The Most Common Financial Mistake People Make
January 26, 2012, By Mark Meissner 0 comments
When evaluating the most common financial mistakes people make, a very simple yet common pattern emerges: Most people are doing nothing at all as far as planning to retire. Moreover, the most common mistakes are mental. If I had to guess, most dads spend more time watching the NFL on any given Sunday than they do on planning for retirement in a year. Most dads my age that I know haven't saved a dime and have never invested in their lives.
Their reasons? They say they don't have extra money to save and invest, don't have the time, don't know where to get started. They say they've got kids to worry about now and they'll catch up on saving for retirement later.
Most of the guys I know aren't accountants; they're construction guys, plasterers, mechanics, landscapers, artists, web developers, mortgage brokers, freelancers and so on. Most of them don't have company-sponsored 401k plans. They just get a paycheck each week or two and pay their bills, spending whatever is left over on guns or boats or new other toys. A few think they are lucky and work for unions with pension plans, and so they feel comfortable that they're socking away something for retirement. In reality, it won't sustain any sort of retirement.
Saving and Investing
If you're one of these guys, you can change this situation in less time than it takes to watch one NFL, MLB or NHL game. Saving and investing is simple. All you have to do is automate withdrawals and deposits. Most company 401k plans only have about 15 funds you can invest in. Invest in them all evenly as a starting point. In an earlier article I covered how to select what to invest in to make the most money possible depending on the amount of risk you can and should take.
You will hardly notice that the money you're putting away is going elsewhere. When you invest pre-tax dollars, you lower your taxable income. If you are in the 25% tax bracket for example, you will save $250 per year in taxes for every $1000 you invest. If you make $50,000 per year and invested nothing (and your tax rate was 25%) you would pay $12,500 in taxes and your take home pay would be $37,500. If you make $50,000 per year (same 25% tax rate) and invest 10% of your income, you would only pay $11,250 in taxes, and your take home pay would be $33,750.
You would take home $3,750 less; however, you would have $5,000 more in the bank that's earning you money. Not to mention, most 401k plans will match your investment up to a certain extent—so that $5,000 could be significantly more if you're investing with your employer's plan. Not to mention, depending upon how much you put away, you may be able to put yourself in a lower tax bracket, further reducing your taxes. You also should be investing in your own retirement before you worry about the kids and their college needs. They can take out loans for college, and you can't take out a loan for retirement (unless you're planning on a reverse mortgage or home equity loan down the road, which is a terrible plan).
