No emergency fund:
A fully funded emergency fund works much like the foundation of a house. It’s the base upon which you build. If your foundation isn’t solid, you’re bound to run into trouble. Generally, you should target 3-6 months of living expenses in an emergency fund that should be liquid.
Not taking advantage of a Roth IRA:
Presuming you file taxes as a single filer and your income is less than $122,000 or you file jointly and your income is less than $193,000, a Roth IRA allows you to put away post tax money, while in lower tax brackets due to the earnings constraints. The primary benefits of Roth IRAs are that funds may grow tax free and, if qualified, can be withdrawn tax free in retirement after age 59.5.
Not saving enough:
According to a recent study by Fidelity Investments looking across the more than 16 million 401k accounts on their platform, the average balance for somebody between 60-69 years of age was $195,500. Many of you will have to rely on your savings for retirement and as you can imagine, $195,500 is only going to get you so far. Another huge impediment is waiting too long to begin saving, zapping the power of compounding over long timeframes. The key is to start early, preferably in your early 20’s, and increase your savings percentage over time as your earnings increase.
Not considering your personal risk tolerance:
Something I see on a regular basis, especially given the upward trend in equity markets the last 10 years, is risk tolerance not lining up with objectives or one’s ability to withstand market volatility. I often encounter clients with a sense of complacency, as if domestic equity markets have done well the last 10 years, it will continue, right? Or on the other hand, it could just be that your investment portfolio has become out of balance over time. You want to find the sweet spot for your specific needs. The last thing we want is for a significant market downturn to scare you out of the market at the wrong time or for your retirement date to be pushed back because you’re taking on more risk than necessary.
Analysis Paralysis:
We live in a world where information is almost instantly available at our fingertips and there are plenty of “experts” ready to provide their two cents. Information is wonderful but information overload can become damaging when it inhibits your ability to make a decision and move forward.
Having a narrow focus:
Rather than focus on one thing at a time, it’s important to focus and prioritize multiple things at once when it comes to your financial life management. It’s all interconnected and by having a narrow focus you may be doing damage or not taking full advantage of other areas of your finances. It’s critical to think big picture, after all, a financial decision you make today could impact you for decades to come.