Everyone approaches life, money, and saving in a different way. By understanding your approach, you can avoid common money mistakes that people like you are prone to making. Below are five types of people, and the financial mishaps they tend to make.
1. The Entrepreneur
Entrepreneurs and small business owners don’t think of retirement in traditional terms. They have a vision for their business and they put all their energy and financial resources into the business.
They are absolutely sure it will work out. Entrepreneurs need to maintain that level of certainty while also keeping their financial house in order.
- Cashing out retirement plans to fund the business.
- Using too much debt.
- Getting behind on taxes, particularly self-employment taxes.
- Maintain an adequate emergency fund both personally and for the business.
- Using debt wisely to fund the acquisition or start-up of a business by developing a realistic business plan and projection of income and expenses. Don’t borrow until you’ve established this.
- Make contributions to a retirement plan each year even if it is just a few thousand dollars to an IRA or ROTH IRA.
- Get a good accountant and meet with them to set up quarterly tax payments.
If you are an excellent saver and spend within your means, then you fall in this category.
For example, do you fully fund your IRA or 401k accounts each year, and always have savings in the bank? Have you stayed at the same job for quite awhile? Do you have company benefits and perhaps a pension? If you fall in the steady-as-they-go category it is likely you’ll be able to retire earlier than many of your peers.
It’s also likely you’ll enjoy retirement by spending within your means.
- If you’re the steady-as-they-go type, honestly, there isn’t much you need to watch out for. You’ve probably got your financial house in order.
- Run a financial projection. You may realize you don’t need to save quite as much. Maybe there’s enough to do a few extra fun things along the way.
Doctors, attorneys, accountants, surgeons and other similar professions tend to fall into two sub groups. Some are excellent savers, more like the steady-as-they-go group above. Others make big incomes, and develop big lifestyles to match. The big income/big lifestyle type have problems in retirement. They do not save enough to be able to maintain their lifestyle. It is a shock to them when they see that they must either work far longer than anticipated or make a substantial change in their standard of living to save enough.
Biggest Money Mistakes
- Not realizing that when you make a lot, you must also save a lot to be able to maintain that lifestyle later in life.
- Letting ego dictate your spending decisions.
- Using too much consumer debt like big car loans and credit card bills.
- Pay yourself by setting aside dedicated amounts to go to savings before you buy the nicer car, big house or decide on a private school for the kids.
- Run a plan so you know how much you need to save to maintain your lifestyle. If you’re not willing to give up your lifestyle now, realize you will be forced to downsize everything later.
- Set monthly spending limits.
Save? What, I need to save? If you spend it as soon as it’s in your bank account, this would be you. If you don’t change your ways you’ll need to plan on working until you take delayed Social Security at 70.
Biggest Money Mistakes
- Not saving anything.
- Doing no financial planning of any kind.
- It feels good to have money in the bank — really, really good. Just try it. Once it's there, if you really don’t like, you can always go spend it.
- Try a financial fast. It’s one of the best ways to get a handle on spending.
If you save some and spend some you probably fall in this group. You might think ‘No one knows what the future may bring.’ You better take that trip now or buy that cabin or the boat… and it’s ok because you’re also contributing to savings on a regular basis. And sometimes it is ok; other times the spending can outpace the savings and catch up with you later.
Biggest Money Mistake
- Fully funding tax-deferred accounts like 401k plans, but having no after-tax savings.
- Waiting until a few years away from retirement to create a financial projection that shows you what your retirement income might look like.
- Hire a financial advisor. You can easily move into the steady-as-they-go group with a little planning.
- Create a balance of tax-deferred savings and after-tax savings. When you retire, if all your income must come out of a tax-deferred account, taxes will take a bigger hit than you might think.