Estimated Read Time: 3-4 Minutes
We’ve all heard the nightmare stories of people making big mistakes that lead to a job greeting at the entrance of the local shopping center. But what exactly are some things that may have gone wrong for people? We will go through some very practical things you should or shouldn’t do to help yourself reach your retirement goals.
Budgeting is the cornerstone of being financially successful in life. If you don’t know where your income is going, you might as well go ahead and label it all as outgo. Whether you were making minimum wage or you had a seven-figure income last year, you need to make sure that you have a good idea of where your money is going.
Financing a depreciating asset
Financing a depreciating asset is one of the biggest mistakes that a person can make. Here’s an example for you:
- $30,000 car
- 60-month loan
- 6% interest
After 5 years of paying $579.98 a month, you will have paid $34,799.04 on a car that is now worth around $8,000. I don’t believe that I have to go any further, but let’s say instead of financing that $30,000 car, you bought a car worth around $2,500 and drove it for 42 months (3.5 years) while investing the $600 a month and got an average of 10% annually. After 42 months, you would have over $30,000 to pay cash on a car. If you waited the entire 60-month term of the loan, instead of owning an $8,000 car you would have over $46,000. Now you buy that $30,000 car and have over $16,000 remaining to save up for your next car.
Credit cards are the same way. The credit card company tells you that you will be getting cash back or travel points, but the 98.5% of your purchase slips their minds during the commercial. To make matters worse, you WILL spend more using credit. So you net a negative while paying Visa’s CEO a big fat bonus check in the process.
Not using a tax-deferred/tax-free account
Not using a tax-deferred/tax-free account can cost you literally thousands if not hundreds of thousands over the course of your 40 year working life. You need to be taking advantage of the tax deduction now in accounts like the Traditional IRA, or the 401(k), or you need to be taking advantage of tax free growth in accounts like the Roth IRA or the Roth 401(k). Please, I am begging you to ask someone that is qualified to give you advice on which account you should use. You may be leaving thousands on the table for Uncle Sam to dump in his black hole.
Not planning for your future
Not planning for your future is a big topic of discussion among experts. People age 25-40 are generally the meat of the topic, but the people I am burdened for the most are the people who have not started planning for retirement at all and are over age 40. You need to have someone on your side that understands your situation and can give you advice on how to get there. Sub-point “A” here on this discussion is procrastination. I am a huge fan of compound interest. I cannot overstate the power of saving early and often.
Investing in companies that violate your values
Investing in companies that violate your values is something people hardly ever think about. I like examples, so here is another one for you. Say you own a window manufacturing company. Congrats, you had a really good year last year and made $250,000! You can choose to do a variety of things with the money. The three general things you can do is give it away, save it for later, or spend the money. We’re going to deal with the first option: giving. If you would not give the money to an abortion clinic, why would you own a company in your portfolio that does this? There are companies out there that funnel money into adult entertainment and abortion, and unless you have spoken with an expert and gotten direction about this, chances are you own a few companies in your portfolio.
If you care enough about making sure your gifts go to an organization that aligns with your values, you should at least have a discussion about your investments with a someone who truly understands this subject. A person who has a working knowledge of bridging the gap between your values and your investments and understands the core of who you are.
At Values First Advisors, we have helped hundreds of families across the nation to make the right choices with their finances while aligning their investments with their values. If you would like help with your financial plan or investments, please give us a call or send us an email.
Blog authored by: Benji Nunn, President