Financial Folly or Just Bad Luck?
Paul Fain, CFP®
Let’s face it, we all make mistakes. What are some common financial planning mistakes?
To name a few: Overspending. Underestimating life expectancy. Neglecting to develop an eldercare plan. Underestimating the impact of inflation. Buying annuities without understanding them. Underinsuring the risk of disability. Investing too conservatively or aggressively for your personal circumstances. Having unrealistic rate-of-return expectations. Investing based on a fear of missing out.
Based on my experiences as a Certified Financial Planner professional, I would say that financial mistakes are attributable to procrastination and avoidance of unpleasant tasks (10%), financial illiteracy (40%), financial folly (30%), or some combination of bad luck, bad timing or bad judgment (20%).
Most financial mistakes are behavioral, not technical. They can be corrected or avoided (or at least not repeated) with education, discipline, emotional regulation, and attentiveness.
For example, a few weeks ago, a family member discovered that she had not updated the beneficiary designation of her 401(k) account. It was still her ex-husband from 37 years ago. That got updated quickly. Regularly review your beneficiaries, especially after major life events.
After entering the workforce, it is a mistake to delay investing. Those early years of investing, such as in a company retirement plan, contribute mightily to compounded wealth accumulation. The attitude of “I’ll start later, when I’m making more money,” is folly.
It is a mistake when an investor gets overconfident about his or her stock-picking ability. Many confuse luck with skill. If you do not know and understand a stock’s fundamentals ‒ price-to-earnings ratio, growth forecast, debt, profitability, research and development pipeline, management, etc., you probably have no business investing in that company. Instead, buy a professionally managed mutual fund.
It is frighteningly little known that the most salient aspect of financial planning is not saving for retirement or long-term investing, or budgeting, or life insurance. It is health care (and I do not mean just health insurance).
The primary health care nightmares in our country these days are cardiovascular disease, cancer, Type 2 diabetes, and Alzheimer’s disease. Thirty-eight percent of all U.S. adults have either diabetes or pre-diabetes. Per the National Cancer Institute, more than 40% of U.S. citizens are diagnosed with some type of cancer during their lives. Yes, cars, homes, and portfolios certainly matter, but so do human lives.
Your future depends on what is going on right now. People spend countless hours watching TV or scrolling through their social media feeds, but setting aside a few hours a week for their health care and financial well-being seems out of the question. Let’s change that.
Lack of planning is a huge mistake. You need to know where you are going (goal setting) and spend some time and energy planning how to get there. Godspeed.
This article originally appeared in the Knoxville News Sentinel online on May 24, 2024.
