Yahoo Finance These 13 Mistakes Will Deplete Your Wealth
Proper planning is crucial when it comes to your finances — not only for the decisions that can affect your wealth now but also for those that will influence your bottom line long term. But knowing how to make the best financial decisions isn’t innate for everyone. If you don’t fully understand how to best manage your finances, you’re likely to make mistakes that can take your net worth from well-cushioned to barely getting by — or force yourself to stay stuck in a constant financial struggle.
What if you could avoid certain money pitfalls altogether? Take a look at these 13 common mistakes that deplete your wealth so you can sidestep them and achieve financial freedom.
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Not Updating Your Budget
You may already know how important it is to create a budget, but how often do you review and edit your budget? If you don’t adjust your budget on a regular basis based on your current financial situation, your old budget isn’t doing you any good.
Mark your calendar to adjust your budget every six months, or whenever you experience a career or income change. This allows you to update your savings goals, review any discretionary expenses you can cut back on each month, review your progress on debt you’re working to pay off and review whether you’re able to bump your percentages for savings to higher amounts.
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Investing Blindly
Brian Stivers, investment advisor and founder of Stivers Financial Services, said that one of the biggest mistakes that depletes wealth is investing in areas you have no experience in or don’t truly understand.
“The media and internet are filled with fringe investments that promise great wealth with little risk,” he said. “Yet, many of these are extremely aggressive and have a substantial downside. It is important for those who are accumulating wealth or have already accumulated wealth to make sure they fully understand the risk involved in any new investment and how that investment works. For most investors, it makes more sense to stay with traditional investment strategies that are easy to understand and have a long track record of success.”
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Purchasing a New Car
You might think that because you have the money, it’s not a big deal to buy a new car.
Unless you’re paying the full amount for your car in cash, you’re tacking another payment to your list of monthly bills. If you take out a loan to buy a car, you’re paying interest on an asset that is actively depreciating in value. The better approach is to purchase a used car to save money and finance the purchase by paying in cash when possible.
Ignoring Your Interest Rates
One reason why debt grows and becomes difficult to manage so quickly has to do with interest rates. The higher the rates, the harder it becomes to pay off debt that is actively growing month to month.
If it has been awhile since you last reviewed your interest rates, it’s time to look at these percentages and take action steps for lowering them. Set aside 10 minutes to review your debt terms. Reach out to the lender, such as your credit card company or student loan provider, to see if there’s an opportunity to refinance or another option to get a lower interest rate so you’re paying less each month in interest.
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Making Poor Investment Decisions
When the stock market declines, it’s not uncommon for investors to feel panicky about their investments. Many investors will make decisions based on their emotions, such as selling when the market is turbulent, rather than thinking rationally about the market’s long-term outlook.
“Unfortunately, people tend to make investment decisions that are against their own best interests strictly for emotional reasons. These decisions can have a significant negative impact on long-term investment returns,” said Jason Dall’Acqua, CFP and president of Crest Wealth Advisors. “Investing is emotional given the fact that money is at stake, but investors must control those emotions and aim to act on reason and rationality.”
Taking Out Home Equity Loans for Unrelated Purposes
According to Robert R. Johnson, CFA and professor of finance at the Heider College of Business, Creighton University, many homeowners will take out home equity loans for the purposes of financing objectives which are not their home.
Some of these may include buying a new car, making home improvements, paying off credit card debt or even taking a vacation — none of which should be done using a home equity loan. By doing this, Johnson said homeowners are not only unable to build true wealth but they deplete the equity they built up in their home.
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Holding Unprofitable Investments
One of the biggest wealth depleting mistakes Cynthia Meyer, CFP with Real Life Planning, said people make is buying and holding investment properties that either lose money or barely break even for the appreciation.
“The point of owning rental property is to earn net rents after expenses,” said Meyer. “If it costs you more every month to carry the investment than the net rent received, it’s not profitable – and those accumulated losses may offset or exceed any potential price appreciation.”
Neglecting To Save for Retirement
Even if you think that you have plenty of time to build up a healthy retirement savings, it’s important to get into the practice of saving early and consistently into your retirement accounts.
Take advantage of 401(k) plans that are set up through your employer, especially if your employer is willing to match up to your contribution. If you don’t have that benefit available, set up an individual retirement account (IRA) or a Roth IRA that you can contribute to on your own. Try to max out your contributions on a yearly basis in these accounts.
Making Early Withdrawals From Your Retirement Accounts
Your retirement account should not be viewed or treated as an extra savings account that you can dip into for money as you need it. While it can be tempting to consider tapping into your retirement account for non-retirement purposes, like paying off a student loan, the best advice is not to touch the funds in these accounts.
“It’s important to remember that the funds you are saving in those retirement accounts are meant to be long-term investments and grow over several decades with the market,” said CFP Kenny Senour. “On top of that, you are looking at some significant tax penalties for tapping your retirement savings early, which has the potential to derail your progress and set you back for years to come.”
Lacking an Emergency Fund
You may not be facing a financial emergency today, but anything could happen tomorrow. Katie Ross, executive vice president for American Consumer Credit Counseling, said that when we’re doing well for ourselves in the moment, we don’t always think about the possibility of an economic crisis or unexpected expenses. Those that take the time to prioritize creating a fully funded emergency fund, however, rest easy knowing they are prepared in the event of an unforeseen circumstance.
“If you prioritize saving a part of each paycheck now, you’ll thank yourself in the future. If you lose your job or have an ER bill to pay, you can lean on your emergency fund, rather than taking away from your living expenses to pay for it — or worse, relying on credit cards or loans to pay and being in debt,” said Ross.
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Investing In Real Estate With a Short Time Horizon
One of the biggest mistakes Stivers has seen in wealth depletion is when investors start investing in real estate with the hopes of quickly turning a profit.
Real estate, Stivers said, should be considered a long-term investment, not an investment to see great gains in a short period of time.
Becoming Too Conservative With Investments
Is being too conservative a risk to depleting wealth? According to Stivers, the answer is yes.
“Many people, as they near retirement, feel they have enough, so they move funds to CDs, high-yield savings or all low-yielding U.S. Treasuries,” said Stivers. “The net result is that they end up earning less than they are taking for retirement income and/or don’t earn enough to keep up with inflation. So, they may protect themselves against market loss but still create a wealth-depleting portfolio through interest risk.”
To help mitigate any risks of wealth depletion, Stivers recommends working with a financial advisor. An advisor can help retirees create a portfolio that can protect their assets against market loss, have stable growth potential, have dependable income strategies and protect the spouse at the first death.
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Lack of Diversification in One’s Investment Portfolio
It’s not uncommon for many individuals to think they are investing simply by owning real estate, like their primary residence. However, Craig Borkovec, financial advisor at Miracle Mile Advisors, said this is not considered to be diversification in one’s investment portfolio.
Diversification, Borkovec said, includes real estate as well as investment assets in public and private markets as well as insurance policies to cover shortfalls in the event of death, disability or long-term care.
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