February 11, 2016
Money mistakes people make in their 30s
Building wealth requires basic blocking and tackling: set goals, spend less than you make, save money, and protect against risk. It also helps to avoid making simple mistakes. Everyone makes mistakes with money, especially the very young. I don’t mean like when my 5 year old eats dimes. Besides, he’s done it so many times I have to believe it’s intentional at this point. I mean people in their 30’s. Fortunately, these folk have time on their side. It’s not too late for them correct small mistakes. So what do we see these people doing?
- Not working with a professional. What is going on here? Simply put, this industry is just not built to help people in their 30’s. The entire profession has been built on an antiquated commission structure that serves people who have already accumulated substantial wealth. In the modern world of self-directed retirement accounts, many major financial decisions occur before the age of 40. The industry’s excuse is that “young people don’t have money.” Our experience is that young investors have means but don’t feel comfortable with the way most financial advisors are paid.
- Not investing in their own income. I can easily split the 30 year olds I work with into 2 groups: well-paid and not so well-paid. There is a dramatic wage disparity in this group. The vast majority of wage inflation will occur in one’s 20’s and 30’s. I meet a depressingly large number of unemployed or underemployed 30 year olds. I can’t account for motivation but people are choosing to settle down later and therefore take their work less seriously. By not taking their careers seriously, early on, these people will have to play catch up later in life.
- Only contributing the employer match in a 401(K). Contributions made into a 401k are 100% tax deductible. The max amount for 2016 is $18,000 with an additional catch-up amount of $6,000 for those 50 and older. An individual only contributing the amount in which an employer will match into their 401k is not fully utilizing this tax deferred retirement savings program to its full extent. Unfortunately, 401k contribution limits do not rollover from one year to the next. Also, unlike an IRA, if a 401k is not max funded during the calendar year an individual is unable to go back to make previous year contributions. A 401k is a very valuable resource that should be strategically used to fund one’s retirement goal and the answer is rarely to contribute only the exact match offered by an employer.
- Only saving in their 401(K). As mentioned previously a 401(k) is a pre-tax retirement plan. There are also after-tax retirement plans such as Roth IRA’s. Depending on income level, tax filing status, age, tax rate, etc it may be smart to utilize other savings vehicles to fund your retirement or savings goals. Individuals often forget about less commonly used options that may be available through their employer such as 457 plans. It’s extremely important to evaluate all options and to not just proceed with what is most common. Strategically utilizing multiple vehicles for ones savings can help one reach their goal much more efficiently.
- Paying off low interest rate debt too fast. Debt bothers many people and they tend to try and pay it off as quickly as possible. However, debt financed at low interest rates is often best paid off over time, not quickly. If one is able to generate a meaningfully higher rate of return in the market than the cost of debt, then it may be best to put any extra money in an investment rather than pay down said debt. First, what is considered low interest rate debt? In the current rate environment and market conditions I would say anything below 4% would qualify. The next consideration is how much return in the market is enough to justify not paying down debt. This is what is known as an equity risk premium. It isn’t enough for the investment to simply return a rate higher than the debt, say 5%. Rather, it must return a rate significantly higher because stocks are risky. Put differently, if additional funds are available, instead of putting them towards debt with a rate lower than 4%, consider investing the money in something that could return enough to justify the added risk of the market. Obviously, this can be a complex decision, and we recommend working with a professional that can understand your specific situation, risk tolerance, and time horizon.
- Holding too much employer stock. Many employees are compensated in employer stock. Either for emotional reasons (affinity for their company) or technical ones (they believe the stock value will rise) people will occasionally hold employer stock for too long. It’s important to remember that these stock grants are a form of compensation, not a gift of an investment, and will often be taxed as income. Also, employers do not grant stock to employees because they believe the stock will be worth substantially more money one day and they want to make everyone rich. Stock is gifted in lieu of cash because cash payments are a drain on the company’s balance sheet, gifting stock is not. Your family balance sheet and personal worth should never be over-allocated to a single company. From an investment perspective, concentrating your investments into a single stock, rather than a mix of diversified investments, exposes you to excess volatility based on that one company. Additionally, when that same company is your employer, your financial well-being is already highly concentrated in the fortunes of that company in the form of your job, your paycheck, your benefits, and your retirement savings.
As planning professionals, at Gainplan, we not only help individuals with these financial decisions, we also try to eliminate wealth-destructive mistakes that even financially conscientious people sometimes make. All advisors are not created equal, especially when it comes to suitability and fiduciary standards. When working with a firm like ours, you have the assurance that we put the client first, not ourselves; and we will offer unbiased, personal advice and service.
This commentary on this website reflects the personal opinions, viewpoints and analyses of the Gainplan LLC employees providing such comments, and should not be regarded as a description of advisory services provided by Gainplan LLC or performance returns of any Gainplan LLC Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Gainplan LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.