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…