It doesn’t matter how much of a whiz you are with your finances – you’re bound to slip up somewhere along the way. If financial mistakes can happen to Ray Dalio and Warren Buffet, they can happen to you, too.
The good news is that some of the most common missteps have pretty straightforward solutions. Here are common financial mistakes you might run into, and how to bounce back from them:
Financial Mistakes: Investing in Annuities
You can purchase annuities from an insurance company to guarantee a payout later. You receive payment in one lump payment or smaller payments over time. On paper, annuities might sound like a good investment. They are tax-deferred, so you don’t pay taxes on income and investment gains until you withdraw money. They also include a death benefit, so if you die before you receive payment, you can name someone else as the beneficiary.
But before you purchase an annuity, know that there are some features to be wary of.
First, you could end up paying some hefty fees. The fees and expenses from annuities can be double (sometimes more) than they would be with a mutual fund. The fees include commissions for the salesman who sold you the product, which run 1.5 percent to 3.5 percent in annual fees. That includes mortality and expense charges, rider charges and internal subaccount fees.
Finally, watch out for the limitations. Annuities have a lot of them, including a 10 percent early withdrawal penalty and a potential surrender penalty.
The surrender penalty is going to affect you if you have decided you don’t want to keep your annuity after all. This penalty is a fee of up to 15 percent if you decide to get your money back according to the fee schedule. It might take some additional evaluation, but you could be better off doing a 1035 exchange to another low-cost annuity or closing out your account and investing the money elsewhere.
Purchasing a Whole Life Insurance Policy
Buying a whole life insurance policy is one of those financial mistakes that comes disguised as a smart investment. Whole life policies are sometimes sold as the “swiss army knife” of financial planning because the cash value could be pulled out or borrowed against. Unfortunately, they are rarely a wise financial move due to high fees and surrender charges.
Opt instead for term life insurance, which will cover you for a set amount of time, or universal life insurance, which is a less expensive form of permanent insurance. This might feel riskier. But the point of life insurance is to replace your income if something happened to you.
After you retire, your retirement savings should be in place to protect you. There are much better investments than whole life insurance policies, so do your research before purchasing one.
If you already have a whole life insurance policy, and you’ve paid more than the current cash value, you could consider converting it to a paid-up policy, doing a 1035 exchange into another policy or dropping it for term life insurance. Make sure to check on your cost basis (so you don’t end up with a surprise tax bill) and any surrender charges you might owe.
Not Maxing Out Retirement Accounts
Too many people tend to think they’ll add more money later to their retirement savings. But if you want the most bang for your buck down the road, it pays to invest whatever you can now. Appreciation takes time, and even a couple years can make a big difference in overall dividends. Not adding enough to your retirement accounts early on is one of the most common financial mistakes people make.
Contributions to a 401(k), 403(b) and traditional IRA also save you money on your tax bill. Whatever money you add in a calendar year (up to the limit) is tax-deductible. Do your best to max out your accounts – you’ll thank yourself later.
Ignoring Your Budget
Take a look at the many wealthy celebrities who have gone bankrupt, and you’ll know why it pays to track your money. It doesn’t matter how much money you’ve got. Everyone should be mindful of where their money is going.
If you find that you struggle consistently with cash flow, start by tracking all of your money for a month. That includes whatever comes in and everything that goes out. That will give you an accurate picture of how much you can expect to spend throughout the month. After that, tweak it to hit your goals. Look for excess and options for better money allocation.
Regardless of how many times you’ve slipped up in the past, there’s nothing stopping you from getting your money and investments back on track – starting today. Learn from your financial mistakes, make small adjustments to your processes, and you’ll be on your way to changing your financial situation for the better.
About Your Richest Life
At Your Richest Life, Katie Brewer, CFP®, believes you too should have access to financial resources and fee-only financial planning. For more information on the services offered, contact Katie today.