The New Year has arrived and that means making resolutions for how you want the next 12 months to go. For many of you, whether you’re just starting out or heading into retirement, the resolution is to increase your financial security. Others might be considering innovative approaches to spending or investing as their goals for 2023. When setting such a large goal for yourself, it is important to prepare for challenges that could derail your strategy and set you back.
Read on to learn more about three mistakes to avoid when building wealth.
1. You Are Taking on Too Much Debt
Number one on the list is probably a surprise to no one. There are many different reasons that we accumulate debt throughout our lives and how we acquire them can have an impact on our ability to plan for the future. Some debts are unavoidable — unexpected, astronomical medical expenses, for example. That is not the kind of debt being addressed here. The debt that can really derail the wealth building process lies in caving into instant gratification— the desire to get what we want now and save the consequences for later.
American household debt sits at a staggering $14.6 trillion and the average household carries about $90,000. Even the wealthiest individuals are not immune to accruing debt, nor the consequences of carrying it. Therein lies the challenge of building wealth for many people. How can you save when you have so much to pay each and every month? How will you pay off debt if you want to retire? One of the reasons that debt is number one on the list of mistakes is that it creates chaos for all of your other financial planning strategies.
The key to managing debt is not to take it on unless it is absolutely necessary. After that, it is a matter of making smart decisions about where you will carry debt. For example, you may need a new car, but that doesn’t mean accruing $70,000 in debt to get it. Before creating unnecessary debt, reflect on what that purchase will cost you in real dollars owed and against your long-term future. Calculate the number of hours you will need to work for your debtor (because that is who you will be working for) to obtain whatever it is and determine if the value is worth your effort or a chunk of your retirement to get it right now.
2. You Have No Back-up Plan
If there is anything that the last 3 years have taught us, it is that we can only control so much before we are at the mercy of outside circumstances. In 2020, many individuals and families found themselves in the shocking position of becoming unemployed or relying on reduced income. Others watched their retirement accounts and investments plummet as a result of the global crisis.
If building wealth is your resolution, then you must begin by creating an emergency savings account to cover you in the event of the unexpected. According to a 2022 Consumer Finance report from the Consumer Financial Protection Bureau, nearly 25% of Americans have no savings set aside for emergencies. Their report also states that 39% of Americans have under one month of income saved and 37% have at least one month. Most financial experts recommend saving upwards of six months of expenses.
Emergencies create debt when we do not have the money to cover them. And, as noted in the previous mistake to avoid, debt becomes a stressor and a shackle that can ruin your future plans. You may not be able to get to that point immediately. However, every dollar you save is a dollar you won’t have to search for if the worst happens.
3. You Are Passive About Retirement Planning
Retirement planning is one of the most important steps a person can take when building wealth and a financially secure future. It is also one of the first places many people cut corners in tight times. Immediate needs always seem to trump the future, which feels quite distant in comparison to the bills in front of you. However, it is essential that you begin planning for your retirement now, not “someday.” As many have learned the hard way, someday appears far sooner than we expect.
How can you take an active role in investing in your financial future? The first step is to ensure that you size up your retirement investments with each new increase in income. It’s not exactly exciting to begin carving into that new raise to save for retirement, but it is practical. In fact, you should be systematically boosting your retirement contributions as you age, whether your salary increases or not. The cost of living will be significantly higher in every way once you reach retirement age. From the products you buy and the expense of keeping a roof over your head to the high cost of aging in the form of care and medical bills, you are going to need every penny to have comfortable golden years.
The second step you can take is to diversify your retirement portfolio. Don’t rely solely on a 401k to cover your future. In fact, don’t rely solely on any one avenue of investment. Diversify to protect your retirement through a variety of economic circumstances and ensure you aren’t looking at an account in shambles when the big day finally arrives.
If you have resolved to make better financial decisions in 2023, you can begin by avoiding these common pitfalls. You can also reach out for additional help from one of Bannerman Wealth’s experienced advisors by scheduling a call online. We look forward to speaking with you!