IRA

A few weeks ago I discussed several mistakes people make with their finances that they are often aware of but fail to correct. This week, we dive into some of the sneakier financial mistakes people are making that they are not aware of!

Substantial assets are tied up in company stock. Company stock can be found in many forms; a 401k plan, employee purchase plans, restricted stock units (RSU’s), options, bonus payouts and more. These are all great opportunities to benefit from your company’s success and I often recommend employees take advantage when given the opportunity. However, over time it is wise to watch what percentage of your net worth is tied to the company you are working for. If the company struggles, chances are everything takes a hit at once: options become worthless, your bonus is smaller, the RSU’s decline sharply in value and in severe situations, you can even lose your job. Make sure to keep your net worth diversified!

Nondeductible IRA contributions. The problem here stems with many financial firms working to increase their assets through IRA contributions regardless of whether or not it’s beneficial for the client. I have seen this with all types of firms: large institutions, small banks and robo advisors. Contributing to one’s IRA is generally a great idea, if one gets a tax deduction. However, if you don’t qualify for a tax deduction the benefit is minimal (if existent) and can even lead to additional taxes if not documented properly. The qualifying rules can be confusing, Nerdwallet has a good article outlining the rules and limits. Nonetheless, there are select times when nondeductible IRA contributions can make sense. I suggest reading up on the details and consult with your tax or financial advisor before contributing to an IRA.

Insufficient or lack of disability insurance. Disability insurance is one of those items I hope my clients never have to cash in on. However, it is important to have, and can be crippling to your wealth if your coverage is weak. For many of the clients I work with, I have recommended they select the highest option within their group plan. Unfortunately, sometimes this isn’t enough as you should look at the policy holistically. For instance, when a highly compensated employee easily maxes out the monthly benefit. Also, many group policies don’t include bonuses in their calculations. The intricacies continue as the benefit is sometimes taxable and sometimes not (it is based on who is paying the premiums). At the end of the day there are several items that play a major role in the adequacy of one’s disability insurance. When you look at these items together make sure it provides an adequate salary replacement. If not, you should consider gap coverage. If you want to know more, here is an article that discusses aspects to disability insurance in greater detail.

Sentimental value influences – Inheriting property is sometime tricky because one may have an emotional tie to what has been inherited. For example, a client doesn’t want to part with a piece of rental property or XYZ stock because it meant so much to their dad. I’ve seen the emotional tie to the property cloud the optimal financial decision. Maybe you are swimming in high interest debt and could sell that stamp collection to get out of it, or now you have 50% of your net worth in one business and seriously need to diversify. There are no words to describe what it is like losing a loved one and sometimes our decisions become focused on keeping the individual with us vs. being financially savvy. Thus, it is important one understands the consequences of holding onto a property solely for its sentimental value.

I hope you enjoyed this article and possibly uncovered some areas of opportunity in your financial life that you were not aware of.

Have you ever committed to a healthy night – gone to the gym, had a healthy dinner, skipped the wine, only to wind up with a late night trip to Ben and Jerry’s? Of course you have, at least in some sense… even though you knew that would wreck all of your hard work, you excused away your better judgement for the momentary gratification.

This article is not about ice cream, but how savvy people make financial mistakes they know they are making. These are the 5 most common I see.

No emergency fund. An emergency fund is vitally important for all households. The “book” says 3 – 6 months of living expenses is a good target depending on whether you are in a single income or duel income household. To be more precise, you should customize the amount based on your unique situation; such as; employment stability, industry variability, earnings volatility (salary vs. bonus vs commission) and expense composition.

Unqualified withdrawals from a 401k/IRA. There are times when it makes sense to partake in an unqualified withdrawal from a 401k/IRA. However, most of the time it does not. It is important to explore all possible options available before doing this, as it can’t be undone. Some alternatives that could make better sense are: spending down on one’s emergency fund, cut ongoing expenses, take a loan out of your 401K and even filing for bankruptcy.

Dismissing employers 401K match. If you have a 401k match available to you, take full advantage of it. This is a great opportunity to catapult your retirement savings. The caveat is, you are tying money up in a qualified retirement account, but you will likely thank yourself down the road. There are countless calculators online to show you the power of compounding in a retirement account. When you throw in an employer match, the downstream impact is enormous.

Carrying credit card debt and only paying the minimum balance due when one has cash available. Most of us know this is a bad habit, but many of us don’t know how bad or why. Many credit cards average an APR (Annual Percentage Rate) between 15% – 22%¹, which is much higher than any reasonable expectations for an investment return. A better strategy would be to take your savings, pay off your credit card in full and build your savings back up over the next several months. Carrying credit card debt and trying to improve your financial situation is like swimming with sandbags, it is going to weigh you down and wear you out.

Building up and sitting on cash in your bank account. The S&P 500 has an average return of ~10% annually over the last 90+ years. 10 year treasuries are paying over 2% right now. If you don’t have a short term need for money in your bank account and can handle some volatility, you are better off investing it. Whether you want to be risky and invest all in equities or more conservative and invest in treasury bills is a discussion you should have with your advisor. For example, imagine you had invested $300K in a conservative portfolio and received a 4% return annually. After eight years you would have made $110K with your investments. If it sat in a savings account earning 1%, you would have just an extra $25K in your pocket.

Are you making any of these mistakes? You already know you’re doing yourself a disservice, so act now and realigned the ship! These issues only take you further off course with time.

Be on the lookout for Part 2 next week when we will dive into the issues that are less obvious, but just as important, 5 Common Financial Mistakes People Make that they are NOT Aware of!

1) https://www.valuepenguin.com/average-credit-card-interest-rates

The Sneaky and Costly Financial Mistakes You Could Be Making!

You Know Better! Stop Making These Financial Blunders!