(AgapePress) - In preparing this list of the most common mistakes people make related to their finances, I speak from experience that has encompassed hundreds of client sessions. This is by no means a comprehensive list, but serves to highlight the planning mistakes we have seen most frequently.
Failure to set goals. Philippians 3:14 states "I press toward the goal for the prize of the upward call of God in Christ Jesus" (NKJ). We establish spiritual, mental, and physical goals, yet are slow to establish financial goals. It's sad to say that the average person spends more time planning his or her annual vacation than they do their finances. We must establish short (less than 12 months), mid-range (12 months to 5 years) and long-range goals (over 5 years), quantify them, and then establish a plan to attain them based on the resources available to us.
Failure to aggressively eliminate debt. If you're playing the market with your surplus funds rather than applying them toward consumer debt reduction, you're going to have to do pretty well to come out ahead. For example, on a $5,000 investment, you would need to earn $1,250 per year (25%) just to offset the $900 interest expense you would have saved if you'd paid off an 18% credit card line instead (assuming a 28% federal tax rate). The best way to enhance return is to eliminate debt.
Failure to match investments with personal needs. A "poor" investment is not necessarily one that has under-performed; rather, it is an investment that is inappropriate given your specific goals. You must determine your specific needs and design a portfolio accordingly. The best investment in terms of safety cannot meet the needs of one with a long-term need for growth. Likewise, the risk and volatility associated with more aggressive investments may undermine the stability of someone needing safety and/or income. Your personal knowledge of investing (do you understand the nature of your holdings?) and level of desire to be active in managing your portfolio (how much time do you wish to devote to it?) are also considerations.
Failure to allow for inflation and taxes. Inflation and taxes can adversely affect the best plan. During a period of 4% inflation, someone in the 28% marginal tax bracket must receive a 5.6% return on his or her portfolio just to stay even. Likewise, someone with a long-term need for income must include a growth element to keep the purchasing power at or above the impact of inflation and the drain of taxes.
Failure to have realistic expectations. The recent bear market may have been a reminder that the stock market doesn't go up every year, yet study after study confirms people are still too optimistic regarding the expected growth rate of their investments. Over the long haul, stocks have returned close to 10% per year. Expect more than that and you're likely to be disappointed.
Failure to set appropriate levels of risk. Your "time horizon" is the length of time remaining before you will need to begin drawing on your investments for living expenses. The longer your time horizon, the more risk you can take. It is important to understand that someone in his or her mid-40s today is 20 years away from retiring. Even then, most couples will be depending on their retirement assets to meet their financial needs for an additional 20 years. That translates into a 40-year time horizon, which means you can afford to take significant market risk.
Failure to diversify adequately. Employer stock purchase plans, super star mutual funds or stocks, and a lack of understanding have led many an investor into a position of having all (or most) of his or her eggs in a single basket. You must diversify in a manner consistent with your objectives. Some studies indicate that over 90% of your long-term investment performance is driven by your diversification and asset allocation decisions, so be careful to avoid looking only at return.
Failure to seek competent, objective counsel. Our society promotes the need for expertise, then chastises those that seek to use it. We are told that seeking help is a sign of weakness. If one is ill, he or she quickly seeks medical assistance. When our automobile doesn't run, we quickly seek out a good mechanic. Yet when it comes to our financial present and future, we often try to do it all ourselves.
Failure to begin. Procrastination turns attainable goals into impossible ones. The longer we wait to establish meaningful personal goals and implement a realistic plan to accomplish them, the greater the difficulty we will have achieving success. The best time to start was yesterday, but today is better than tomorrow.
Published since 1990, Sound Mind Investing is America's best-selling financial newsletter written from a biblical perspective. To see how their specific saving and investing advice can benefit you, visit them online. James H. Shoemaker is CLU, CFP, ChFC, CFS for Sound Mind Investing.
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