Gen X attorneys might find it somewhat distasteful to hear themselves compared to flip-flop-wearing techies from Gen Y. Despite their substantive differences, when it comes to money, their mistakes are often eerily similar. Based on my experience, here are the top four.
Mistake #1: No plan: little chance of winning
This is what I refer to as the sitting duck phenomenon. Both Gen X attorneys and Gen Y techies tend to have above-average IQs and very little time, a potentially dangerous combination, motivating self-management without the time to do a competent job. Often when it comes to their financial plans, this leads to a frayed patchwork of mutual funds and a handful of individual stocks, alongside boatloads of cash sitting in stasis, awaiting deployment for the “right time.”
Attorneys and techies don’t lack for hard work, albeit at different paces and at different times of the day. However, despite otherwise good intentions to keep excess cash invested and working, too, time seems to slip away. Cue the cocktail party stock tip from a colleague, three drinks deep, or the Fortune magazine in the dentist’s waiting lobby, featuring “the top five stock picks that will make you rich.” With no plan, no advisor, and lots of dry powder, they’re sitting ducks for bad advice.
Mistake #2: Spend now, save later
It seems easy to save when earnings are high, but there are always luxuries to spend money on. A vacation home, private schools, elaborate home upgrades and fancy cars are some of the many ways to spend today and defer saving to tomorrow. But compounding is powerful. $40,000 in annual savings over 30 years, earning 7 percent per year, ends at ~$3.8 million before taxes. Starting 10 years later, but saving $65,000 per year over the final 20 years earning the same annual return comes out to ~$2.8 million before taxes, or roughly $1 million less despite the higher savings rate!
Moreover, while I’ve ignored the impact of taxes, it should be noted that retirement savings are most valuable in high-earning years because pre-tax retirement plan contributions are a reduction to taxable income. By not saving, high earners miss out on the opportunity to lop off a portion of their income taxed at the highest federal and state tax rates, which are 39.6 percent and 13.3 percent, respectively, in the Golden State of California. A dollar saved is as much as 52.9 percent off…
Mistake #3: I know this company better than the stock market does
It’s hard not to get emotional about a stock—particularly one that you work for or serve in a professional capacity. But all else being equal, concentrating wealth in a single stock is reckless in the presence of open exit doors. Sure, some stocks do fabulously, and we have all read heroic tales told by those who have accumulated massive wealth from a single stock. On average, however, there are more silent losers than famous winners.
Attorneys and techies alike should not lose sight of the marginal utility of wealth. Banking the first million is by far the most valuable to any investor hoping to retire one day. Each and every million thereafter is worth less and less as a contribution to one’s standard of living in retirement. With this framework in mind, greed can more easily be tempered.
Mistake #4: Exposure to unlikely, but not rare, events
No one wants to talk about the possibility of bad things happening to them or their families. But avoiding those uncomfortable conversations can be costly. Gen Y techies and Gen X attorneys should both have a plan for the two “Big Ds”—disability and death—yet many do not. A premature death or disabled spouse can be financially ruinous to a family. Affording child care, tuition and mortgage payments may be difficult even for wealthy families if one spouse is not around to take care of the kids or earn an income. Many professionals at larger companies have group disability and life insurance plans but those who are not covered through their employer are smart to buy individual plans.
Ultimately, portfolio management and financial planning aren’t rocket science. Smart, disciplined people with sufficient interest and time can do a good job on their own and avoid these four potential pitfalls, among others. The problem is that many successful people cannot dedicate the time required to do it well, and are therefore more at risk of making financial decisions today in a hurried fashion. Hiring a pro is of course more expensive than doing it yourself, but good professionals can earn back their fees, and these fees can pale in comparison to the cost of mistakes and the value of missed opportunities.
– Related on ThinkAdvisor: Buffett’s 6 Nuggets of Investing Advice: Berkshire Shareholder Letter