By Michael Donahoe
As a financial advisor, I see common mistakes time and time again. These mistakes are often not out of carelessness, but from a lack of understanding of how various financial tools and accounts work. Education is key to reaching financial goals. While most clients come to us with money already invested in the stock market or a retirement account, it’s common to find opportunities for improvement.
We’re here to help you to make smart financial decisions. After all, a person could diligently save for decades without realizing how much further ahead they could be had they just utilized the money-making and savings tools at their disposal.
The 3 biggest financial mistakes I see don’t revolve around poor stock choices; they’re all within your control to improve. Here they are:
1. Not Taking Full Advantage of Available Opportunities
It’s hard to know which opportunities benefit you the most. Does your employer offer tax advantage accounts? Or have you considered opening one of your own? Saving on taxes can save you a tremendous amount over your lifetime.
A few examples of accounts I see left underutilized include:
- Roth retirement account contributions: Contributions into a Roth retirement account grow tax-free, meaning you’ll never pay taxes on the gains and you won’t pay taxes on withdrawals down the road.
For 2021, you may have an opportunity to contribute $6,000 (or $7,000 if you’re 50 or older) into an IRA or $19,500 into a 401(k). (1) These figures can change over time, so always check in with the IRS or a financial advisor for confirmation.
- Health savings accounts: If your employer offers an HSA, contributions are made through payroll with pre-tax money. Contributions lower your taxable income for the year, which lowers the amount you’ll owe Uncle Sam come tax time.
Even healthy young adults should consider contributing to an HSA; eventually we all need medical care. Because healthcare costs can often come unexpectedly, having a bit of a reserve in an HSA is often great to fall back on when needed.
- Leveraging company benefits: 401(k) matches, fitness incentives, free educational opportunities, flexible spending accounts (FSAs) for out-of-pocket healthcare costs are all examples of use-it-or-lose-it benefits many employers provide. Missing out on retirement account deposits or not using FSA money is simply leaving money on the table.
Think of utilizing these benefits as receiving your full compensation. Your benefits package is more than your paycheck and health insurance. You wouldn’t willingly take a 5-10% pay cut, so why not maximize the other benefits that come with financial incentives?
2. Putting Too Much Focus on Investment Performance
Growth of your investments is important to building financial independence. But when you consider all the factors that build wealth (i.e. your savings rate, tax efficiency, spending habits), it is common to put more weight on investment performance than warranted.
It is better to focus on your own decisions and what you can control. Employ a disciplined investment strategy and let your investments do their job (to grow over time).
Our approach to investing is guided by financial planning. Investments are ultimately used to fund goals such as retirement income needs, and it’s critical to integrate your investment strategy with what you need your investments to do for you.
3. Not Getting the Right Help
Do you feel 100% confident about the myriad of financial choices you make day in and day out? Have you encountered more complexity as you have grown your assets and gotten closer to being financially independent?
You may benefit from a professional relationship to provide the partnership, guidance, and education you need in order to move forward with confidence. When it comes to tax mitigation strategies and building a plan specific to your goals, many of the pieces to financial planning come with complexities.
Not having a trained professional intimately involved in your circumstances and goals, identifying opportunities, and encouraging you to act can result in substantial missed opportunities. While you won’t get a bill, the losses likely far outweigh the cost of this expense.
I’d love the opportunity to help identify areas for opportunity to ultimately help you reach your goals. To learn more about financial planning and the services we offer at Harvest Asset Group, call us at (207) 775-1151 or email us at email@example.com.
Michael Donahoe is the founder and principal of Harvest Asset Group, LLC, an independent, fee-only financial planning and investment management advisory firm in Portland, Maine. Michael enjoyed a successful corporate career in marketing and sales before transitioning to the financial planning profession, founding his firm in 2012, where he now leads the client services team and serves as the firm’s chief compliance officer. Michael earned his MBA degree from George Washington University and completed his educational requirements to earn the CFP® mark of distinction at the University of California, Berkeley. He is a Fee-Only and NAPFA registered financial advisor, a designation which followed the completion of rigorous continuing education requirements. Michael has lived in the Portland area since relocating from San Francisco in 1995 to be closer to family. He is active in community affairs and spends his non-working time enjoying the natural beauty of Maine.