Every year around the High Holiday season I have the same epiphany: Investors should set aside time to reflect on their money decisions from the past year. While there doesn’t need to be a proscribed time or liturgy for this type of introspection, making sure to reflect on our money decisions periodically is an important component of the financial planning process. Many of the financial missteps that investors make are avoidable with proper education and lifestyle tweaks.
In this video I will outline six common “financial sins” that investors tend to make. Understanding them is the first step to properly position our finances for the future.
- Spending money we don’t have: In today’s world, almost any purchase has a payment plan or financing option available to allow consumers to obtain merchandise they can’t currently afford. Acquiring luxuries through financing may be a very imprudent decision. It’s imperative to be cognizant of your income level and cash flow and only spend within your means. Afterall, a healthy cash flow is the cornerstone of prudent financial management.
- Procrastinating retirement planning:Many folks hold off on planning for retirement. They assume that there will be a more opportune time to start planning for their financial future. Perhaps they anticipate a higher income, lower expenses, or a meaningful liquidity event due to the sale of a business or inheritance. In reality, hoping for a more optimal time to start saving and investing regularly will lead to inaction and missed opportunities. Starting to save even a small amount of money now is a far better approach than planning to save larger amounts when your financial situation hopefully improves in the future. Remember, hope is not a strategy.
- Making financial decisions based on what our friends are doing:The social pressures that come with living in a tightknit community cause some of the most difficult money challenges to overcome. These pressures lead to a “keeping up with the Joneses” mentality, which inevitably leads to heartache, regardless of income level. There is always somebody richer than you and who has better stuff than you. Coming to terms with this fact of life can make it easier for you to focus on what’s actually important. Furthermore, social pressures may lead folks to adopt an investment philosophy similar to their friends, which oftentimes make no sense. The best practice when it comes to friends and your finances is to keep the two separate.
- Dismissing your insurance needs because it’s expensive:Premium payments for life, disability, and long-term care insurance all eat into one’s annual cash flows. These costs are viewed as a nuisance, and obtaining this coverage is pushed off by some folks until it’s too late. I tell my clients to embrace this annual financial outlay and to view it as a small tax on being alive and healthy enough to provide for your family. It may be a financial annoyance today, but it can save your family from financial devastation in the future.
- Avoiding estate planning because it’s uncomfortable:Estate planning, and all its components, is generally the least popular part of financial planning because it involves contemplating one’s demise. However, what is even less pleasant is the fiasco that is sure to happen after the death of a family member who didn’t do proper estate planning. Taking the time to sit down with a competent attorney who specializes in these issues is imperative. The attorney can draft the relevant documentation, such as a will, health care proxy, power of attorney, and trusts, if necessary.
- Not sticking with your strategy: Throughout the year, there are nerve-racking news stories and market volatility that may cause someone to question their investment strategy. We saw this multiple times in 2024 with geopolitical concerns, wars around the world, politics, interest rate moves, and so forth. Throughout the year, I send out “client notes” when a nerve-racking event does occur to soothe investors’ fears. Afterall, the ability to stay the course during the tough times is what separates the most financially successful people from the rest of us. If you didn’t make drastic decisions and stuck with your plan this year, you likely did quite well. Folks who panicked, abandoned their strategy, or made impulsive decisions, likely cost themselves money.
In order to meaningfully increase your net worth, it’s imperative to have a sensible process and to stick with it for the long-term. Investors that can do that, will be very pleased by the outcome.