We all slip up when it comes to handling money. But sometimes small infractions we think are no big deal, end up becoming mistakes that sabotage our long-term wealth. As you plan for your future, be careful not to make these five mistakes.
1. Carrying debt
Debt, especially consumer debt, is the mortal enemy of wealth! One of your first goals in protecting your long-term wealth should be to make a debt pay off plan and stick to it. The debt snowball and debt avalanche techniques are two effective ways to dig your way out of debt.
One thing you can start doing immediately is pay as much as you can above the minimum due on your debts. That way more money goes toward paying off the principal balance.
2. Committing common investing mistakes
One of the surest ways to build wealth is to start investing early and stay consistent. However, you also need to have a plan in place that ensures your investments are diversified and aligned with your timeline (aka when you need to use the money), asset allocation (aka the investment type) and risk tolerance.
It’s also easy to forget to rebalance your portfolio to ensure your investments always sync up to your asset allocation. If one investment performed particularly well, it could’ve thrown your allocation out of whack.
For example, your risk tolerance could have an 80 percent stock and 20 percent bond split. But if some of your stocks do well, you could be at a 90 percent stock and 10 percent bond allocation, which no longer aligns with your risk tolerance.
You also need to understand how investments impact your tax strategy.
3. Failing to put a tax strategy in place
Of course, you have to pay your taxes, but it’s a time-honored American tradition to figure out how to work within the rules to pay the least amount possible.
You should aim to take advantage of every opportunity to lower your tax liability. In turn, you can use that extra money to save and invest more in building your wealth.
Do some research to determine which tax strategies you can use. For instance, you can choose to max out your retirement savings, create a charitable trust, or even go so far as to move to a state with no state income tax.
4. Not being properly insured
It’s an unfortunate reality in the United States that one major medical emergency could do some serious damage to your net worth. For that reason, it’s important to maintain adequate, effective health care coverage.
You should also aim to save at least your total deductible amount as part of your emergency fund. If you’re eligible, Health Savings Accounts (HSA) are a great way to save for future medical expenses tax-free.
Insurance is another component to consider. Make sure you have adequate insurance on your home (which may mean renter’s insurance) and vehicle as well as life and disability insurance. If your family depends on your income, you’ll want to ensure you’re covered.
5. Poor retirement planning
Saving up for your financial independence and being free of reliance on each paycheck is a huge money goal for everyone.
One of the easiest ways to get started is by saving for retirement with a 401(k), IRA, 403(b), or similar retirement plan. If you’re eligible for a company-match on your retirement plan, save at least enough to take the match. Contributing to a retirement plan is also a great way to lower your taxable income.
If you’re too overwhelmed at the thought of picking which stocks to invest in, you can start by using a target-date fund. That will automate your investments to gradually adjust from aggressive, to moderate, and eventually to conservative as you reach retirement. Once you become a more confident investor, you can reallocate your investments to align with your own risk tolerance and time horizon.