Whether you’ve inherited poor financial habits from your parents, jumped on the latest finance fad or simply can’t make sense of your advisor’s guidance, bad financial advice is all around us. When it comes to managing your money, the specifics of your situation are essential, but there are basic concepts you must grasp (or re-learn) to give you the greatest chance for financial success.
These are the top 10 things most people misunderstand about financial management.
- Misunderstanding of debt. Not all debt is bad, but all debt must be managed. You don’t have to be debt-free before you invest, but you should strategically prioritize how you pay it down.
- Misunderstanding of markets. The stock market is unpredictable but can be a valuable tool in saving for future financial independence. Generally, you should avoid anything too aggressive, too conservative or too trendy. Find and stick to an investment strategy that fits your long-term goals.
- Misunderstanding of match. Understand your employer’s 401(k) plan and be sure to contribute enough to maximize your company match. If you don’t, you’re leaving money on the table.
- Misunderstanding of mortgages. Just because the bank will loan it to you doesn’t mean you can afford it. Don’t rush to buy a home with a hefty mortgage payment before you’re ready.
- Misunderstanding of insurance. Home and auto accidents or repairs can be sizable, unexpected expenses. Be sure you can afford your deductible comfortably to avoid going into debt when accidents happen, and understand the coverage limitations of your insurance policies.
- Misunderstanding of budgeting. Account for the future and today’s necessities first. Saving monthly must be in your budget, even if it’s cut first in an emergency.
- Misunderstanding of emergencies. Make establishing an emergency fund a priority, and when you need it, use it. Don’t pile up credit card debt simply because your air conditioner went out. That’s what emergency funds are for.
- Misunderstanding of planning. Your family and finances aren’t protected unless you have a will or trust. Brave the awkward conversations and make decisions now. Often, the guardian for your children should be different from the trustee of your estate, and we recommend you designate three people in each category.
- Misunderstanding of risk. Secure enough life insurance to maintain your family’s quality of life. Insure spouses who don’t work outside the home, too.
- Misunderstanding of business structure. Whether you establish your business as an LLC, partnership, C or S corporation affects your tax liability, benefits and accounting requirements for years to come. Choose wisely and revisit it as environmental factors change.
The saying is true “you don’t know what you don’t know.” So, enlisting the help of a knowledgeable financial advisor can help you avoid the mistakes that arise from these misunderstandings.
Blog by Aaron Waters, Wealth Advisor.
Category: Financial Service Team