3 common personal finance mistakes investors make

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02/23/2024

AUTHOR: NDVR

TAGS: personal finance, investment strategy

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We've seen some common money mistakes investors make when managing their personal finances. While some of these mistakes can seem small, they compound and can have a significant impact on your financial situation today, and what you’ll end up with in retirement.

In this blog, we’ll run through the three most common mistakes we see: mis-managing your finances, your lifestyle, and your investments. If you can fix these three, you’ll be in a much better position for a comfortable (and stress-free) financial future.

Mis-managing your finances

One of the most common mistakes we see when it comes to personal finances is investors not automating their finances. Automating your finances is crucial for maintaining financial stability and establishing consistency when it comes to your budget. There are a few easy ways to get started when it comes to automating your finances.

  1. Set up autopay (on everything!). This includes bills, subscriptions, and most importantly, your credit cards and loans.
  2. Set up bi-weekly or monthly transfers into your savings and investment accounts.
  3. Depending on your savings goals, create an account with investment allocations that match the time horizon of those goals. Then, set up the appropriate auto-transfers to fund them.

Just as importantly as saving and investment your money is maximizing where you put it. Depending on when you’ll need the money, and how quickly, there are different investment vehicles that might make sense.

For money that you might need very quickly (like an emergency fund), a high yield savings account is ideal. If you’re saving for something short-term, such as a vacation a year from now, treasury bills are a great option because they’re liquid, and you can lock in your return rate if you hold the treasury bill to maturity. You can get started with these at NDVR.

If you’re saving up for a more long-term goal, such as five years from now, it's important to ensure that your capital will be available when you need it. At NDVR, we look to our Lifestyle Protection strategy, which helps protect your future withdrawals while optimizing the rest of your portfolio for growth. A risk-balanced allocation to stocks and short-term bonds could also be appropriate for this goal. Or perhaps, a combination of both.

Finally, when it comes to your retirement savings...it depends. We wish there was a straightforward answer or rule investors could use for their retirement accounts, but there’s not. At NDVR, our financial advisors tackle retirement planning (and preparation for your entire financial plan) by building our clients a custom portfolio designed to help them achieve the objectives of their unique plan.

Long story short: balancing your checkbook is a thing of the past. Automating and maximizing your savings gives you more time to spend on the things you care about now, and in the future.

Mis-managing your lifestyle

Simply put, most people live outside their means. We see investors having the most difficulty in the following areas:

  • Building (and sticking) to an appropriate and realistic budget
  • Falling victim to lifestyle creep and splurging too often
  • Not setting aside money for non-tangible things, like an emergency fund or retirement

And while living a more expensive lifestyle today can feel like a tomorrow problem, it can quickly spiral and affect your financial goals significantly. And, it leaves less for the unexpected expenses we all have.

The more you spend, the less money available to save, so it becomes harder to accumulate wealth for retirement. Because of that, even more money is needed in retirement to maintain the lifestyle you’re already overspending on.

So how can investors avoid overspending? We suggest starting with the following.

  1. Build a realistic budget and stick to it.
  2. Always have 6-12 months of emergency savings in a liquid high interest rate savings vehicle (here are some options). The amount of money you have saved should depend on your living expenses. Six months is more appropriate for married people with jobs uncorrelated to one another or people who have lower fixed expenses (like no mortgage), and 12 months is more appropriate for spouses who have correlated jobs and high fixed expenses.
  3. Take a holistic look at your financial plan and determine where and if you need to make changes. If you’ve never done this before, the NDVR Portfolio Lab makes it easy to view your whole financial picture in one place. You can quickly make changes to see how different inputs affect your plan’s expected performance, and in turn, the lifestyle you can expect to afford in retirement. Finally, the Portfolio Lab helps determine an optimal level of risk and return to achieve the goals that you’ve set for yourself.
  4. When your income increases (like with a raise or a new job), increase your savings rate before the extra money hits your bank account. You can also apply this to your 401k, or your auto-deposit into your brokerage account.

Avoiding lifestyle creep and overspending is hard, but taking small steps can help put you and your financial plan in a better place.

Mis-managing your investments

Investing well is difficult to do. We believe a well-diversified portfolio that follows a systematic investment approach is the most consistently successful investment strategy you can have.

It can be tempting to invest on your own. But picking stocks is very difficult to do, because no matter what our knowledge base is, investors are human and can fall victim to psychological biases that are hard to avoid. Some common mistakes we see investors make when it comes to investing on their own are:

  • Chasing “hot” stocks that are in the news, or promoted via word of mouth/online
  • Selling winners when they are up and don’t have the same investment opportunities they once did (otherwise known as “taking your winnings”)
  • Selling losers when they are down (“cutting your losses”)
  • Misreading luck as ability (like when you “knew” that stock would go up, and feeling like a genius)
  • Panicking when stocks decline
  • Investing in industries you’re comfortable with, which tend to be correlated with the industry you work in. If the industry declines, your job and your wealth may both be in decline, multiplying the negative effects on your financial plan.

Our recommendation? Get an experienced, fiduciary advisor who can help you build a custom portfolio that is directly tailored to help you achieve your specific financial objectives. Look for an advisor who offers things like unconflicted advice, low fees, tax optimization strategies, and unique and advanced technology that make it easy to control what you’re investing in.

We understand that at the end of the day, some still like to invest on their own. In this case, we recommend an approach called “Core-Satellite”. This approach has the core of your assets invested in what we described above (a custom, diversified, systematic portfolio), and then allocating some of your wealth to a riskier brokerage account where you can invest on your own.

Long story short...

Managing your money is more than just making a budget; it's about setting yourself up for financial success. By getting your finances on autopilot, reigning in those impulse buys, and making smarter investment moves, you can turn things around.

A financial advisor can be an invaluable partner here, so make sure you choose one that not only offers good investment strategies like we mentioned above but is also equipped to handle your entire financial plan. At the end of the day, fixing these common money mistakes can put you on a smoother path toward securing your financial future.

Why wait to optimize your wealth?Connect with a financial advisor today

Disclosure

This material is published for informational purposes only.

The views expressed and other information included are as of the date indicated and based on the data available at that time. They may change based on changes in markets, general economic conditions, rules and regulations, and other factors. NDVR does not assume any duty to update any of the views and information herein. Unless otherwise noted, views and opinions expressed are those of the authors and not necessarily those of NDVR or its affiliates.

NDVR is an investment advisor that may or may not apply the views and other information described herein when providing services to its clients. The views and information herein are not and may not be relied on in any manner as, investment, legal, tax, accounting or other advice provided by NDVR to any individual or entity or as an offer to sell or a solicitation of an offer to buy any security.

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