I’m a Financial Planner: 4 ‘Wealth-Building’ Habits That Don’t Always Deliver
According to a recent survey from resume.io, 66% of job seekers over 50 have been forced to continue working due to financial pressures, with 25% admitting that their retirement income wasn’t enough to support them.
With 28% of those looking for work over 50 sharing that they’ve taken on debt while on the hunt for employment, it’s more important than ever that you follow the right wealth-building habits when you’re still in your career.
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We consulted with financial planners about wealth-building habits that most often backfire on people, why they fail and alternatives.
Habit No. 1: Investing in Safe Assets
“Many of my clients come in with [certificates of deposit] CDs or money market accounts as their general savings vehicle,” said Christopher Walsh, senior financial advisor at Capital Choice Financial Group. "They think they're accumulating wealth for the future when, in fact, inflation has kind of erased all of their gains over time.”
Why Does This Wealth-Building Habit Fail?
While you may feel like you’re doing the right thing by playing it safe with your investments, you’re missing out on building real wealth. Walsh noted that a client locked in a 13-month CD at 3% last year, which meant that they had less buying power at the end of the term with inflation reaching 3.5%.
What’s a Better Alternative?
Walsh recommends a CD tied to a bond index, or a blend of government and corporate bonds, as a safer investment with better returns.
Habit No. 2: Investing Too Aggressively in One Asset
Hyper-aggressively investing in particular companies or asset classes without proper diversification can be a poor wealth building habit for most, per Walsh. He has seen clients get caught up in semiconductor stocks or crypto, becoming hyper-leveraged without any diversification.
Why Does This Wealth-Building Habit Fail?
Walsh pointed out that a single regulatory or consumer adoption change can have massive effects because all your proverbial eggs are in one basket. He warned that getting too excited about positive returns and positive news in the sector, but over-leveraging yourself into one or just a few stocks leaves you pretty vulnerable.
What’s a Better Alternative?
The better option is to diversify your portfolio to have a mix of assets so that you’re not relying on one industry or asset class to build wealth. You never want to rely on one stock or industry to build wealth.
Habit No. 3: Avoiding Credit
“A habit that can sound logical but often plays out like tripping out of the gate in a marathon is avoiding credit altogether,” remarked Steven Rogé, chief investment officer and CEO of R.W. Rogé & Company, Inc. “Some popular financial gurus recommend paying for everything in cash to avoid overextending yourself.”
Why Does This Wealth-Building Habit Fail?
While it’s understandable that someone with a history of poor spending habits may want to avoid credit, most people should aim to build up their credit score so that they can get better interest rates.
What’s a Better Alternative?
You want to focus on responsible credit use to build your credit score. Rogé elaborated, “A higher score can save you real money on the big-ticket items, a lower rate on your mortgage or your car loan, and even a small change in your borrowing cost adds up to serious dollars over the life of a loan.”
Habit No. 4: Investing Too Much Into Traditional Taxable Retirement Accounts
Rogé warns about jamming as many dollars as possible into a traditional, always-taxable IRA or 401(k) account.
“With pensions and defined benefit plans long gone, it's on each of us to save, and most of us do it through a 401(k) or 403(b) plan," he said. "A lot of people were auto-enrolled, or set the account up so long ago they assume they're all set, but most plans now offer a never-taxable Roth option.”
Why Does This Wealth-Building Habit Fail?
Rogé stressed that tax diversification matters more than most people realize when it comes to building long-term wealth, especially in retirement.
What’s a Better Alternative?
Rogé advises that a mix of always-taxable (401(k)), sometimes-taxable (brokerage) and never-taxable (Roth) accounts gives you the most flexibility. You can pull out cash in a tax-efficient way for monthly spending, an emergency or a Roth conversion.
Rogé concluded, “We're in one of the lowest tax-rate environments in recent history, which is why we advise many clients to direct the majority, if not all, of their retirement savings into never-taxable Roth IRA and 401(k) accounts.”
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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