Think you are financially savvy?
In my experience, many well-educated and smart people carry around some financial ideas that are doing them more harm than good. Here are three that I have seen cause a lot of damage. Time to check your thinking!
Myth # 1: Only rich people need estate planning.
Does the word “estate” make you think of palatial homes and an equestrian lifestyle? That word association has tricked many people into thinking that they don’t need estate planning. That is simply not true. Your “estate” is everything you own: equity in your home, retirement accounts, your vehicles and the proceeds of your life insurance policy. Estate planning is about giving what you want to whom you want, all the while making sure that everyone pays as little as possible in expenses and taxes.
Another truth: everyone already has an estate plan. Some people take charge of it and understand it, others leave it to chance. My advice? Everyone, regardless of their circumstances, needs a will and an estate plan. If you have one of each, make sure that you revisit the documents every few years (and especially after a major life change like a divorce or a death of your spouse).
Myth # 2: Making more money equals more wealth.
According to the National Endowment for Financial Education, 70% of lottery winners and other individuals who receive an unexpected windfall end up broke within a few years. That is a perfect illustration that wealth is not just about how much money you bring in – it’s about how much you have left over after your expenses are paid. Society encourages us to go out and spend that raise or bonus as a reward for the hard work. “Because you are worth it” makes for a great ad slogan but lousy financial advice!
What can you do about that pressure? Begin by getting honest about your spending. Ask yourself whether your money is paying for things and experiences that improve your quality of life and serve you best in the long run.
Myth # 3: As long as you have some retirement savings, you are financially prepared.
Unfortunately, this one is no longer valid either. Human lifespan is climbing up, so are medical expenses. If you are in your 50’s today, you need to be planning for another 40+ years of life. Very few financial planners use longevity assumptions that have you living into your 90’s. So if you have an old plan this is the time to dust it off and get it updated.
It is also a good time to make sure you understand where your money is and why that strategy makes sense. Sure, investing and finance are complex subjects with enough acronyms to make your head spin. That should not stand in your way of having a basic comfort level with your financial situation. A recent study by the National Foundation for Credit Counseling found that almost half (44%) of the surveyed individuals would give themselves a grade of C or lower when it came to financial literacy. That is not good enough.
The big lesson here is that knowledge is power.
Ignorance is not bliss, especially when it comes to money. The best thing you can do for your peace of mind is to work with an experienced financial planner. Choose a neutral professional who has no vested interest in selling you “flavor of the month” investments. The right-fit planner can be a powerful ally on your way to taking charge of your financial future.
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