As a financial advisor with over 20 years of experience, I’ve worked with clients from all walks of life. From young professionals just starting out, to retirees, to high net worth individuals with complex financial situations.
Throughout my career, I’ve noticed that even my most affluent and sophisticated clients often make mistakes when it comes to managing their finances.
Here are the 10 biggest money mistakes I see even my wealthiest clients make:
1. Not Having a Financial Plan
The number one mistake is not having an overall financial plan in place. Without a comprehensive plan that projects into the future, it’s easy to make financial decisions in silos instead of looking at your finances holistically.
A financial plan helps you define your goals, understand your full financial picture including assets, net worth, cash flow, and liabilities, and creates a roadmap to help you achieve what’s important to you.
2. Not Maximizing Tax Efficiency
With complex investment portfolios and multiple sources of income, my wealthy clients are in high tax brackets. Not implementing enough tax-efficient strategies can lead to unnecessary taxes that impede building long-term wealth.
Strategies like utilizing retirement accounts, harvesting tax losses, giving appreciated assets to charity, and holding investments for over a year to get favorable capital gains treatment can help minimize taxes.
3. Taking Too Much Investment Risk
While risk is necessary for return, many affluent investors take on too much risk in their portfolios. Becoming overly concentrated in one asset class, investing too aggressively, or chasing the hottest investments can be risky behaviors.
Diversification, proper asset allocation tied to time horizon and risk tolerance, and regular rebalancing back to target allocations can help manage risk appropriately.
4. Not Having Proper Estate Planning
Nearly three-quarters of wealthy individuals don’t have the core estate planning documents in place according to a recent survey. Without an up-to-date will, powers of attorney, trusts, and beneficiary designations, your assets may not go to your intended heirs as you expect. Proper estate planning can also help you minimize estate taxes so more assets pass to beneficiaries.
5. Overlooking Tax-Advantaged Accounts
Maxing out tax-advantaged accounts such as 401(k)s, IRAs, HSAs, and 529 college savings plans allows your money to grow tax-deferred or tax-free. This can supercharge your ability to accumulate wealth over the long-run.
However, some clients don’t fully utilize these accounts or aren’t aware of eligibility rules and annual contribution limits. Making tax-advantaged accounts a priority can lead to exponentially higher long-term savings.
6. Not Having Enough Liquid Emergency Funds
Even high net worth individuals can sometimes be cash-poor. Tying up too much wealth in illiquid assets like real estate or an art collection without enough cash cushion can spell trouble in the event of an emergency expense or temporary loss of income stream.
I recommend having at least 6-12 months of living expenses set aside in liquid cash accounts for protection and flexibility.
7. Overlooking Healthcare and Insurance Needs
With affluence comes more complex insurance needs that could be overlooked. Often my wealthy clients do not have updated property/casualty coverage that adequately covers their homes and possessions.
They also may not have addressed long-term care needs which have the potential to decimate finances in later years. A complete insurance analysis helps ensure you have both the necessary protection and the right level of coverage.
8. Not Factoring in Aging and Long-Term Care
An important but sometimes neglected part of financial planning is preparing for the effects of aging. Even wealthy clients run the risk of outliving their assets and need strategies to help their money last.
Also underestimating potential long-term care needs down the road could severely jeopardize finances. Aging readiness planning, updated legal documents, and long-term care funding should be addressed.
9. Trying to Time the Market
Some affluent investors think they can outsmart the market, trading aggressively and moving in and out of positions frequently. However, no one can predict market movements consistently.
I try to dissuade clients from the temptation to time the market, which often ends up hurting more than helping long-term performance. A passive, disciplined rebalancing strategy is usually a better approach for most.
10. Not Seeking Professional Help
Even very smart and accomplished individuals can struggle to objectively look at their own financial situation. Working with a CFP professional provides an outside expert perspective to help point out blind spots and pull everything together into a cohesive plan.
An advisor holds you accountable to financial planning best practices and can save you from potentially costly mistakes.
Avoiding Common Missteps
While mistakes certainly do happen, being aware of these common pitfalls that cause even wealthy individuals big problems can help you stay on track towards your financial goals.
Working with an experienced financial planner provides guidance to help affluent investors avoid costly errors and capitalize on savings opportunities. With sound planning, you can work towards building and preserving your wealth effectively.