Common Financial Mistakes

As a flat fee financial planner, I tend to work with younger clients who haven’t yet built up enough investable assets to land on the radar of the “1% of assets” advisory firms.  I have a passion for teaching younger tech professionals and business owners good financial habits.  Here are some of the most common financial mistakes I see my Millennial and Gen Z clients make.  Avoid these, and you’ll be ahead of most of your peers.

Spending before saving

Trying to budget and pay bills first and then save what’s left doesn’t work. If this is the approach you are trying to take, you will likely end up with very little in savings and fall far short of your financial goals. Saving, especially for retirement, must be prioritized ahead of spending. I realize how simple and obvious that sounds, but far too many people get these steps out of order. Even the strictest, most disciplined budget will find a way to consume all of your paycheck and leave nothing to save if you prioritize living expenses ahead of saving for your future. Pay your future self first, and then live on what’s left. If there isn’t enough money left to pay your living expenses after saving at least 20% of your gross income, your living expenses are too high. And automate your savings. Otherwise, it’s too easy to skip it.

Not maintaining an emergency fund

An emergency fund is essential to staying on track with your financial goals. Without a cash reserve to draw from when unexpected expenses or job losses arise, you end up using high interest debt or drawing from retirement accounts to cover the shortfall (and neither of those is a good option).

Not having enough or the right insurance in place

This one can be very easy to overlook or put on the back burner. Medical, life, and disability insurance are all critical pieces of a good long-term financial plan. The hope is that you never need them, especially life and disability, but an unexpected death or disability can be devasting to your family without sufficient coverage.

Not getting estate planning done

Taking care of this critical aspect of financial planning is so simple to get done but so difficult for most families to actually do. An estate planning attorney will do all the hard work for you by asking the appropriate questions and preparing the legal documents you need, such as wills, powers of attorney, advance medical directives, and trusts when necessary. But the act of scheduling the meeting with an estate planning attorney is something so many people put off for “tomorrow.” Don’t put it off! Get this done!

Not maximizing employer benefits

If you work as a W2 employee, chances are you have access to employer-provided or subsidized benefits as part of your overall compensation. If you work for a large corporation, there’s a good chance these benefits add substantial value. Some of the benefits you may have access to participate in are medical, dental, vision, 401k, flexible spending accounts (FSA), health savings accounts (HSA), short and long-term disability, life insurance, employee stock purchase plans (ESPP), legal services, tuition reimbursement, stock options, restricted stock units, and many other benefits.

Let’s look at one simple example of an employee earning $100k with my former employer, Fiserv. If this employee only took advantage of the high-deductible health plan for her family (spouse and children), saved five percent in the 401k, and saved the max in the HSA, Fiserv would contribute $800 to her HSA and $3,000 to her 401k. That is $3,800, or 3.8% of her salary, in direct employer contributions. In addition, she would likely save her family in excess of $7,000 per year in medical insurance premiums over an equivalent, non-subsidized medical plan. And assuming she and her spouse are in the 24% federal tax bracket and the 401k dollars are pre-tax, she would save $4,392 in federal taxes (Note: you do not pay FICA taxes on HSA contributions through payroll deduction…that’s an additional 7.65% of tax savings!). As you can see, just taking advantage of the health insurance, health savings account, and 401k in this example has added more than $8,000 (or 8%) of direct benefits to this employee’s compensation, not to mention the substantially subsidized health insurance premiums. And if she and her spouse do not have wills, the legal plan is $186 per year and completely covers the cost of common estate planning documents, such as wills, powers of attorney, healthcare proxies, medical directives, and trusts.

Understanding how to best take advantage of the benefits your employer provides can add significantly to your overall compensation. And when considering a job change, you need to know how to translate the benefits into dollar amounts for an apples-to-apples comparison. You could be leaving for a higher income but lower overall compensation if you don’t do the math.

Speculating instead of investing

There is a big difference between speculating and investing. Understanding these two concepts and applying them appropriately can mean the difference between financial freedom and financial hardship. Speculating can take a few different forms and even involve the same assets that you hold for “investing” purposes. The difference is often in the timing. For instance, you likely hold some Amazon stock inside a mutual fund or ETF in your 401k. In this case, you are likely purchasing a little bit of Amazon, along with many other companies, each time you save money into your 401k from your payroll deduction. Most likely, your plan is to save into that 401k for many years and then slowly draw down on the pile of money you’ve accumulated in retirement. In this scenario, you are “investing” in Amazon, along with thousands of other companies held in the mutual funds or ETFs within your employer’s 401k plan. On the other hand, you may have a brokerage account where you buy and sell Amazon stock on a daily basis in hopes that it goes up in value that day (or that hour) so that you can make a quick profit. This is “speculating.” You may think you have a “system,” but the truth is, you have no idea whether Amazon’s stock price will go up today. This is pure speculation, no different than flipping a coin. For sure, you can lose money investing, but your odds of building wealth in the stock market are much better with a properly diversified portfolio held for several decades than they are with speculating on individual stocks, cryptocurrencies, or the short-term ups and downs of the market. If you want to speculate because you enjoy the game, do it with a very small amount of money that you are willing to lose. Don’t risk your retirement on speculation!

Avoid these mistakes, and you’ll be well on your way to financial freedom!