Financial Traps to Avoid
By R. Todd Holden, Financial Advisor
There’s a reason why even athletes, entertainers and businesspeople with seven-figure (and higher) incomes suddenly find themselves filing for bankruptcy. Money mismanagement can eat through even the biggest bankrolls. Here are some specific threats to financial stability that people can avoid to help effectively manage their finances.
A 2022 survey by Debt.com revealed that over 90 percent of respondents believed everyone should have a budget (though only 85.6% of the respondents said they used one).1 Half of the survey respondents said they’re living paycheck to paycheck, which may help explain why they consider budgeting to be so important. Budgeting does not have to mean skipping coffee and driving a jalopy for the rest of your life. It does mean paying close attention to how much money comes in and where it all goes. Use your financial goals to guide you in steering your money in the right direction.
Too Much Debt
One of the biggest financial traps to ensnare yourself in is debt. If you have a lot of debt to pay off, a budget is even more important. It helps reduce the likelihood of relying on more credit to fill the gaps. A budget also helps you to manage to collect those extra dollars and cents that you could put toward paying more than the bare minimum on debt. When paying off debt, start with the higher-interest accounts first and work your way through eliminating, or at least significantly reducing, your debt.
Insurance can be expensive, but going without insurance can cost you even more down the road. Renters, homeowners, auto, health, disability and life insurance policies are the main types of insurance to consider. If you have a business — especially if it is your main or only source of income — getting the appropriate business insurance can protect your livelihood in the event of a mishap.
No Retirement Planning
A recent survey by Clever estimated that nearly 30% of Americans have nothing saved for retirement.2 The survey also revealed that retirees who have saved for retirement, on average, have only $191,659 saved. This is far less than the $514,800 recommended by experts.
Because of this, many Americans continue to hold stressful, low-paying jobs well into their retirement years. It is never too early to start planning for retirement, no matter how small your contributions are. Remember to take advantage of matched contributions from employers whenever possible.
Too Much Risk
There is no investment that is 100% without risk. If there were, the returns on that investment would be negligible. Even so, taking on too much risk at the wrong time can lead to big financial problems. Taking on high levels of risk is more appropriate for young people who have more time to recover and is not advised for people nearing or in retirement.
Even worse is when risky investments turn out to be fraudulent or shady. In fact, the more risk-free an investment sounds, the more you should dig into its legitimacy. This holds true whether the business or individual you plan to invest in is a stranger or your brother. People who miscalculate or fail to do enough research can cause you just as much financial damage as unknown fraudsters.
Poor Tax Management
No matter how much or how little money you make, tax management is a great way to help keep money in your pocket. This is especially important after a large windfall such as an inheritance. For instance, if you inherit an Individual Retirement Account (IRA) and choose to cash out, you may lose a portion of this to taxes. Divorce is another time of life when tax management is critical.
Stocks are often traded frequently, making them active investments, but you still need to ensure your portfolio stays balanced. Similarly, if you have a home, keeping up with repairs and improvements maintains and grows its value. Unmanaged assets also pose a problem, such as when people allow large sums of money to sit in accounts with low to no interest and high fees.
For some people, money management is a talent and financial literacy is almost an inborn skill. Many other people, however, could use a little help making financial decisions. If you’re in the latter group, I recommend you speak with a financial professional who can help to steer your finances in the right direction. If you’d like to schedule a complimentary consultation with me, visit my website at rtholden.nwfllc.com or email me at firstname.lastname@example.org.
1Debt.com, “Americans are Budgeting More than Ever.” https://www.debt.com/research/best-way-to-budget/
2Listwithclever.com, “State of Retirement Finances: 2022 Edition,” April 7, 2023.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. This material was prepared by LPL Financial, LLC.