June 28

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8 Financial Mistakes You Will Make

FAMILY UPDATE!


Two of the kids are up in Georgia with their cousins and grandparents.  It's strange only to have two kids.  It's so easy!  The difference between two and four is vast.

We went up to Orlando for my daughter's lacrosse tournament.  It rained the whole time and got canceled.  Very sad.  But we stayed at an Airbnb for the first time, and I loved it! 

You get a whole house to yourself.  Checking in is as simple as entering the lock code on the door.  The house we stayed at was so nice.  I wish I could live there!  Not to mention it was actually less expensive than staying at a hotel.  I would recommend it highly.

The picture above is my two remaining children hanging out without their brothers getting in the way.


After twenty years and thousands of meetings, these are the mistakes I see consistently from all you humans out there.

1. Not saving enough. This is probably a no-brainer, but people are not saving enough money in their 401ks (or other retirement accounts).  Remember, you get a tax deduction now (which will probably save you at least 20% of your contribution amount).  When you are retired and take the money back out, you will be in a much lower tax bracket.  It is a huge tax savings. At a minimum, you need to be saving 10% of your income.  20% if you are behind.  

This is the advice I give to people: increase your contributions temporarily.  Increase it to the point where you don’t think you can do it. If it’s just not tenable in a few months, lower it back down.  You’d be amazed at how quickly you will adjust.  Few people ever change it back.  

Remember, you can safely withdraw 5% of your account balance once retired.  So $500,000 means about $2000/mo of income.  Do a budget for yourself, take 5% of your savings, and add in your Social Security.  Is it enough?

2. Timing the market. This is another no-brainer, but people are still moving their investments to cash in order to "wait until things look better."  But take a look at what has happened over the past two weeks.  The markets have jumped over 5%.  This is a perfect example of why waiting for the right time doesn’t work.  Your long-term returns will be significantly reduced if you missed the past two weeks.  In fact, you may have lost out on 100% of the gains for the year.  Markets move fast.  Don’t try to time them.

3. Buying a rental property. A lot of people fight me on this, but I have consistently seen rental properties be a problem.  That is different if you are a professional real estate investor with multiple properties.  But buying one rental usually leads to minimal or negative returns.  Why?  It just takes one bad tenant.  Plus insurance, taxes, and maintenance add up quickly.  It is difficult to raise rents because you get to know the people.  Family ends up living there. Do you want to fix the toilet at 3 AM?

"But Dave, I made a fortune on my rental."  That could be true.  We’ve seen a once-in-a-lifetime phenomenon in Florida in the past two years.  If you had a rental, you did great (and got a little lucky).  I’m happy for you!  But going forward, having a bunch of your savings in a property could be a big mistake.  I would estimate that 80% of the amateur real estate investors I meet make little to no money.  The ones who do eke out a little profit would have done just as well putting the money into a CD.

3.  Downsizing.  It might seem logical to downsize from your $500,000 single-family home into something smaller, but it doesn’t always work out the way you think.  

Let’s say you sell your $500,000 and move into a not-nearly-as-nice villa for $300,000.  When you start to look at commissions, moving costs, HOA fees, and other surprise expenses, you will end up in a new home you don’t like as much with an extra $150,000 in the bank. 

$150,000 can give you $600/mo in income (much of which is eaten up by HOA fees).  Is it really worth it?  You left your neighborhood and friends.  You left the house you had fixed up exactly how you wanted.  Think before your leap.

Of course, some people’s homes are simply too big, or the maintenance is becoming too much.  But just don’t let finances dictate the move.

4.  Not spending enough money.  This is on the other end of the spectrum but those of you who have saved over one million dollars often live like you are broke.  Remember, the 60s are your go-go years, your 70s are your slow-go years, and your 80s are your no-go years. Don’t wait too long to enjoy your savings.  I also write extensively about generosity.  Give with a warm hand.  It doesn’t matter if you die with 1.5 million or 1.2 million.  

5.  Buying annuities.  This is the one that really gets my blood pressure up.  Everywhere I turn people are being sold annuities.  In particular, the biggest culprit are products called "equity-indexed annuities."  I don’t have time to go into the gory details. They are the most complicated products on the consumer market.  I'm trying to think of a single time when somebody I met with was happy they went with the annuity.

The sales pitch is so compelling.  "You can never lose money."  "You can never run out of money."  

But they never mention, "If the markets go up you only get a very limited portion of the gains" and "You are stuck in this thing for ten years" and "They are taxed more heavily than other investments," and "Insurance companies make a fortune off of them" and "I get a 7% commission by selling this to you" and "You’ll end up making the same as a bank CD."

6.  Retiring too early.  You are going to live a long time.  The earliest you can take Social Security is 62 (at an extremely reduced amount).  About 30% of workers start there.  The vast majority of you will need to work past 62.

I find many people are very short-sighted.  They say, "If I get a part-time job and collect Social Security, I will be fine."  But are you going to be working when you are 82?  The life expectance of a healthy 65-year-old is 90.  Unless you are a really good saver and live on a tight budget, between 65 and 70 years old is probably a better target.

7. Buying gold coins from an advertisement you saw on a 24/7 news station.  Don’t do that.

8.  Watching the stock market.  I talk about this almost every week.  If stocks don’t return an average of 10% between now and the end of your life, it would be absolutely unprecedented.

By the way, over the past 12 months, the stock market has increased by 17%.  Why isn’t that on the news?
  
Be Blessed,

Dave

P.S.-  Please share this with friends.  They need to know this stuff.

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