And How to Avoid Them
It was a dark and stormy night. You thought you had planned wisely, when all of a sudden — out of nowhere — bam! Your finances are hit with an unexpected proverbial ax (cue a blood-curdling scream).
Scary, right?
While financial mistakes may not actually be the stuff of horror stories, they do have the potential to derail your future plans, and that can be terrifying. In the spirit of the spooky season, we present five common financial horror stories and tips to help you avoid them.
Horror story #1 – Credit card debt
If not properly managed, credit card debt can haunt you for years into the future. It’s not just your credit score that suffers — interest charges and high fees can eat away at your disposable income and slash your ability to save for the future. Credit card debt can quickly add up, leaving you trapped and unable to escape.
Tips:
- Establish a budget to track your monthly income and expenses and include expenses you pay for on credit as a part of your budget.
- Don’t use your credit card to pay for more than what you can afford to pay off each month.
- Focus on paying off your credit card debt as quickly as possible, putting as much as possible toward the card with the highest interest rate first.
- If you do carry a balance, pay more than the minimum payment each month; otherwise, the balance can quickly get out of hand.
- Maintain an emergency fund to cover three to six months of expenses to avoid the need to fall back on credit when you encounter unexpected expenses.
Horror story #2 – Overspending
Overspending can be a horror story for your financial, emotional and mental health. Not only can spending more than you can afford put you into debt and derail your savings and investment strategies but it can also wreak havoc on your mental health as you worry about how to meet your financial obligations.
Tips:
- Create (and stick to) a budget. If the thought of tracking your expenses gives you a fright, think big picture — keep your expenses at a level lower than your income.
- Establish clear financial goals and remain focused on your priorities.
- Beware of spending on food, online shopping and subscriptions; these are all common areas for overspending.
- Practice delayed gratification. When you feel the urge to make an unplanned purchase, wait for 24 hours to see if you still want the item. This strategy can help you avoid impulse spending.
- Be aware of lifestyle creep. As your income increases over time, increase your savings rate instead of letting increased spending eat away at your extra income.
- Practice gratitude. Be grateful for what you already have rather than looking to acquire more.
Horror story #3 – Failing to plan for taxes
Taxes are a necessary evil we all must face, but failing to prepare for them can quickly lead you to the dark side. Without a tax planning strategy in place, you may be overpaying Uncle Sam by thousands of dollars each year.
Tips:
- Work with a qualified tax professional to manage your tax payments throughout the year rather than waiting until you file to figure out how much you owe.
- Beware of changes in income from year to year and the impact on your tax situation.
- Implement tax planning strategies within your investment portfolio. Examples include tax-loss harvesting, tax-advantaged investments and asset location.
- Consider using donor-advised funds and qualified charitable distributions to support charitable causes.
- Look for ways to lower your income, such as maximizing retirement plan and health savings account contributions.
- Taxes are just as important in retirement. Consider strategies such as Roth conversions, tax-efficient withdrawals, spending down wisely, and Social Security/Medicare optimization.
Horror story #4 – Neglecting your retirement savings
Not only does failing to save enough for retirement mean you likely won’t be able to achieve your desired retirement lifestyle, but it can also lead to an overreliance on Social Security, increased financial stress, limited healthcare coverage and the need to work longer than you had hoped.
Tips:
- Start saving today. The sooner and more consistently you save, the better off you’ll be thanks to the power of compounding interest.
- Understand your retirement plan match structure and contribute enough to your plan to maximize the employer match.
- Save in a variety of retirement accounts with different tax treatment — taxable, tax-deferred, tax-free, etc. This practice provides you with maximum flexibility to structure a tax-efficient withdrawal strategy in retirement.
- Set clear retirement goals. Let those goals motivate you to save and invest wisely for the future.
- Plan for healthcare and long-term care expenses. These costs can quickly erode your retirement savings if not properly planned for.
Horror story #5 – Not having adequate insurance
If you’re not taking steps to protect your family and finances, you’re setting yourself up for a scary situation. Don’t be the guy who turns his back on the monster and starts to walk away. Instead, arm yourself with adequate insurance to protect all you’ve worked so hard to build.
Tips:
- Understand what you need to insure. Take inventory of all aspects of your personal and financial life to determine what needs protection. Consider home, auto, umbrella, life, long-term care, medical and disability insurance.
- As your life changes, your insurance needs to change too. Regularly review your coverage to ensure it continues to meet the needs of your ever-evolving life.
- Understand the terms of any existing insurance policies to make sure they cover what you need them to, and review beneficiaries on life insurance policies regularly to make sure they match your wishes.
- Build an emergency fund to help cover insurance deductibles and unexpected expenses in the event of underinsured losses.
- Work with a qualified wealth advisor and insurance professional to help ensure you have the right coverage in place.
Could you use some help avoiding these common financial horror stories? Creative Planning is here for you. With the help of our qualified professionals, planning for your financial future doesn’t have to be scary. To get started, schedule a call with a member of our team.
