The Perfect Portfolio
Avoiding money mistakes at every age
As people age and go through life’s different stages,
their relationship with money changes. Reflective of their particular age, people can make different mistakes about money –– and making some mistakes early in adult life can compound money problems later on.
Financial planners and other money experts tend to agree that regardless of age, the biggest mistakes revolve around:
• Not having a game plan
• Not saving enough
• Not having an emergency fund
• Having too much debt
Not having a game plan comes down largely to two words: no budget. Financial planners maintain that if individuals or couples want to take control of their money they need to know where the money is going and plan in advance how to spend it. Everyone needs to have a budget and stick to it.
The Certified Financial Planners at LearnVest suggest the 50/20/30 rule for allocating take-home pay:
• 50 percent to essentials, such as housing, insurance, transportation, utilities, and groceries.
• 20 percent to financial priorities, such a retirement, savings, and debt. (And do it in that order.)
• 30 percent to lifestyle choices, such as gifts, travel, dining out, shopping, and everything else.
Next, track spending to make sure the budget is adhered to. It can be a simple pencil and paper budget or one developed using an automated system available online or through personal software or a phone app. A computerized system can keep up with expenses and point out spending trends. However, financial planners say the key is creating a budget for each individual’s or couple’s situation and sticking to it. Not having a real budget can easily lead to the other problems: not saving enough, not having an emergency fund, having too much debt, and overspending.
How Much Should People Save?
When the topic of savings comes up, it is often linked to having enough money for retirement. Financial planners urge young workers to begin saving from the very first paycheck, even when retirement is far from their minds. A good rule of thumb is to start by saving 10 percent of income and then increase the percentage over time. Some experts suggest having the equivalent of one-year’s salary saved by age 30 and 10 times final salary in savings by age 67. Of course, that also includes gains through investments.
But the key is to start saving. Savings also allows for the creation of an emergency fund to help with unexpected financial problems. The rule of thumb here is about six months living expenses to take care of things like car repairs, major appliance breakdowns, children’s braces, and other unexpected expenses.
Too Much Debt
Not having sufficient emergency funds can easily lead to too much debt, especially when a credit card is used for that unexpected expense. The American Association of Retired Persons reports that over a lifetime the average American will pay more than $600,000 in interest. Debt is expensive. Financial planners urge debt avoidance and recovery.
Everyone can be tempted to overspend, whether in a small way — such as eating out for lunch on a regular basis — or in a big way, such as purchasing too large a home. The ease of credit cards can contribute to the problem. Suddenly, more money goes out than comes in. Financial planners, who often say overspending is the No. 1 money mistake, counsel that the problem is not making enough money but instead failing to budget the money available.
Money Mistakes by Age
For each age, specific money mistakes loom. Charlie Wells, a staff writer for The Wall Street Journal, reports that the biggest money mistakes many people make are playing it too safe in their 20s; getting overwhelmed by complexity in their 30s; misjudging significant expenses in their 40s; having difficulty catching up in their 50s; and not delegating in their 60s and beyond.
Here is a look, by age range, at the major mistakes some financial planners experience with clients.
“Playing it too safe” can lead to a series of mistakes. For example, young workers often fail to take enough risks with investing in order to build up large returns that will pay off in retirement. A 2016 study by Lindsay Larson, assistant professor of marketing at Georgia Southern University, found that millennials tend to favor investments that have a guaranteed income with little risk of impressive returns. Retirement just seems to be something that young adults see far off in the future. What’s the hurry? Yet, young people have the opportunity to put all that time to good use.
Part of the issue seems to be a lack of understanding about money. Larson’s study found that some millennials’ financial literacy is not particularly strong. This also causes issues with credit card use. LearnVest ranks “not understanding the importance of credit scores and credit reports” as one of “The 13 Biggest Money Mistakes People Make,” regardless of age.
In addition, young people sometimes take on huge student debt without knowing what monthly payments will be after graduation. Know the payback and be certain a graduate degree will lead to a high enough salary to pay back loans quickly.
Also, student loans, car payments, and credit cards can lead to financial traps for young adults. It is so easy just to whip out that little piece of plastic and use it to pay for everything. Not having enough money to pay the balance off each month is okay, right? Just pay the minimum and kick the can down the road? Not a good idea. Financial planners caution against the trap of rationalizing purchases with credit cards that exceed one’s income, especially for everyday expenses as the charges can mount rapidly. Student loans and car payments often affect other financial goals.
Full adulthood, when many people marry and start families, comes with its own financial issues and mistakes that can make individuals “overwhelmed by complexity.”
This is the age when people often begin to equate success with a life of luxury, and that can lead to spending too much on an expensive home and luxury automobiles … which in turn can make debt a way of life. Start with a smaller, less expensive house or car and move up.
While financial planners say adhering to a budget is always important, it becomes critical with a family to feed and a mortgage to pay. Use the 50/20/30 rule.
Most 30-somethings are saving at least a little for retirement, according to a 2016 study. But saving really needs to ramp up, and taking advantage of their company’s 401(k) can be an easy way to do this. The 2016 study also pointed out that many workers in this age group do not invest aggressively enough when they can because they do not understand investing, and that can mean lower returns.
Financial planners also caution this age range against neglecting personal financial needs. Children do not necessarily need every dance or art lesson, summer camp every year, or the latest and most expensive sports equipment, especially if contributing to retirement savings is sacrificed as a result.
Misjudging exorbitant expenses is a significant mistake that people in their 40s can make. Money mistakes loom in people’s everyday lives and disrupt plans for retirement.
Not reviewing mortgage interest rates can lead to the loss of thousands of dollars. Financial planners suggest reviewing the mortgage to see if refinancing makes sense. If it does, saved money can be shifted to other needs, such as retirement savings.
Having a will is something many people do not want to think about; however, it is important for financial security, especially when minor children are involved. Life insurance and other forms of insurance –– home, health, and automobile –– also need to be in the mix.
People in their 40s, with children getting older and reaching college age, experience a strain on personal finances that often increases. Contributing to college tuition instead of retirement savings could mean putting the child in a position later in life where the child will have to sacrifice to take care of the parent. Financial and career counselors suggest taking a careful look at college choices. Many state schools offer programs and degrees that are as good, if not better, than more expensive private schools. Supporting children can be especially difficult for parents who are already in that “sandwich” of taking care of children and aging parents.
The financial planners’ mantra is: It’s never too late to start saving. Even beginning with just one percent and increasing it annually can, through the power of compound interest, pay off.
People in their 50s often realize they may not have enough money saved for retirement, especially since people are living longer and retirements are lasting longer. Financial experts say retirement funds may need to last as long as 40 years. Mistakes to avoid include:
- Dipping into retirement funds too early. It can be tempting to dip into the retirement fund to finance that cruise or luxury automobile. Don’t. The retirement fund should be just for retirement. Taking money out early can mean tax issues, resulting not only in the loss of those funds for retirement, but also any interest that would have accrued to them.
- Not having an updated will. Wills are not just for deciding who gets the silverware or the jewelry. Lifestyle changes, such as divorces or grandchildren, can mean a needed change in the will.
- Ignoring insurance needs. Again, lifestyle changes mean updating insurance plans.
- Underestimating retirement costs. Most retirees do not spend much on food and entertainment or housing if the mortgage has been paid off. But one area that can be quite costly is health care. Financial planners urge people to consider their long-term health care needs. LearnVest planners suggest considering disability insurance. Some companies offer long-term disability as part of their benefits package, and that can be less costly than purchasing an individual policy.
The 60s and Beyond
“As we get older, our personal balance sheets grow more complicated,” writes The Wall Street Journal’s Charlie Wells. “Numerous recent studies on aging reveal an unpleasant truth: Our analytical abilities can’t keep up with the complexity. And since we are living longer, that makes it even more likely that we’ll have to deal with cognitive impairment.”
Most people overestimate their abilities to keep up, and that can lead to a huge financial mistake. Wells cites a 2009 study by Georgetown Professor Sumit Agarwall, “The Age of Reason,” that shows that the peak financial decision-making age is 53. Agarwall’s study suggests that people are more prone to make mistakes as they age, such as not reading the fine print on investments, and that can be very costly. He urges people to delegate financial decisions as early as their 50s or 60s.
Joe Duran, CEO and founder of United Capital, a financial management firm with more than $16 billion in assets under management, reports that his research shows that 70 percent of people in the United States either spend money too casually or too carefully. Each approach has implications for people’s financial lives.
The key is to develop a balance that can lead to a stable and healthy relationship with money.