Are You Making These Money Mistakes?
By Zachary Bainter, CFP®
A new calendar year marks a time when many prioritize improving their financial health - especially in the first quarter. Financial resolutions lead to many impactful changes. But there is a lot of misinformation out there about financial planning and investments. While every situation and financial plan is unique, there are some general guidelines to follow that I share with my clients. By avoiding common money mistakes, you will be that much closer to financial security.
Not Contributing to a 401(k) Since Your Employer Does Not Provide a Match
The number one reason I hear why people don’t contribute to their 401(k) is because their employer doesn’t match their contributions. I don’t know who started this idea that 401(k)s are bad unless you are getting a match, but it is dead wrong. The 401(k) allows you to save more than an IRA. Even better — most plans these days have fairly-priced investment options. Another mistake is only contributing up to the match. Aim for a minimum of 10% of your pre-tax income. When you’re 64, your older self will thank you.
Paying Down Principal before Maxing Out Your 401(k)
Many people are uneasy about debt. However, if your mortgage is low (less than 4%), then you should not be concerned with paying down the principal until you are saving what you need to for your other financial goals. Although everyone’s situation is different, aim first to - at the very least - max out your 401(k) contributions. Retirement won’t be any fun if you don’t have any money to spend. Moreover, if you have children and one of your goals is providing for their higher education, then make sure you are on track for that goal before considering pre-paying your mortgage. When you are well on-track for all your goals, AND you have enough liquid reserves in case of a shock to your financial plan, then look to pay down low-interest debt.
Not Thinking About the Stock Market Long-Term
One of the lingering effects of the Great Recession is that many investors still suffer from what psychologists call recency bias. Many experienced significant declines in their portfolios. Those that sold in the panic made those losses permanent. However, since the bottom in March of 2009, the S&P 500 has more than tripled in value. The lesson here is that unless you need the money for a specific near-term reason, like imminent retirement (though money needed in the near-term should be kept in low-risk instruments), the stock market is a means to accumulate wealth over long periods of time. Historically, the stock market goes up more years than it goes down. Don’t panic when the stock market goes down. In fact, that is when you most likely want to be a buyer — especially if your timeframe is long enough, which it is usually is.
Not Having a Plan in Place
“By failing to prepare, you are preparing to fail.” These famous words from Benjamin Franklin ring true when it comes to financial planning and your investment allocations. It is common to have many accounts - perhaps 401(k)s from previous employers — with various investment allocations not working harmoniously towards a common goal, such as retirement. Many times, these accounts, especially if they are smaller in balances or older, are not invested according to the goal. Review your accounts and consolidate them if you can. This will make it easier to monitor. Check your beneficiaries. Be sure your plan is protected from unexpected risks. If you aren’t working with a comprehensive financial planner you should set quarterly or semi-annual reminders in your calendar to do all of this.
Securities offered through LPL Financial, Member FINRA (http://www.finra.org/)/SIPC (https://www.sipc.org/). Investment advice offered through Gerber Kawasaki Inc, a registered investment advisor. Gerber Kawasaki and Gerber Kawasaki Financial Advisors are separate entities from LPL Financial. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures success or protects against loss.
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