fund but choose the wrong instrument for it. It is vital to choose a product that offers high liquidity, so you are able to withdraw your funds immediately in an emergency. We recommend keeping an emergency fund with 2 years of your annual spending to get you through a tough environment.

Remember to always ensure that you avoid all of these mistakes when planning and saving for your emergency fund. 

 7. Not monitoring your investments

Another financial mistake that many people commit can be forgetting about their investments altogether and not revisiting them again. Remember that investing is a dynamic process. Your money will take weeks, months, and years to compound. During this time, several things could go wrong. Many events may also benefit certain investments and offer a good profit. Monitoring your investments regularly will help you make a note of all of these events. This can help you draw a suitable strategy, invest your money where you see maximum potential, rectify any financial mistakes along the way, rebalance your asset allocation, and more. If you do not rebalance your portfolio or reevaluate it periodically, you could lose time and the right opportunities. However, hiring a professional financial advisor may help in some situations. 

 To conclude

These seven mistakes can cost you your peace of mind more than anything. So, try to avoid them at all costs. Financial planning can be complicated and overwhelming at times. Moreover, it is normal to do things wrong. But it is essential to learn from your mistakes and not make them again. It can also help to get in touch with a professional financial advisor as soon as you notice an error and are not aware of how to rectify it. A professional financial advisor can put you on the right path and work towards minimizing the damage. If you are unsure of your personal finance strategy and not able to identify a financial mistake, you can look at your investments and track their performance. If you do not see any success for a continued period, it may be time to consult a financial advisor. 

If you want to hire a professional financial advisor who can advise you on how to identify common financial mistakes and correct your mistakes if you have made any, to set you back on the right track to achieving your financial goals, use the free advisor match service and get matched with 1-3 vetted financial advisors that can help you with your unique financial needs and goals.

For additional information on retirement planning strategies that can be tailored to your specific financial needs and goals, visit Dash Investments or email me directly at dash@dashinvestments.com.

About Dash Investments

Dash Investments is privately owned by Jonathan Dash and is an independent investment advisory firm, managing private client accounts for individuals and families across America. As a Registered Investment Advisor (RIA) firm with the SEC, they are fiduciaries who put clients’ interests ahead of everything else.

Dash Investments offers a full range of investment advisory and financial services, which are tailored to each client’s unique needs providing institutional-caliber money management services that are based upon a solid, proven research approach. Additionally, each client receives comprehensive financial planning to ensure they are moving toward their financial goals.

CEO & Chief Investment Officer Jonathan Dash has been profiled by The Wall Street Journal, Barron’s, and CNBC as a leader in the investment industry with a track record of creating value for his firm’s clients.