Big Picture, Financial Planning, Millennials

6 Stories of Mistakes People Made Before They Started Working With A Financial Planner

Mistakes can be so costly when it comes to your personal finances. The problem is that most are not intentional, they come from a lack of information or from bad information in general.

In this blog post, we are going to look at 5 real life examples of mistakes people were making before they became our client. The interesting part of each of these stories was that they thought they were doing the right thing. They were doing exactly what they were told to do from a friend, parent, or coworker. It’s why taking advice from non experts can be so costly.

Anyways, let’s dive into each and what you can learn from them!

1. A Story About Credit Cards

We had a client who’s parents told him to always keep a credit card balance since it was good for his credit score and history (this is not true). So that is exactly what he chose to do for years before working with us.

He had a balance of about $10,000 on his credit card at all times. This resulted in $2,400 of interest a year on average. Plus his credit score had been driven down into the low 600’s which resulted in him getting a car loan at 8%. All of this bad stuff that happened from one bad tip from a family member. This ended up costing him at least $8,000 over the last 3 years. Friendly reminder to fact check the things you are told!

Takeaway: Never carry a balance on your credit card

It does not help your credit score at all to hold a balance. Good credit comes from low utilization (below 30%), long history of having a card, and on time payments, etc.

2. A Story About Taxes

One of our clients inherited her dad’s 401(k) when he passed away. She was required to take all the money out of that account within 5 years. She also owns a business and was paying herself from it. She essentially was doubling her income (taking from the 401k and paying herself from the business) which was shooting her up to the 32% tax bracket. She did not know she had any options to offset this. She was just told on the phone she had to take the money out over 5 years so that was what she was doing. She was not even thinking about the tax impact.

We wanted to limit this double tax so we had her live off her beneficiary 401(k) from her dad (since she has no choice but to take it out within 5 years) and then funnel as much of her and her husbands income into a solo 401k we set up for both of them. This will save them over $68k in taxes over the next 3 years. Talk about a game changer.

Takeaway: You don’t know what you don’t know. Tax planning can reap huge returns when done properly. Hire a financial planner when things get confusing!

3. A Story On Investing Your 401(k)

Another client was unsure of what to invest in in his 401(k) when he started his job 14 years ago. His parents told him to be smart/conservative and to pick the government bond fund in the portfolio. So that is what he had did for 14 years… 14 YEARS!!! His portfolio could be over 3x what it is today if he just had the proper asset allocation.

Takeaway: Do not take advice on investing from anyone other than an expert who knows your entire situation.

4. A Story On The Importance Of An Emergency Fund

Another clients’ parents told her there was no reason to hold any cash on hand since it would lose value to inflation. They told her she needed to invest every spare dollar she had. Sounds great, right?

Well… her portfolio was down about 20% and she lost her job. They told her she shouldn’t sell at a loss and just use her credit card to cover the months she had to wait till she got an income. This ended up being pretty long and she had $25k in credit card debt.

Based on her new job it will take about 2 years to pay off this debt and build a small emergency fund. It also killed her credit score and she is unable to transfer that debt to a 0% interest card, a strategy that could’ve saved her over $5,000. She would be in a way better position if she just took the time to build an emergency fund first.

Takeaway: An emergency fund is one of the most important parts of your financial plan.

Setting up your finances in a way where you can manage any emergency and not have to sell investments is crucial to long term success.

5. A Story About S Corps

Before beginning to work with me, one of my clients had already changed the legal structure of their company to a S Corp. I was surprised! The majority of business owners who contact me are unaware of the advantages of a S Corp. The issue is that the owner was being paid a $100,000 salary while not taking distributions. They were essentially incurring more costs to create/maintain an S Corp but failing to benefit from the tax savings that could be realized by taking distributions. They could switch up the way they paid themselves and reduce their annual tax burden by $7,500 to $15,000! A huge benefit!

Takeaway: A lot of times when we hear information, we only get part of the story. Make sure before you make any big changes you know exactly how to best execute it!

S Corps can be great when used properly!

6. A ROTH IRA Investing Story

I have another client who was told to start investing in a ROTH IRA. Great advice, right? The problem is, they just told him to invest in an ROTH IRA, not that it was a vehicle and he actually had to invest the funds that go inside the ROTH IRA. For the last 5 years, he was just putting money in, but he never invested any of it.

People have to understand that not everyone has the same base knowledge as them when giving advice. Focus on educating people first!

Takeaway: Only take advice from people if you fully understand what they are saying and what to do. Half the time they also only understand a small part.

These are 6 real life examples of financial decisions that could set you back even though you were trying to do the right things. I hope you can learn from these and ensure you do not make any of the same mistakes.

Remember, be careful taking advice from others who do not know your full situation. It can come back to bite you!

Disclaimer: none of this is advice, it is just for informational purposes. Talk with your financial planner before implementing any of these strategies.

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