Are You Falling Victim?

Are You Falling Victim to These Financial Mistakes?

by Michael Vaughn, CFP®

There are so many things to consider when it comes to finances, from deciding whether to buy or lease your next car, to budgeting for retirement, to signing up for a credit card. It’s impossible not to make mistakes here and there!

But we often see some people make significant mistakes—mistakes that can impact your financial success both today and in the future. Let’s look at some of the biggest financial mistakes I often see to help you avoid them yourself. 

Taking Money Out of Your Retirement Savings Accounts Before Retirement

IRAs and 401(k)s are some of the most powerful tools for funding a happy retirement. While that money is supposed to be left untouched until retirement, sometimes life happens and you need to use that money sooner than expected. But taking money out of your retirement accounts early is hardly ever a good idea.

The IRS penalizes 401(k) withdrawals prior to age 59½ by slapping a 10% penalty on the amount you withdraw. (1) In addition, if you withdraw the money early, not only will you get taxed on your income earned from working, you will be taxed on the amount you take out of your 401(k), which could even push you into a higher tax bracket. This adds up more than you might realize. Between these two immediate consequences, it’s possible you would only keep less than 70 cents out of every dollar you withdraw early. (2)

Lastly, if you withdraw money from your IRA or 401(k) before retirement, you are also losing out on the benefits of compound interest, which helps the money you put away grow faster due to interest building upon itself.

Not Having an Emergency Fund

As much as we can try to plan for the future, we don’t know for certain what’s going to happen. Whether it’s a global pandemic, a devastating injury and mounting medical bills, or having to help out a loved one unexpectedly, it’s important to have an emergency fund in place to protect yourself and your assets. Proper risk management is key to staying afloat during uncertain times. This can be accomplished by considering unexpected risks that are personal in nature, such as divorce, disability, accidents, and illness, and by making sure you are properly covered.

Letting Emotions or the News Cycle Drive Investment Choices

There are so many headlines going on today, from an impending recession to war around the world. It can be hard to stay afloat throughout these fear-mongering headlines, but it’s important to not let your emotions or the news cycle drive your investment choices. 

Emotional decisions often lead to bad decisions. Emotional investors may sell out of fear at the bottom and wait until the market is back near the top to have the confidence to buy again. This is one of the most damaging mistakes of investing: buying high and selling low. 

According to a report, 58% of investor respondents agreed their portfolio performs better when emotions are left out of the equation, yet 47% said it was difficult to keep emotions at bay, and two-thirds of investors regret emotional, impulsive investing decisions. (3) Don’t let fear dictate your future.

Buying Everyday Things on Credit Cards

Credit cards can be one piece of your financial puzzle, but they need to be used responsibly to avoid the risk of overspending. While some people prefer to use credit cards for everyday expenses because some cards come with points and other benefits, using credit cards is not always the right fit. If you find yourself tempted by credit cards and end up overspending, (4) choose cash or debit cards instead. 

Avoid These (and Other) Financial Mistakes With the Help of a Professional

These are just a few of the common financial mistakes we see, and it can be hard to know how to avoid them all. Having a financial professional in your corner can make a huge difference, not only in the amount of wealth you can build, but also in how much confidence you have in your financial future.

At Pinnacle Family Advisors, we build a personal financial plan that accurately reflects our clients’ values, goals, money mindset, and risk tolerance. To get started or if you’d like to update your plan, schedule a meeting by emailing me at [email protected], calling (417) 351-2942, or using my online calendar.

About Michael

Michael Vaughn is a CERTIFIED FINANCIAL PLANNER™ professional and Vice President at Pinnacle Family Advisors (PFA) with 21 years of industry experience. Before joining the PFA family, he served clients with investment management and retirement planning at The Mutual Fund Store for 14 years. Michael graduated from Missouri State University with a bachelor’s degree in business administration and management and earned his CFP® certification in 2004. He also served 20 years in the Missouri National Guard, retiring in 2007 as a Major. He currently volunteers on the board of directors for Good Dads and Fellowship of Christian Athletes. Michael is married to Lori and they have two daughters. To learn more about Michael, connect with him on LinkedIn.