Personal finance can be challenging, even for smart, successful professionals. Many high-achieving individuals and pre-retirees assume that their high income guarantees financial security.
Unfortunately, this isn’t necessarily true. Having a high salary doesn’t negate the risks of a volatile market, unexpected medical bills, or other financial challenges. And even successful individuals can make money mistakes that impact their long-term wealth.
Are you unintentionally putting your financial security at risk? Read on to learn about the five most common financial missteps and how to correct them.
Money Mistake #1: Following an Outdated Financial Plan
When was the last time you reviewed your financial plan? It’s easy to think that financial planning is a one-and-done project — once you make a plan, you just need to follow it as the years go by.
But life can change quickly! If your job, income, or family situation has changed since you created your financial plan, you might not be making the progress you want on your financial goals.
For example, let’s say you made a financial plan five years ago. Since that time, you’ve earned a promotion (and a salary increase), and your oldest child has started college. Your financial plan probably doesn’t account for your new income or your child’s college expenses!
Even if you haven’t experienced a significant life change since creating your financial plan, it’s still wise to re-evaluate it regularly. Economic conditions, inflation, market behavior — all of these can affect your financial situation.
How to fix it
- Review: Analyze your plan every year and any time there’s a major update to your life circumstances, such as a change to your income, family structure, housing, or debt profile.
- Adjust: Change how you spend, save, and invest to realign your financial decisions with your immediate and long-term goals.
It’s easier to keep your financial plan on track with help from an expert. A CERTIFIED FINANCIAL PLANNER® can help you evaluate your current plan and make adjustments when necessary.
Money Mistake #2: Consistently Overspending
Once you’re making enough money to be financially comfortable, it’s easy to get a little lax on your budget. Lifestyle creep — increasing spending when income goes up — is a common issue, especially among high earners. Consider these spending mistakes — do any of them sound familiar?
- Using credit cards for large purchases without ensuring you can pay them off every month
- Paying for countless subscriptions (streaming services, gym memberships, etc.) that you may not even use
- Buying a new car (with an auto loan) every few years, even if your current vehicle meets all your needs
- Making convenience the default without evaluating how grocery delivery, dining out, entertainment, and luxury purchases impact your budget
When you start making more money, it’s easy to assume you can afford all the trappings of a more expensive lifestyle. But it’s still essential to balance your income and expenses! Unchecked spending can make it harder to grow your net worth and secure your financial future.
How to fix it
- Automate: Set up automatic transfers to your savings account and investments to ensure those funds aren’t available for discretionary spending.
- Evaluate: Review your expenses for the past few months and identify any consistent spending decisions that don’t align with your long-term goals.
- Recommit: Decide to prioritize big-picture goals over immediate gratification.
If you’re making a comfortable living, you don’t necessarily have to limit yourself to a shoestring budget. But it’s important to keep an eye on your spending so you don’t unintentionally hinder your progress on your financial goals.
Money Mistake #3: Underestimating Taxes
Usually, tax liability increases with income. As you make more money, you move into higher tax brackets.
Have you re-evaluated your tax strategy with a financial planner and CPA recently? If not, you might be missing opportunities to maximize deductions, minimize tax liability, and take advantage of opportunities to grow wealth.
How to fix it
- Learn: Several types of tax-advantaged accounts allow you to save money and lower your tax burden. Your financial advisor can help you make the most of your IRA, 401(k), and HSA options.
- Give: Charitable contributions allow you to support the causes you care about and can also reduce your tax liability.
Taxes are complicated, and you can save yourself time and frustration by working with a financial planner and CPA.
Money Mistake #4: Missing Out on Investment Opportunities
Investing wisely is all about balancing risk and potential returns. But you might feel a little anxious about investing your hard-earned income — especially if you’ve had to overcome significant financial challenges to get to your current place of financial stability.
Do any of these situations sound familiar?
- Keeping too much cash on hand or in a low-yield savings account
- Having an investment portfolio loaded with low-risk/low-return assets
- Automatically rejecting new investment opportunities without researching and evaluating them
You don’t want to be so aggressive in your investments that you jeopardize your security. But if you play it too safe, you can miss out on opportunities to make your money work for you.
How to fix it
- Reassess: Take the time to evaluate your risk tolerance and see how it aligns with your short- and long-term goals.
- Adjust: Work with your financial advisor to identify low-performing assets and determine whether it’s time to make changes to your portfolio.
Your situation is unique, and your investment strategy should be, too. An experienced financial advisor can help you understand all your options and make investment decisions that will serve you well now and in the future.
Money Mistake #5: Procrastinating on Estate Planning
You might not want to dwell on what happens when you pass away, but you can’t just ignore it — especially as you get older. Making a will once isn’t enough — it’s crucial to re-evaluate your estate plan every few years or when there’s a significant change in your circumstances.
If you pass away without a clear estate plan, your assets might not go to your heirs according to your wishes. Your loved ones may have to deal with lengthy, stressful legal battles if you don’t leave clear instructions in your estate plan.
How to fix it
- Review: Re-evaluate your will and other essential legal documents: power of attorney forms, healthcare directives, trusts, and insurance beneficiary instructions.
- Update: Identify any changes you’d like to make, and work with your financial planner and an estate planning attorney to ensure all your documents are accurate and complete.
Remember, estate planning isn’t just for wealthy older individuals. Even if you’re young, single, childfree, or living paycheck to paycheck, it’s crucial to create a comprehensive estate plan.
Get Expert Guidance to Secure Your Financial Future
Once you reach a comfortable level of success and feel financially stable, it’s easy to push money management tasks to the back burner. You might not need to live by a strict budget or agonize about every non-essential purchase, but that doesn’t mean you can just trust your finances to manage themselves.
If you just keep following the plan you created when you were less financially comfortable, you might be missing out on opportunities to grow your wealth and make progress on your long-term goals. And if you’ve stopped monitoring your spending altogether, you may even be risking your financial future.
These mistakes may be common, but that doesn’t mean they’re inevitable. With a few intentional actions, you can make sure you’re still on track to reach your financial goals (without sacrificing the quality of life you’ve worked hard to provide).
Are you ready to re-evaluate your financial situation and make sure you’re still on track? We’re here to help! At Guiding Wealth, we help people of all ages and financial circumstances identify their priorities and make money decisions that align with their values.
Whether you want to adjust your retirement plan, investment portfolio, monthly budget, or estate plan, you can trust our team for expert advice that’s tailored to your unique situation. When you’re ready to get started, schedule a consultation with our team!