By Heather Cleland
(Editor’s note: Welcome to a new monthly column about building wealth, managing money and smart investing. The column is authored by the partners of Willow Creek Financial Services, Sebastopol, one of the leading wealth management companies in California.)
Building wealth, retiring comfortably, enjoying financial security. Isn’t this the dream of every business person? Yet, the reason many people never reach their goals is a combination of the seven biggest money mistakes we see in our practice.
Bad Move No. 1: Investing from the heart, not the head
Emotions help us savor life, but are dangerous when they rule business or financial decision making. Avoiding the two common money emotions, fear and greed, is especially challenging during volatile market conditions. Emotional overconfidence can result in our swallowing “the story” (i.e. the recent Facebook fiasco) instead of pursuing a sound investment strategy.
Better Move: A well thought-out financial plan, and the discipline to stick with it, will put you on track for success and security. It’s smarter to build wealth slowly and deliberately, rather than taking reckless risks and trying to get rich quick.
Bad Move No. 2: Burying your head in the sand around succession planning issues
Succession planning often takes a back seat to more immediate demands. Many owners are so busy working in the business; they don’t take time to work on the business.
Better Move: Begin developing an exit strategy where you will realize the value of your business through a sale or orderly passing of the baton. This can take 5 to 10 years of planning to transition successfully and profitability.
Bad Move No. 3: Not optimizing Social Security benefits
Retiring business owners are leaving thousands of dollars on the table because they don’t understand how the Social Security system really works. Unfortunately, the rules are complex and even Social Security staffers aren’t up on the more sophisticated options such as spousal benefits planning.
Better Move: Find out what your options are and start planning now for a secure retirement. Consult an expert so you understand how and when to maximize these important inflation-adjusted benefits.
Bad Move No. 4: Not being diversified
The saying “You don’t know what you don’t know” is often true of investors. We have found that many clients don’t even know what questions to ask when evaluating a possible investment. And, they think owning a number of investments means they have a diversified portfolio.
Better Move: Avoid high priced, illiquid investment products. Understand the risks of investing in stocks and bonds and the importance of asset allocation. Always ask your advisor or broker how they are compensated.
Bad Move No. 5: Not managing your tax liabilities
We all need to do tax planning year-round whether we own investments or not. It takes a proactive approach to take advantage of tax saving strategies.
Better Move: Start tax planning in late summer. Review your options for buy/sell timing issues and other tax saving opportunities with your tax professional and financial advisor. Timely planning can help you capture significant tax savings the following April 15.
Bad Move No. 6: Giving up financial control
Isolating financial responsibilities is a bad money practice given the possibility of death, disability or divorce. Having regular family meetings on money matters makes it much easier to agree upon and reach important objectives and goals.
Better Move: Couples should make sure both of them know how much money is in the bank, where the accounts are located, and where important documents are stored. For those caring for elderly parents, it’s a good idea to know your way around their finances, too. Just in case.
Bad Move No. 7: Failing to plan
No one ever plans to fail, but too many people fail to plan. Not having a plan in place to meet your financial goals is risky in today’s increasingly complex environment. Without a roadmap to reach your goals, decision-making becomes more difficult. There is no context to judge how your short-term decisions will ultimately affect your long-term goals.
Better Move: To meet your financial goals, it is important to have a disciplined savings plan, a sound investment strategy, and a sustainable distribution rate during retirement.
Given the unrelenting demands of small business, some studies suggest that owners may be prone to money mistakes because of an “overriding short-term focus.” One solution gaining traction in the financial industry is holistic planning. The idea is to incorporate business, family and personal goals into a single master plan. Looking at the big picture ensures you are measuring success from a long-term point of view and that you avoid common money mistakes. Holistic planning helps you live well today while protecting your future. And isn’t that what we’re all working for anyway?
Heather Cleland, Certified Financial Planner, is a partner at Willow Creek Financial Services, Sebastopol, one of the leading wealth management firms in California. For more information go to www.wcfsinc.com or call 707-829-1146.
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