Have you fallen victim to myths about net worth? Or are you making some of the most common mistakes that working adults make when it comes to accumulating wealth? If so, it helps to know the pitfalls, myths, errors, and planning snafus that tend to hold people back from achieving financial freedom. In no particular order, here are several important things to watch out for.
Ignoring Tax Strategies
Taxes matter, whether we want to admit it or not. Too many younger folks fall into the trap of ignoring the tax effect on long-term net worth because they aren’t yet earning enough money to feel the tax pinch. But as your income grows and you begin to accumulate more and more wealth, taxes can take a giant bite out of your investments. The solution is to take time to speak with a professional advisor so you can have a tax strategy in place for the long haul. You’ll want to think about things like possibly setting up a trust, incorporating a self-owned business, making strategic charitable contributions, and so forth. There’s nothing wrong with minimizing and avoiding taxes, as long as you do it legally. It’s tax evasion that gets people into serious trouble. So, know the difference and discuss pertinent approaches with your advisor.
You Must Start Building Wealth Today
Get your budget in order first. Before you can begin building up your financial assets, you have to get spending and monthly budgeting under control. For example, if you have regular bills like mortgages and vehicle payments that are eating up your income, consider refinancing them to save money. That way, you’ll be better able to balance the monthly budget and have something left over. Use the leftover portion to pay down high-interest credit cards, contribute to a savings account, or add to your emergency fund. When refinancing a car, see here to find a lender who has experience with those kinds of arrangements. Not all do. Even before contacting a reputable refi lender, check out one of the many auto refinance calculators online to get an idea of what your options are. Re-doing a vehicle loan can cut your monthly expenses by a significant amount. Plus, the entire process can be completed quickly and easily if you work with the right lender.
Not Having Enough Insurance
One emergency can wipe out a lot of your assets. It’s sad to see hard-working people lose out just because they don’t have enough, or don’t have the right kind of insurance. It’s not enough to say you have homeowners, car, life, and health insurance. Your insurance needs change as time goes by. This is especially true for homeowners, life, and health policies. Check each one to see if your coverage is where it needs to be. There’s no sense in working hard for a decade or more only to lose a huge chunk of savings on a house fire, non-covered medical expense, or something else. The solution is to sit down with an experienced insurance agent and review every policy you have. Upgrade to higher limits where needed and consider purchasing additional policies on newly acquired assets, like boats, summer homes, or collectible art.
Salary is All-Important
Your annual earnings are one piece of the net worth puzzle, and certainly not the most important piece. The key to creating long-term financial stability is spending less than you earn. Even better, aim for using passive income from investments to cover all your monthly expenses. But the specific amount of your yearly income only comes into play if it’s not enough to allow for any savings or investment.
Not Using the DEC Investing Principle
Avoid putting all your monetary eggs in one basket. This happens a lot with people who have stock-option plans where they work. Their portfolios contain one security. Whatever your investment plan is, aim for diversification, the “D” in the DEC principle. The “E” stands for early, indicating that you should start funding an investment account as early in your working life as possible. The “C” is for consistency. Even if you can only afford to contribute $100 per month, don’t skip a contribution date. Consistency is one of the most powerful forms of leverage when it comes to building a lifetime nest egg. The solution is to speak with your broker or a professional financial planner to make sure you’re consistently contributing to your long-term financial well-being, and spreading out the risk by keeping several securities in your portfolio.
Wealth Builds Quickly from High-Return Investments
It builds slowly and the return rates don’t matter that much. A tiny percentage of people are able to accumulate huge sums of money in a short period of time. In the real world, working people spend their entire lives arranging for a comfortable retirement. Some do it more quickly than others, but the fact remains that it’s a slow process. Don’t get hung up on high-return stocks, funds, or other instruments. Likewise, avoid the trap of feeling like you have to beat the market. You don’t. The key is letting funds grow consistently, safely, and in a way that they incur the lowest rate of taxation. That usually means having most or all of your long-term monetary assets in an IRA, 401(k), or a house.
Being Wealthy Means You’ll Have More Free Time
If you become a workaholic, you might not be able to break the habit once you are able to cut back on work hours. It happens to plenty of people. The struggle so hard to get ahead and save for retirement but then can’t take a step back and enjoy what they have when the time comes. A warning sign is working on weekends and holidays when there’s no need to. Keep an eye on your habits and ask your spouse, friends, and coworkers if they notice signs that you’re working too hard. There’s no point in creating wealth if you’re too stressed out to enjoy it, or worse, physically incapacitated from exhaustion or serious illness.