After years of working with financial advisory clients, three major financial mistakes come to mind. Today we’ll examine the following mistakes:
- Not having a full-spectrum estate plan: It’s critical to prioritize building a solid and comprehensive estate plan.
- Ignoring tax strategy: Understanding your options regarding how to handle tax obligations makes tax time less of a burden and less worrisome.
- Holding an incorrect amount of cash: How much is too much and how much is too little? There are a few different strategies to consider to make sure you’re ready in case of an emergency but yet don’t miss out on fruitful investments.
Then we’ll discuss how working closely with a wealth management advisor can help you bypass these errors on your way to your ideal financial future.
1. Not Having a Comprehensive Estate Plan
Though many of our clients are diligent in their savings, with sizable retirement assets and high incomes, there is a tendency to think that saving and earning a lot is all they need to meet their goals. Unfortunately, this is a mindset trap that couldn’t be further from the truth.
There is so much more that goes into financial security than just how much money is in the bank. Estate planning is a crucial aspect of a comprehensive wealth management plan, especially if you want to pass significant assets to the next generation, or properly plan for the succession of your business. Through the proper use of trusts and other estate documents, you can increase the likelihood that what you’ve built over your lifetime is properly passed on while minimizing taxes and probate expenses.
Many high-income earners often overlook the full scope of a comprehensive estate plan, which can have devastating effects on your accumulated wealth. Making sure you are adequately covered now can save you time, money, and energy in the future.
2. Ignoring Tax Strategy
It’s not how much you make, it’s how much you keep. We often speak to investors that don’t fully understand the cost or fee structure of the investments they’re in, or how the taxation of their investment accounts really works. It is important to be mindful of these items as they can take a big bite out of any potential returns you could receive.
Some advisors don’t pay enough attention to the tax consequences of changes made to clients’ accounts, which can cause undesirable tax liabilities for you (both capital gains tax and ordinary income tax). When making decisions like what trades to make or where to take a distribution from when you need cash, it is important to have a strategy in place that helps manage your taxes—both in the short term and long term. A plan to only minimize taxes today could leave you experiencing far more significant tax consequences down the road. The best tactic is to weigh the benefits and drawbacks of your money movement so you always know the bigger picture consequences related to taxes.
Taking money out of your portfolio involves finding a withdrawal strategy that minimizes your tax obligation. Otherwise, you may end up paying more than you need in taxes. To optimize returns on your portfolio after taxes, it’s essential to consider investments with built-in tax-efficient strategies. Among these are index funds, which include certain mutual funds and EFTs (exchange-traded funds). Selecting such investments allows you the opportunity to effectively reduce the amount lost in taxes and maximize your after-tax returns.
3. Having Too Much or Too Little Cash
Your cash is the money you have readily available for use. It could be physical or digital or held in a short-term money market product. Cash is your most liquid asset. But how do you know if you’re carrying too much or too little?
A commonly held recommendation is to have three to six months of living expenses on hand. This allows you to easily handle unexpected bumps in the road without too much worry; having less might not be enough to give you a wide safety net in the event of a crisis.
On the other hand, if you’re holding too much cash, you’re probably sacrificing returns and slowing your rate of financial growth. Essentially you’re losing money every day when you have too much cash.
You may have too high a percentage of your portfolio tied up in the stock market. That makes your assets harder to liquify. In case of a large, unexpected financial event, you may end up with debt in order to weather that situation. A wealth manager can help determine the right amount of cash for you, specifically, to have on hand.
We Can Help
Unfortunately, there are many more financial mistakes than these that we see every day. But we at Anderson Financial Strategies love guiding our wealth management clients in tweaking their strategy and optimizing their finances to pursue long-term success. Ready to get started? If you would like to explore our services for your family or business, please call us at 855-237-4545 to schedule an executive briefing to discuss your goals.
About Shon
Shon Anderson is president and chief wealth strategist at Anderson Financial Strategies, LLC with over 15 years of experience. As a fiduciary, Shon’s mission is to provide his clients with quality financial expertise along with rapidly responsive service through an honest relationship. He specializes in providing family office-style services to help his clients organize and focus their financial life. Shon graduated from Wright State University with a bachelor’s degree in financial services and an MBA in finance. He is a CERTIFIED FINANCIAL PLANNER™ practitioner and holds the Chartered Financial Analyst® (CFA®) certification. His insights have been quoted in leading financial news publications such as CNBC, Yahoo Finance, Fox Business, Consumer Reports, Forbes, Bankrate.com, Investment News, and Kiplinger. Shon serves as an adjunct professor teaching personal finance courses at Wright State University, leads CFP® exam review courses for Keir Educational Resources, and is president of the CFA Society Dayton. Shon and his wife, Jessica, reside in Sugarcreek Township, Ohio, and are blessed with triplet daughters, Elizabeth, Bridgette, and Alexandra, along with their son, Jacob, and dog, Jack. Over the years, Shon has been involved in several volunteer organizations including the Wright State chapter of Delta Tau Delta as an alumni advisor and was a Big Brother in the Big Brothers/Big Sisters program. To learn more about Shon, connect with him on LinkedIn.