10 Mistakes to Avoid for Financial Success (December 19, 2006)
Not Asking Questions—This is very straightforward and to the point. Financial planners want you to feel comfortable about your finances. If you have a question, please ask.
Investing Without Saving—The returns produced by the stock market in the 1980s and 1990s have led many people to invest heavily. But most financial professionals advise individuals to keep a cash reserve of at least three to six months' worth of living expenses. With a reserve, you won't have to sell stocks in case an emergency arises and you need cash.
Not Understanding Risk—While investments are rising we have a higher tolerance for risk. But when investments are falling (which they will do at some point) we have a lower or no tolerance for risk. The point—our risk tolerance will change! As financial planners it is our obligation to reassess our client's risk tolerance. BUT we cannot do that without the investor's participation. When was the last time you revisited your risk tolerance?
Not Taking Responsibility to Monitor Investments—As your world changes your investments need to reflect these changes. For example: growth vs. income, risk vs. guarantee, taxable vs. nontaxable, aggressive growth vs. moderate growth, etc.
Failing to Update your Universal Life Insurance—If you purchased a Universal Life Insurance policy during the 1980s or 1990s you need to have an inforce illustration prepared by the life insurance company and sent to you. We find that policies sold during this time period need to be reviewed. Remember, they were issued during a period of high interest rates. Interest rates are a major factor in your policy longevity. Check it out or have your agent check it out.
Forgetting to Update your Beneficiaries—Have you checked your beneficiary designation recently? If not, you may find that your designated beneficiary is not who or what you think it should be, especially if you have divorced, remarried or had children since your account was established. You also want to talk to your financial planner about the tax implications for the kind of beneficiary you choose, whether a particular person, an entity, your estate or a type of trust.
Withdrawing Money from Retirement Plans—By withdrawing money from your retirement plan, you lose valuable interest that is extremely difficult to replace. Some plans allow for hardship withdrawals and/or loans but you must be careful when taking advantage of these withdrawals. In addition to losing interest, you could face penalties or withdrawal fees.
Paying Too Much for Insurance—You definitely need insurance to protect yourself and your family. However, many people purchase insurance policies and put the policies away in a drawer never to be seen again. It is important to review all of your insurance on an annual basis to make sure it is still in line with your goals, and that it is still competitive with new policies on the market. This includes auto, homeowners, life, disability, health, dental and long term care insurance.
Ignoring the Threat of Dementia and Incapacity—Death and taxes may be life's only certainties, but gradual deterioration rates a high probability. At some stage in your life you might lose the ability to manage your own affairs. Even if you're a long way from such actions, your elderly parents may be susceptible. Talk to your attorney about the following: durable power of attorney, health care derivative, revocable trust, and wills.
Misunderstanding Your Planners Role—It's a common misconception that a financial planner is primarily an investment advisor, someone whose job is to help you "make money," "get rich" or "beat the market." While investing is certainly an important element, the fundamental goal is to help you make the most of your assets in order to achieve your life goals. What differentiates planners from other financial professionals, such as stockbrokers and insurance agents, is that they focus on a client's overall financial picture. They help ensure that all aspects of the individual's fiscal life are working smoothly toward achieving their client's needs and goals. Investments, or other financial products for that matter, are merely one aspect of that overall picture.
Now that we've equipped you with 10 very common mistakes, make an effort to ensure that you are on the right track to financial success and financial security. Getting things done is just a phone call away.
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