As someone who does not have a financial services background, but rather a communications and marketing background in a variety of industries spanning more than 20 years, one of my goals is to help our team create content that benefits our clients, prospective clients and the general public through financial literacy education.
I am constantly asking questions of the planning and investment teams here at Syverson Strege to find out what topics, concerns and trends we should focus our content on, and one theme that comes up again and again is common financial mistakes and how to avoid them. Sometimes these mistakes happen when we are young, but financial mistakes and course corrections can be made at any point in our lives.
I asked our team of CERTIFIED FINANCIAL PLANNER™ practitioners to share some of the most common financial mistakes they see, as well as their advice on how to avoid making them. Read on to see what they had to say.
Mistake: Buying more home than you can afford causes a lot of stress and restrictions on what else you can do. A loss of pay for a while or a major home repair further exacerbates a cash flow crunch and can cause the loss of the home. A higher-priced home always seems more appealing, and people end up thinking that it must be OK to buy it if the bank will lend them the money. Additionally, borrowing too much becomes a huge problem when credit cards are used as a cash flow supplement and the balances aren’t getting paid off with each statement. This can become an ever-increasing snowball that can crush you and make it very difficult to recover from.
How to Avoid It: You want to keep your housing cost below 30% of your take-home pay. Otherwise, instead of you owning your home it owns you because you will have less freedom and flexibility in life. A great way to combat racking up credit card debt is to have a fully funded emergency savings account of 3-6 months of expenses. Develop a spending plan and maintain discipline to follow it. Apps like Mint.com, EveryDollar and Quicken can be great resources to leverage. Following a plan to spend less than you make and invest the rest will benefit you over time. Be patient and enjoy the simple pleasures of life in the meantime.
Mistake: If you wait for the perfect time to develop a plan, make an investment, create estate documents, etc., these important actions are unlikely to be done in a way that serves you well. When it comes to estate planning, specifically, everyone says their family will be different, but even the closest-knit families can experience drama over the gray areas of an estate.
How to Avoid It: Unfortunately, death is something that will come to us all, but you can save your loved ones a great deal of hardship by making sure your estate is set up properly. Time is an even more important life asset than money. Making timely decisions that can set a course toward your goals, but that can be changed as life happens, is key.
Mistake: Being easily lured into “hot tips” from acquaintances or in the news. It’s fun to talk about Tesla, Twitter and GameStop, but that doesn’t mean they’ll make for good investments. A company that gets good press or is talked about by your friend may not necessarily be a good investment; what’s important is the price you pay relative to the cash flow and income.
How to Avoid It: It’s best to stick with a portfolio diversified across asset classes and countries – and not get involved with picking individual securities unless a person is dedicated to studying the ins and outs of the company and what drives its value.
Mistake: It’s a very common mistake to try to time the stock market. One example is someone who got out of the market in 2008 and didn’t get back in the market until 2011. By missing the recovery, they likely cost themselves hundreds of thousands of dollars.
How to Avoid It: The best strategy at any time isn’t necessarily a particular investment or asset class, but rather an investment policy. A well-reasoned investment policy assists an investor through both the ups and downs of the economy and the markets. Having a policy in place takes away the worry about whether to take money out of the market. Most investors are unsuccessful at timing the market and require the right timing for both the exit and re-entry into the investments. Emotions should not control your investment decisions, but your investment policy should.
If you would like to receive a complimentary private consultation to see if Syverson Strege is mutually a good fit for your unique financial situation, please call 515-225-6000 or request to be contacted via our website at www.onlyworkforyou.com. We look forward to speaking with you!