I worked hard to clean up my finances in my 30s, but a financial planner says I'm still making 5 expensive mistakes
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- I made numerous financial errors during my 20s and have been working on sorting them out ever since.
- I recently met with a financial advisor, who highlighted five errors I am still committing.
- I possess an excessive amount of money in my savings account, inadequate diversity in my taxes, and far too many individual stocks, among other issues.
Right before I turned 30, I decided to get serious about my finances. I had spent most of my 20s making all kinds of money mistakes (from not saving for retirement to racking up credit card debt). I was eager to approach a new decade of my life with my finances in a strategic place so I could meet the big goals I had for my future, like retiring early and buying property.
I didn't know what to do first, so I did anything I could to tighten my spending and start investing. Since I never worked one-on-one with a financial professional, I always wondered if I was making any glaring mistakes. It turns out I was.
I decided to find a financial advisor . I sat down with Adam Scherer, a financial planner and president of Greenbeat Financial , to review every inch of my financial portfolio to not only identify the mistakes I'm making but also make a game plan for how I can start fixing them.
1. My savings account has more money than I really need.
The initial error I anticipated Scherer mentioning is one I have consciously acknowledged for quite some time. Over fifty percent of my investment portfolio consists of cash simply stagnating in my account. savings account I'm making this error because I'm uncertain about what alternative options I have for that money and I'm afraid of losing it.
Scherer mentioned it's fantastic to have money readily available as an asset. emergency fund A useful guideline is for a couple to maintain enough funds covering six to nine months of both fixed and variable expenses in their cash account.
How can I correct this error?
Scherer emphasizes that initially, it’s crucial to evaluate your risk tolerance. Next, you should determine when you plan to use these funds in the future—be it for retirement in two decades or purchasing a home within half a decade. With this information at hand, you can proceed with deciding where to invest that money. retirement plan (by using indexes or mutual funds) or diving into real estate (either by direct purchase of property or via a REIT, enabling investment in real estate assets without personally acquiring them).
2. The equilibrium of my risks could be incorrect.
Several years back, upon receiving extensive advice from numerous friends, I decided to establish an investment portfolio with a robo-advisor This service takes care of your finances for you. Simply specify your risk tolerance, and it handles everything else. Following my peers’ example without giving it too much consideration, I opted for an allocation with 90% invested in stocks and 10% in bonds, which made the investment quite precarious.
Scherer suggests that since you're currently apprehensive about taking risks and uncertain about your financial objectives, it would be wiser to adjust the allocation from 90/10 to an 80% stake in stocks and 20% in bonds.
"If the thought that 90% of your funds are invested in high-risk assets with just 10% in safer options leaves you feeling uncomfortable, it’s perfectly fine to reallocate them into a more reassuring distribution as you consult a professional for advice and support," according to Scherer.
3. I own an excessive number of scattered single stocks.
I admitted to Scherer that, throughout the pandemic, I invested small amounts in numerous individual stocks with minimal research or consideration. Scherer pointed out that these stocks were predominantly from a single sector—technology, media, and telecommunications—and that concentrating my investments so heavily in just one industry could be both risky and lacking strategy.
Scherer suggests spreading investments across various industries because these sectors tend to move together at different points in time.
So, what are my options? Scherer said I can sell my current individual stocks and use that money to invest in stocks across different sectors, or I can go broader and buy sector-focused ETFs to have a fully diversified portfolio .
I was curious whether this indicated that I ought to allocate an equal amount of funds to every sector.
"Whether this works hinges on your desired rate of return, our current position within the hype cycle, future trends, and various other elements," explained Scherer.
4. I require greater diversity in my tax planning.
One point Scherer mentioned was lacking in my portfolio was tax diversification. He pointed out that there are three types of tax buckets: taxable assets (like funds in a taxable account), brokerage account ); tax-deferred (where taxes are paid later, similar to my SEP IRA); and tax-exempt (where the funds aren’t taxed, such as a Roth IRA ).
Scherer indicated that I might face difficulties contributing to a Roth IRA since my income could be too high for contributions, and as someone who files taxes separately from their spouse, I wouldn’t meet the criteria for the increased threshold. Nevertheless, he brought up an alternative approach.
Scherer explained that you can still implement a backdoor Roth IRA strategy to increase your investments in this 'tax-free' category. To proceed with this approach, you would first establish both a traditional IRA and a Roth IRA account. Following that, you’d make nondeductible contributions to the traditional IRA and subsequently transfer these funds into the Roth IRA.
5. Neither my spouse nor I are safeguarding our financial well-being mutually.
At the conclusion of our discussion with Scherer, I brought up that I had gotten married lately. Despite maintaining mostly independent financial affairs and not filing joint tax returns, I questioned whether there were any steps my spouse and I needed to take regarding our money management since getting hitched.
Scherer said yes.
You could set up one another as beneficiaries across various accounts," suggested Scherer. "Should an asset come with a designated beneficiary—such as your retirement fund, savings account, or investment portfolio—it allows for the automatic transfer of these assets directly to that individual once something happens. This way, you sidestep the lengthy legal proceedings involved in probate court, which also helps save both time and expenses.
Another thing Scherer mentioned was that now that we're married, we should consider getting life insurance .
"If you both have a life insurance policy in place, it can ensure the other person is able to pay for some debts and maintain the quality of life they are accustomed to if their partner passes away," said Scherer.
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This article was originally published in April 2022.
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