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A Wiser Retirement®
268. Top Financial Mistakes and How to Avoid Them
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Are you curious about the top financial mistakes people make, and how to avoid them? Tune in to this episode of A Wiser Retirement® Podcast as Grace Kennedy, Financial Planning Associate, shares insights on the most common financial pitfalls and how to steer clear of them.
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Top Financial Mistakes and Avoidance
Speaker 1I would say the number one financial mistake that people make who have money so they're not trying to accumulate yet, but they've started accumulating wealth already is buying whole life insurance policies and annuities. I have never seen an annuity that made sense. Welcome to a Wiser Retirement Podcast. Are you curious about the top financial mistakes people make and how to avoid them? I'm Casey Smith. Today I'm joined with Grace Kennedy, a financial planning associate, with us. Each week, we bring you practical advice on retirement, investing and planning for your financial future. Don't forget to subscribe to the podcast wherever you're listening. Let's get it. Hi, Grace Hi.
Speaker 1All right, so this is your first podcast. It is so welcome to A Wiser Retirement. Thank you. For those of you who don't know, Grace Grace has been with us for how many months now?
Speaker 3I think six.
Speaker 1Six months. It feels like you've been here forever.
Speaker 3I know it's weird saying only six months, I know.
Speaker 1You know months, I know you know. So Grace's role is partially keeping me in line. So if you're a client and you come and do review meetings with me, most likely in the last six months Grace has been in the room with me and I tell you what you know. We, our firm, is what? 87, maybe a little higher than that now. Percent women.
Speaker 1Yeah so there's a lot of women that work here and I'd say as a whole we're a pretty happy bunch. But occasionally somebody walks in my room and goes so-and-so is driving me crazy today.
Speaker 3It's inevitable.
Speaker 1And you know what? I never hear your name. Your name never pops up. No one ever says Grace is driving me crazy. Today, no one's ever said that she's also came in like the boss.
Speaker 1So she has no problems walking my room and going. You're going to be late, we have to get going, so I appreciate you keeping me on schedule, grace. So, yeah, we. When Hadley put together the podcast topics for this quarter, I asked her. I said, hey, let's start working in different people so we can profile people, because you know typically what I tell prospects senior advisors do all the talking and plenty of associates do all the work.
Speaker 1So you've been doing all the work for me, and so now it's time to give you some of the spotlight here. So you did some research for us. I did. And that research was some of the top financial mistakes people make and how we might be able to avoid them. For sure.
Speaker 1Some of these, I think, are probably good. You could pass this podcast to young people for them to be a little more educated on. Hey, don't do this. You came up with your list. I added one thing to it which we will hit off at the very beginning. I think the one of the, I would say, the number one financial mistake that people make you have money. So, they're not trying to accumulate yet but, they've started accumulating wealth already is buying whole life insurance policies and annuities. Yeah.
Speaker 1I have never seen an annuity that made sense long term. Um, yes, it protects you from the downside, but it also eliminates the upside. So you're just kind of you. Just you kind of go nowhere, yeah, um, typically they get sold to old widows, yeah, uh, because the the person selling them has every incentive to sell them and they're pretty good salespeople. Normally they have the ability to win people's trust. And then occasionally we see young people with annuities and it's funny. They come in and they're really embarrassed. They're like well, I have these two annuities. I know I shouldn't have done that. Or yeah, sometimes it doesn't pop out until the second.
Speaker 3Or third meeting.
Speaker 1I've got this, I've got this annuity. Of course, immediately we think, oh, they must've just inherited it or something. And that's not the case. They they got sold a product. Um, a lot of times they will play to the salespeople, will play the people's fears, but you're, you're not going to make any money in a product that caps your top, your upside. So you get capped to the upside. We've had what uh two 20 plus rate of return years in the S and P 500. And the these products uh typically cap out around 6%.
Speaker 3Yeah.
Speaker 1And, of course, you. You may have downside protection, but seven out of 10 years are positive years in the market, so you just have to weather through those three.
Speaker 3Definitely.
Speaker 1Yeah, and we're looking at, uh, no way you're ever going to keep up with the average of the market and, in fact, honestly, uh, you can create your own annuity.
Speaker 3Yes, you just talk about a lot yeah.
Speaker 1You need to. You need to talk to people who are smart about this kind of stuff and and say look, if you are really concerned about, uh, the market falling apart and you have all these fears, you really just need three buckets. You need a cash bucket that can be five years worth of cash. You might put 10 years worth of expenses inside short-term US Treasury bonds those are really secure. And then the rest you can put in to something like the S&P 500. And basically you just built your own annuity product yeah, exactly.
Speaker 1You have the dividends from the stock, you have the growth to keep up with inflation, you have income from the bonds and then your cash. Now you should be getting around $4, $4.25 for now. That'll go away and that'll be more of a challenge in the future. But yeah, in the advisors that are collecting 10% commission on these things, you lock up your money for 14 years. Um, just doesn't, it just doesn't make sense. And then the whole life side um, the very, it's very expensive. When I see young people have whole life policies, uh, doctors are really preyed upon young doctors for for whole life policies.
Speaker 1And you might. Let's see we've had a couple of cases where young people are putting $3,500 a month into a whole life policy. We had a pilot that was told not to contribute anything to his 401k plan, that he should put in $6,500 a month into a whole life policy because you could be your own bank and borrow from yourself tax-free. And I'm like, well, yeah, but they actually still charge you interest.
Speaker 3Exactly yeah.
Speaker 1And is it really tax-free when you're, when you're just moving money, you don't. You don't have to pay tax. You don't have to pay taxes if you borrow from your checking account, your savings account, and then, as you age, obviously the the death benefit gets can get more expensive, depending on what kind of policy you have. Uh, but the whole, the whole life side has never made sense to me. Unless you have estate planning issues, uh, net worth as a family is over $28 million. Then you might purchase a really large whole life policy to help cover some of the um death tax. But um, of that, it doesn't make a whole lot of sense. Like I said, there are underlying cases and we're talking to thousands of people who download this podcast every week, right, yeah?
Speaker 1So, I don't know your specific case, but those are two things that I would say you need to avoid. I have never met anybody that was proud that they made these purchases.
Speaker 3Yeah, it's a mistake, and you can avoid them by just not purchasing them.
Speaker 1So now I've just hijacked your whole list.
Speaker 3No, not at all.
Speaker 1Let's start with what you came up with.
Speaker 3Yeah, my number one, which is really number two.
Speaker 1Right.
Speaker 3But, yeah, we have top 10, which will be top 11 now, but top one will be unnecessary spending, and I feel like this can fall into a lot of different categories, because we all kind of unnecessarily spend on things. You know it's inevitable, but spending too much on things that aren't essential can drain your finances over time, over time. Okay, and this can be like a very like a simple example that I have um unnecessary for for me is buying a Starbucks coffee. You know, every morning you don't need to do that, right, I don't, because I've seen the impact on it. You know Starbucks isn't cheap. Let's say I want to go get my brown sugar, oat milk shake and espresso, which is my favorite drink. Okay, it's a mouthful.
Speaker 1How do I fit that on a menu?
Speaker 3I don't know, I like I get you know, tongue tied trying to say it to them. They're like we know what you mean I'm like okay, thank you, it's a $6 drink.
Speaker 1Wow.
Speaker 3It's $6. That's the grande. It's not even the big one. Oh wow, $6. Okay, say, I wanted to do that every day of the work week. I just wanted to get up before I come into work, which is, I'm sure, a lot of people do that. Ok. So five, five times six, you're spending thirty dollars a week, it's like around one hundred and twenty dollars a month, just on coffee, and then if you're going on a monthly basis, that's fifteen hundred dollars a year, or on a yearly basis.
Speaker 1Yeah.
Speaker 3Yeah.
Speaker 1It's over a thousand dollars.
Speaker 3It's fifteen hundred500 a year that you're just spending on coffee, you know.
Speaker 1Right.
Speaker 3And I think that's like an easy mistake that people make. That can also be with like shopping, buying something that you don't really need, or also eating more, eating out more than you should. You know, it's just like these little things add up and the keyword here is unnecessary and that's subjective. You know, maybe that coffee is very necessary for some people. Like I get it. I need coffee every day too, and so we're not saying that like you can't just like go and buy your favorite Starbucks drink.
Speaker 1That reminds me, uh, mr Wonderful on Shark Tank. He always makes fun of people who buy Starbucks coffee. He's just like I can get the same coffee for 50 cents. Everyone else is like no, it's not really, it's not the same. He's like it's the same, it's just coffee.
Speaker 3Maybe black coffee.
Speaker 1Right exactly.
Speaker 3But yeah, I mean, some people may need that drink, I completely understand. But if we could put that more in a budget, maybe, and budget for it at least. Maybe you don't need it five times a week, spending 120 dollars a month.
Speaker 1Maybe we can back it down. You can pre-load a starbucks you can right so you can put your budget for starbucks and only have that and only have that exactly that that's smart.
Speaker 3You can't do that especially when you do starbucks but say you have like your favorite local coffee shop, you're like I can't stop going there. Okay, well, that's a budget for it and can afford that, you know, and then you can enjoy it more. You're not like overspending on your coffee budget, you know. Or you know something else you can do is let's invest in a coffee machine, you know. Or whether you want an espresso machine. Those a thousand dollars, that $1,500 per year, can go into an espresso machine. They're expensive. And then you can break even, you know, know, in a year where, if you're actually repetitively using that, you know um. So there's, that's just like a small mistake. I think people make um and they don't realize how much coffee is. I swear, whenever you start putting that on your budget.
Speaker 3I've done it because I used to I was in college, I wanted to go to the coffee shop and study and have my coffee. You know like have the whole atmosphere. And as soon as I started budgeting and I put it on my budget a hundred dollars a month I was like I don't even have that much money. That's crazy.
Speaker 1Right.
Speaker 3So it I think having it written out is definitely a help to avoid that and budgeting out.
Speaker 1It's all about choices, right? In the end, you might not spend it on coffee, but you might spend it somewhere else. Or if you're really trying to um achieve a goal of some sort.
Speaker 3Exactly yeah.
Speaker 1Delayed, delayed gratification is really hard, especially for Americans.
Speaker 3Yes, yes, and we'll probably even get into that a little later. Um, okay. Next number two is going to be-ending payments. This is seen a lot whenever you have subscriptions to streaming services. There's absolutely every streaming service you can think of these days and some people want it all. You know what I mean. Have you ever been to someone's house and they're like you wanna watch a movie? You're like, yeah, what do you have? You're like all of it, I have it all.
Speaker 3You just tell me what you want, I'm like what you got, it all, and so I've put together, if you had all of them, what that would be on a monthly basis. So let's talk about YouTube TV. That's $83. I think it just went up because I don't remember it being $83. Netflix $18. Disney Plus $16 per month. Paramount Plus $12 a month. Hulu is $19. Paramount Plus $12 a month. Hulu is $19,. Prime Video is $9,.
Speaker 3Max is $17 and that's $174 per month that you're spending on streaming services and that equals out to over $2,000 per year just on streaming services, and unless you're just like an avid TV watcher, I feel like you're not actually getting the benefit of all of those. So a way to avoid that is there are bundles for your subscriptions so that you can consolidate your subscriptions. Let's cancel some of them that you haven't touched in months and then you can pay way less for your little bundle of subscriptions. I think that there's something out there for like Hulu, disney Plus and Max maybe, and it's like $30, $35 a month. You just got three for one. You know what I mean.
Speaker 1I mean, I'm going to sound old and maybe a little more entrepreneurship-ish if that's a word than maybe what our listeners would be. But I would say that you should pick one, maybe, and then you should read. You should find books, yeah Right.
Avoiding Credit Card Debt Risk
Speaker 1Exactly, and maybe you're reading for pleasure, but I, I'm a business book reader, for obvious reasons. But. But yeah, I, I, I can't, I. Of course, time for me is very precious, I don't have a whole lot of it, but you know, if I'm trekking across the country, going to a conference, let's say in California, I feel guilty if I watch a movie on the airplane, cause I'm like this is, this is great quiet time it's as quiet as it used to be now that we get text in the airplane, but but yeah, I feel I feel very guilty if I'm not reading something trying to improve a process here, or hire better or all those things right.
Speaker 1Yes. As a CEO of a company, my job is to be a leader, and therefore I feel like I should always be reading something to make sure I'm a better reader Agreed yeah, Either that, or I'm reading aviation magazines because something related to safety because I want to make sure I don't die when.
Speaker 5I'm flying Right.
Speaker 1So I would encourage people to be learners, and you can do that through documentaries and things like that obviously. But man, we have this funny saying that's crept up between me and alexa here and she'll say things like if you're 80 years old and you're looking back, what do you wish you had done? Most times I I'm not gonna say I wish I'd watched more movies yeah, especially now the movies suck more.
Speaker 3Yeah, you know what I mean Exactly. I've never heard anyone want to say that. Anyone say they watch it. Yeah.
Speaker 1Well, some guys are all in on the whole oh, I know the whole football thing. I think that goes back to quality time. Yeah, if you're watching with friends or family members, or eventually your children or something like that, then that falls into the quality time, definitely yes. Yes, but yeah so don't don't lose money and come out dumber in the process.
Speaker 3Just like in taking all this. Yeah, I know, I saw that too and I was like I was like wow, we should really go on a walk. You know, like vitamin D, like let's stop. We look at screens all the time. We really want to look at a screen all day at work, look at our phone and then reward ourself at home by looking at another screen.
Speaker 3You know, what I mean. Like exactly, let's screen. You know what I mean. Like let's be active, go to the gym, do something you know, but at the least you know if you're, if you want to have the subscriptions, let's consolidate.
Speaker 1Especially, especially, for young people. I mean, what are you doing right now in your spare time?
Speaker 3Studying? Yes, you're studying for the CFP exam. Yes, there's no TV watching at my house.
Speaker 1So the rate of return on yours passing the CFP exam is very high for you. So so that's what I tell all young people is if you're under the age of 30, you should be absolutely working your butt off, because now you have the time, the energy to, to to go do that. And then down the road in your thirties you have a family, maybe you have children. Then you can kind of coast a little bit sometimes and because you put all the work in for the first decade of your career most people don't, don't understand that.
Speaker 1So that goes back to why are we sitting here watching? Uh, watching movies, and and you know so anyway, uh, I, for me, movies are when I'm sick and I can't sleep then maybe I'll catch up on on some movies Exactly.
Speaker 3But this is number two on the list, so apparently it's an issue Right Exactly. Yeah, Number three moving on to number three is living large on credit cards. That actually kind of rhymes. That's funny Living large on credit cards. Overusing credit cards for lifestyle expenses leads to mounting debt and high interest payments. Amen. I mean that is so many people do this I feel like I did some research and in 2024, the average interest rate on a credit card was 24.62%. It's 25%, okay.
Speaker 1Yeah, on a credit card Right, that's crazy. Yes, I think it's funny as people people well, yeah, but I get sky miles. I'm like at 25% interest and you're holding a balance and the average is around 8,000. Yeah, I said you probably just buy the airplane ticket Just buy the ticket that's not benefiting you at all.
Speaker 3You can be better off in a lower interest credit card, if you have to carry the debt.
Speaker 1Exactly. And being a wealth management firm, I'd say we don't see a whole lot of that, yeah, but occasionally young people will come to the door. Yeah, I think the most I've ever seen was 250 000.
Speaker 3That's a ton in credit card debt.
Speaker 1Isn't that crazy, that's scary yeah, that was just before like um, the big financial crisis in oa like 06 05 06. I feel like everyone had 30 000 credit card limits, even like at home Depot. Yeah.
Speaker 1Um and and multiple cards in their case a lot of things they had bought they could sell, so they were able to reduce it pretty, pretty quickly. In fact, dave Ramsey has a whole book, the total money makeover, and all it is is a radio show of people calling in talking about how much money they lost, and the people who lost the most money got invited to go on a cruise ship with. Dave.
Speaker 4So it was like a whole cruise ship of people who become debt-free. I guess uh, one of the promotions they did.
Speaker 3Yeah.
Speaker 1But the total money makeover is a great book by Dave Ramsey If you, if you feel like you need um to be motivated to get rid of debt.
Speaker 3Yeah, yeah, it's definitely a leading issue. I feel like and I think it's something you can also hide. You know what I mean. Like a lot of people that may have like giant credit card debt may not want to come into a financial planner because they're like no, we're going to make them, let's pay off the debt. And it's hard, especially on a credit card with that kind of interest rate.
Speaker 1It's hard work.
Speaker 3Yes, like we were saying, whenever you do make purchase, make a purchase on a credit card and you can't pay it off at the end of the month or you don't pay it off at the end of the month. That is detrimental because it's just going to keep on going and going and it's like how do you catch up if you didn't have the money in the first place to pay it off or pay for it?
Speaker 3Right you put on the credit card. How do you eventually you eventually, you know catch up and make those payments? Like you have to work really, really hard, so it's better just not to get in that situation. Um, it's easy. Like I remember the first month I had a credit card. Um, I was in college, I was trying to be responsible actually and like start getting a credit score and um, I remember I like looked at my credit card balance and I was like, okay, my limit was like a thousand dollars. It's not like I put a lot on there. But I also was in college with no income. I look at my bank account and I was like, hmm, so that's not adding up. You know, like rent was due coming up. I mean it was not a good situation. Thankfully, I had like the Discover card that has like the 18 months where it like doesn't oh, right.
Speaker 3So that saved me, but I'm like that. Think of not having that, and so many people will just spend on the credit card, not even realize it. Um, but ways to avoid that Cause that's what we're trying to avoid Um number one is creating a detailed budget. Just knowing where your money's going and knowing how much money you actually do have to spend in a month is very important. Monitoring your credit card transactions and when I say that I mean like open up the credit card app and look at your balance so many people, I think, are scared to look at it. They're like, oh, I've been swiping all month, like I don't want to look at it. Like, open it up, let's look at it. Look at your expenses, look at the transactions. Let's put it down on your budget to see like, oh, I kind of overspent there. We need to stop. Let's slow down. I can't spend any more this month.
Speaker 1Lower your credit limit. Sometimes, if you struggle with this, you might even look at logging in on a weekly basis and just paying the balance owed.
Speaker 3Yeah yeah, paying it more frequently, like don't lay until the end of the month, that is true, so you can stay on top of it. That's a good idea. Lower your credit limit and then the amount of cards that you have. If you have an issue with carrying a huge balance, lower the credit limit or just cut up some cards. If you have multiple that have tiny little limits on it, just cut up some so that you don't even have the desire to want to go and spend it. It's going to take a lot of discipline to get rid of credit card debt.
Speaker 1You typically don't want to carry a balance greater than 30% of your credit limit. So lowering your balance is good in practice, but you also want to protect your credit? Yes, but I would say it's better to hurt your credit a little bit by cutting the balance down if you're right at the max and be eliminating debt or put safeguards for yourself, than it is to be focused on the credit score number.
Speaker 3Exactly, yeah, but a lot of people don't even know that rule either, the 30% rule, right, you know they're building it all the way up to their credit limit and that's still hurting their credit, you know what. I mean Like, if you use more than that 30%, that's still hurting you.
Speaker 1That's right.
Speaker 3And people don't even realize that.
Smart Decisions on Major Purchases
Speaker 5Are you curious why annuities keep coming up as a potential investment option? People are often told that annuities can effectively mitigate investment risks and help secure their financial future. However, annuities often benefit the salesperson and might not be the best choice for you as a consumer. To learn more about the various types of annuities, the negatives of owning them and better investment alternatives, we have a free ebook on our website just for you To download our ebook. Buyer, beware, why Do they Keep Trying to Sell you that Annuity? Simply click the link in the episode notes or visit wiserinvestorcom slash guides. Now let's get back to the episode.
Speaker 3The next one's fun Buying a new car Right.
Speaker 1We both had to do that, didn't we?
Speaker 3I know we're very familiar with this process. Um, except I have a used vehicle. I think we both have used vehicles. Um, so they're not brand new. Um, so a little bit different than what we're gonna be talking about. But new cars lose value very quickly. Um, I looked it up to see like what the average. You know how everyone's always like the second. You roll off the lot with your new car, it depreciatesates and I it's 10%. That's like conservative.
Speaker 1Yeah.
Speaker 3I also saw that in the first year of having a new car it can depreciate 20 to 45% in the first year.
Speaker 1A good example of that would be like the Maseratis. Yeah, so you'd be like a four door Maserati. Um, uh, I don't know what their base model is, but their mid model be close to $200,000. Yeah. And then, three years later, you can buy that car for $50,000 to $60,000.
Speaker 3Yeah.
Speaker 1I mean it's crazy.
Speaker 3It's insane yeah.
Speaker 1And it gets worse. The car market is kind of weird. But there are other cars that more everyday cars that hold your value, like you got a honda yeah, a honda, and it actually toyota's also really hold their value three years. Sometimes you're better off maybe looking at a new one because I've meant used one is pretty close in value exactly yeah, maybe there's a few exceptions, but I would say, as a general rule, you want.
Speaker 1My car was one year old with 16,000 miles on it and because I bought it the way I did, I got a much better warranty. I have a five-year unlimited mile warranty where if I bought the brand new one, yes, I would have the new car smell, but 50,000 miles would have been my limit and I put a lot of miles on my cars. You have to you, you have to be smart about it. Um, it's hard it is hard especially where, where I am in my, in my stage of my career yeah.
Speaker 3I could almost buy anything and it's like let me be disciplined. Yeah, what happened to?
Speaker 1me was. I picked out a car. I got there and they sold it out from under me, yeah and and so I was looking at this one that was. You know, it was a nice one, it was the one in the showroom and I was like, oh man, that's an awesome car.
Speaker 3I love that car, and then finally.
Speaker 1I was like this is not responsible. Like in two years, this is going to be just as used as any other car. Exactly yeah. So yeah. You just got to make smart, smart, smart decision. Now.
Speaker 3Now, some people, some people though their cars are their hobby and there could be some exceptions there.
Speaker 1I mean, yeah, we're not saying never buy a new car We've had clients who buy very nice brand new cars but they don't have country club memberships.
Speaker 3They don't have second homes they don't have. They can afford it paid in cash they go to. The car meets right, I mean this is a.
Speaker 1This is a big deal for them. Yes, but I would say as a general rule, if you're a young person, you want to be driving something that, ideally, is paid for yes and you want to find something that's reliable transportation.
Speaker 3Yes, exactly.
Speaker 1That's how you need to think about it, yeah.
Speaker 3And I think this is where it kind of falls is a lot of young people and I can say this because I'm in this stage of life you get an income for the first time, like a steady salary, and you're like, oh, what is the max I can spend a month on a new car for the past four years, you know, and it's hard, like I'm over, I bought a 2019 Honda CRV. Is that a dream car? I w. I would say no Like if I wanted it, if that was not my handpicked yes, that's her, you know no that's not what I did Like.
Speaker 3Was not my handpicked. Yes, that's her, you know. No, that's not what I did like, but of course I was trying to be smart about it, like what is what? What can I afford? You know, I probably could have spent a lot more and been crying every month paying the the the bill on it. But an example of like what, how much a car really depreciates and kind of like where the values lie, is, let's say, a brand new Honda CRV. Ok which those look good, I actually wanted one of those Right.
Speaker 3They just created the new body of it Looks so good and I was like, oh my gosh, like let me look at it. Let me just you know why not? You're just car shopping. Thirty five thousand dollars for a midsize SUV. I was like that's out of my price range. That's crazy. I was like can't afford that.
Speaker 3Okay, so let's use $35,000 car Honda CRV. After you've sat at the dealership for five hours, you get your bill of sale, tax tag, title, dealership fees, all the things that add up to a very sad number at the bottom of that piece of paper. Let's say it's $40,000. Okay, we're going to add on $5,000. I feel like really it'd be like 38, 39, but for math let's do 40. Okay, we're going to put down 20%, which is just a standard rule of thumb. You know that's $8,000. Okay, you go and get a loan for 32,000. Then you're, you are leaving the dealership with your $35,000 car. Statistically, like I said, it's 10% loses its value the instant it goes off the lot. Okay, now your $35,000 car is worth $31,500, and you just got a loan for $32,000. So you have a loan that is worth more value than your car is at this point and it's brand new, it's brand new no miles on the thing.
Speaker 3Yeah, like that's crazy.
Speaker 1You know, continue to depreciate.
Speaker 3Exactly First year 20 to 45% Like, and you're not paying that much down on it on the car, correct. So yeah, we're not saying don't buy new cars. I mean, if it's in your budget, of course, go for it. But a lot of used cars have already taken that first hit. Your car is still going to depreciate, cars depreciate. It's a depreciating asset.
Speaker 1But at least it doesn't take that initial hit Certified pre-owned If the manufacturer has a program. Certified pre-owned is probably the closest thing to new. I will say that SUVs and minivans are hard to buy used because if there's kids involved they're beating the dust.
Speaker 3Crown marks on it. Yeah, it's all relative, it depends. Okay, moving on from cars, let's go into homes. Okay, we go from spending too much on a car spending too much on a home. That's hard.
Speaker 1You spot these people. They have really nice cars, really big houses and no furniture.
Speaker 3Exactly, they can't furnish the home. And that's where I'm getting at. A lot of people go house hunting and they're like, okay, what mortgage can I get? What payment can I afford on a monthly. It's like, okay, let's think about all the other stuff that comes with buying a home, the taxes, the maintenance of just having to have, let's, mow the lawn. We would like a mower, you know, to be able to mow the lawn you get in your new house. Let's say you can furnish it, but then all of a sudden the back porch is falling apart on, you know, and it's like all these little things unexpected expensive, of owning a home that people don't think about and that can really hurt you financially just overextending that budget, because that's something that you have to pay every month. It's not like you can just stop paying your mortgage, Right, Um and so or a mortgage so big that you don't have enough in emergency reserves.
Speaker 1If you lost your job for six months. Yeah, Be able to pay for the home, paying the mortgage.
Avoiding Financial Pitfalls and Planning
Speaker 3Exactly so. 22% of Americans identify as house poor, um, which is basically meaning that they are spending more than 30% of their monthly income on housing, which is, I mean, like I get it. It's hard. I'm young twenties right now. I would love to own a home one day but, like you know, they're expensive, especially like in the city where we're at. Like they do get very expensive. Like we were talking, you can buy $500,000 home and then need to tear it down, you know.
Speaker 3like it is hard, I get it crazy, it is but you can't let go of your budget whenever you're looking. You know I'm sure no one's going to sit there and say, like I love my home but like I'm so house poor, you know what I mean. Like there that weighs on you. It almost takes away from the niceness of your home because you can't even afford it and you can't enjoy it.
Speaker 1It kind of goes back to in our planning process. We always want to create a family mission statement. Yeah. And it goes back to the mission statement. Is your mission statement to own really nice cars and have a big home? No one says that. Yeah, most people say I want to build wealth, I want to create a legacy for my family. Exactly, or I want to create a legacy through assets or a legacy? No one says that Legacy through travel is pretty popular.
Speaker 3Yeah, experiences, experiences.
Speaker 1I mean, we all want to have nice homes. Of course there's a lot of remodeling that happens, but yeah, overextending on a home um the the 28, 36 rule, which is uh what? Uh don't spend 20 more than 28, yeah on your housing expenses, and that's your gross monthly income?
Speaker 3yes, of your gross monthly income um, and then the 36 percent is do not spend like in your overall debt don't have that more, no more than 36% of your debt Exactly, which is funny. I just learned that in my CFP course.
Speaker 1I think the average car payment is around $800 now, if I remember correctly.
Speaker 3It was pretty high. It could have even been like $1,000 or something. It was crazy. It could have crept up.
Speaker 1That's been a few years since I looked at it. But that, Uh, but that alone can can also hurt you buying a home if your income is not right.
Speaker 3Yeah, like you're taking away from that that monthly income that you have to officially afford a home. So yeah, the the 2836 rule is important. It's just like a standard rule of thumb, like, okay, whenever you're looking at your monthly housing um expenses, don't let it be 28 more than your gross income. And then, looking at at all of your debt, if you do have a car payment plus your monthly um housing expenses, don't let that be more than 36 percent yeah it's just, it's a good rule of thumb to live by and just have that in the back of your head when you are home shopping.
Speaker 3You know I get it. It can be exciting yeah you know, I went whenever me and my mom were moving years ago. I knew she was like oh my gosh, but you can get this, you can get that.
Speaker 4Like it's fun, I get it.
Speaker 3But, like you got to think about the monthly expenses. Sure, um, okay, so let's say that you do have a home and you're misusing home equity. That is another big mistake. Using home equity for unnecessary purchases rather than investments can hurt your financial stability. So I, of course, have never fallen into this. I don't own a home, so I'm not over here misusing equity, but I feel like this is more common, like I feel like we see this sometimes coming in.
Speaker 1Yeah, when interest rates were really really low, people would overspend and then they would use the home equity line of credit on their home or refinance their home, take cash out to pay off debts, only to get into debt again. Yeah, uh, it kind of became a vicious cycle. Yeah, help kind of trigger the financial crisis, um, with the housing crisis back in. Oh seven, oh eight, uh, just there's less of that now, I feel like, just because it's harder and your interest rate is like six and a quarter.
Speaker 1So it's not really an incentive to to do that unless, um unless you just have to have a large home redo. But yeah, home equity Ideally you want to get your home paid off by 65.
Speaker 3Yeah, when you retire, when you retire.
Speaker 1So home equity line of credit if you use it it ought to be temporary, with an easy way to eliminate it. Definitely be able to pay it off quick yeah because that's equity in your home.
Speaker 3That is what you own. You don't want to give up that ownership to someone else. Correct home like that is what you own.
Speaker 3You don't want to give up that ownership to someone else, like the bank. You know, like you just worked all that time to sit there and do that Like you don't want to, you don't want to reverse that and take that back it's, it's only going to hurt you in the long run. Um, so that's, that's very important. Okay, so next on the list is not saving enough. Um, and I think this is just like a general, this doesn't even have to do with retirement, but just like not saving enough, like everybody's. Like, oh, retirement savings, but like no, you actually just need savings, emergency savings.
Speaker 1Right Before you have retirement savings, you should have emergency.
Speaker 3Emergencies. Yeah, let's. Let's get that built up because something is going to happen. Um so a lack of saving leaves you vulnerable to emergencies and unplanned expenses which are going to happen. It's not even just like an. If it's going to happen, you want to have that reserve. So I researched that the average saving rate for US household in 2024 was 3.6%.
Speaker 1That's all they're saving Of their income. Yeah, about 3%. So I think the average person is making I mean educated person is probably around 45,000, which is crazy. Uh so that would be $1,300 a year. That's $112 a month.
Speaker 3That's crazy, yeah, that's crazy to think, and it's probably because they literally they're spending it on their coffee and their's been on their coffee and their subscriptions right exactly, and they don't have room to save because they're so, yeah, that that is a big it's very cliche, but it's very accurate three to six months of your expenses need to be yes need to be put in not your income but your expenses.
Speaker 1Whatever it's costing every month to live, three to six should be in yeah.
Speaker 3Do you have enough savings that if something crazy were to happen which happens, happens can you live off of your savings? I think that's very important. I'm working on mine right now, so I understand that it takes discipline to do it, but that's a very important rule. Okay, so not just saving, but not investing in retirement is another mistake that people are making. This is a big one, because I think a lot of people are so used to living in the here and now. They're like I'm just going to spend the money, social Security will take care of me. Later Something will come and take, or I'll save later. I'm young, I'm in my 20s, but it is so important, especially when it comes to retirement, the power of compound interest you need to start now.
Planning for Financial Success
Speaker 1Right, right when it comes to retirement, the power of compound interesting. You need to start now, right. Right now Well being that we work at a wealth management firm. Most people that meet with us are probably maxing out their 401k plans.
Speaker 1However, if you're listening for the next generation. You need to hound this home. Eliminate debt. Don't stay out of debt, especially student loans. Make sure that you have enough in savings but then tell your kids they need to be. It's hard to max out a 401k plan initially, but if they just put 10%, if you're in your early twenties. If you can just throw in 10%, you'll be fine.
Speaker 3Yeah, just start. Stay out of debt.
Speaker 1Put in 10%, you'll be fine and eventually, as your career progresses, you can start maxing out.
Speaker 3Exactly. I was interested to know like a statistic on this and I looked it up and it was like 16% of Americans don't have retirement savings at all, yeah, and then 39% don't have like the accounts, they don't have a 401k, they don't have an IRA.
Speaker 1And the average baby boomer has like $200,000 in total net worth. There's a lot of people out there that are living only on social security eventually, which is crazy to think about. It is.
Speaker 3Yeah, and yeah, it's. Just go ahead and start now. Put in the employer match, like, do something, just start putting in the 10%, like you said. Um, it's never too late, just go ahead and start. Um okay, paying off debt with the retirement savings that you do have. Let's talk about that. Um, using retirement funds to pay debts can jeopardize your finance or your future financial security. That is so true.
Speaker 1If you so how you would do this?
Speaker 1normally is you do a 401k loan you're paying interest to yourself, so it's kind of like an interest-free loan somewhat to pay off the debt. The problem I have with that is typically how you got into debt is because you didn't have good spending habits and therefore you realize that you do this to mask the problem. You look down, it's a false sense of security. You have a loan now it's just a loan over here and the 401k loan for people that are maybe use that to buy a property or something like that. I can kind of justify it Cause, like well, it's invested in real estate, it's growing, yeah, and it can still grow. You can sell the real estate, you could pay off the loan, but, um, to use it to eliminate debt can be, can be. You do it one time.
Speaker 3Yeah.
Speaker 1And if you get into debt again, then you're now, you're just double.
Speaker 3Yeah, double where you were. Exactly.
Speaker 1It's the same with the home equity line is you can only do that so often, right? Yeah. So, yeah, typically we don't want to disrupt the retirement, but if we need a complete reset, I'll do it. I'll tell a client okay, we're, we're going to do a hard reset. It's not going to cost you a fortune in taxes, but we have to reset everything.
Speaker 3Yeah, and then we're going to build from build from, and sometimes that is what you have to do. It just depends on you. Know each scenario.
Speaker 1I mean if you're, if you're, if you're under the age of 59 and a half which in our this is podcast, is more for younger going to lose your income tax rate. So if you're in a 24% tax bracket, you're gonna get taxed at 24%. State gets taxed at five for pulling up money of a retirement account. Plus, if you're under 59 and a half, you're paid additional 10% penalty so you're looking at a very high percentage of that money that you won't be able to actually touch and it's not working for you anymore.
Speaker 3It's actually working against you now Right. People are like oh, I'm just paying myself back. But like, whenever you're like contributing to the 401k now, it's like not going into the market. It's actually just going towards paying off that loan.
Speaker 1Correct.
Speaker 3Um, so it's just all about your mindset and realizing the reality of actually doing that. Okay, finally, this is the most important one Drum roll. Drum roll, literally not having a financial plan.
Speaker 1Yeah, so most Americans don't have financial plans. Yeah, and I'd say most of the people who have financial plans don't actually have financial plans because, they're, they're not. They're not comprehensive plans. It might be focused on one or two segments. Whatever that advisor selling is probably what they focused on. Um, but having a financial plan that has a debt elimination plan has a cash uh goal. That that's always every plan right. Um has retirement planning, which I think is what most people who have plans have done to have, just haven't done anything else around that. Yeah.
Speaker 1But retirement planning will tell you hey, based on what I'm saving today, this is what my future looks like at retirement. It sets the expectations. Am I working until 60, 65 or 70?
Speaker 3Right and what you need to do.
Speaker 1Exactly, and then how you need to allocate your money amongst that. And then there's also other ways. A joke is, there's more than one way to lose money. It's not just a stock market. So that comes with insurance and estate planning. Making sure that we have all our safeguards in place to protect our assets, and then how we pass those assets to the next generation is somewhere to happen to us prematurely. Yeah, those are. That's all part of the planning process. Obviously, we do all that here at Wiser, but for our clients who have gone through this, they have the confidence that they know they're doing what they're supposed to with every dollar that they get.
Speaker 3Exactly Like money is purposeful. Therefore, you need to make it have a purpose in your life. You know like you need to put it to work. You don't just need to, like, sit there and spend on the subscription, spend on the coffee. Like you need to put it to work so that it benefits you later. Yep.
Speaker 1And having a clear plan is super important. I tell people all the time. Some people think the word budget and they think, oh, I can't do these things. But actually just budget should mean the description should be every dollar has a purpose. So it could be that you have purposed Starbucks every morning, you have purposed every subscription possible, but before you got to that line item, you are maxing out your 401k.
Speaker 3Yeah, you're doing the necessary steps. You've done all the other things.
Speaker 1Right, it's okay.
Speaker 3And then with the leftover money after you've saved and paid all your expenses Absolutely. Okay, let's have fun with the money.
Speaker 1Dave Ramsey has the whole cash bucket thing and you walk around with paid cash for everything. That's great for people who are like on financial triage where they're about to die. Yeah.
Speaker 3They have to do that.
Speaker 1They need to do that to get disciplined, but I think for most people at least people listening to this podcast I think the best budget is always pay yourself first. What do you have to do now to protect yourself in the short term and long term. How much should you be putting away After that? Everything becomes what I call opportunity money. So opportunity money is for the second home. Someday it's for the big family vacation.
Speaker 1It may just be for more tax efficiency and retirement. It could be for many, many different things, but the point is that opportunity money is not counted toward retirement and I said I think that's what we're really good at with our clients is helping them direct that opportunity money the wealth that's been created outside of what they need in retirement. That's the benefit of a plan. Thank you, grace, that was not bad. First podcast Okay, we're good. Thank you, grace, yeah, that was not bad. First, podcast.
Speaker 3Okay, we're good. Glad it wasn't bad.
Speaker 1That was a very good first podcast. Thanks for listening to today's episode. If you're interested in learning more about Wiser Wealth Management or want to schedule a consultation, meet with one of our fiduciary financial advisors. You can do so by going to wiserinvestorcom. You can also click on the link in the episode notes. Don't forget we have a YouTube channel as well. It's called A Wiser Retirement also, and you can watch this live and see Grace's beautiful smile and see how smart she looks today. Have a great week everybody.
Speaker 4We'll see you next time. Thanks for listening to A Wiser Retirement podcast. We hope you enjoyed today's episode. Make sure to subscribe wherever you're listening. That way you don't miss any new episodes. We'd also appreciate if you could leave a rating and review. If you have any questions about anything that was discussed today, head to wiserinvestorcom and reach out.
Speaker 4This episode was produced by Rachel Dotson. This podcast is strictly for informational purposes only and is not to be considered as investment advice or solicitation to buy or sell any financial products, securities, digital assets or any other investment vehicles, or a basis to make any financial decisions. Wiser Wealth Management Incorporated is a registered investor advisor with the SEC. The host and or guests may personally own securities, digital assets or other investment vehicles mentioned on this podcast. Neither the host nor guests of the show are compensated for their participation and no referral fees are paid to or received by any host or guest for clients, listeners or similar interests. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor, tax professional, insurance professional and or legal professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.