Top 5 Worst Financial Decisions to Avoid for Financial Independence

Hunter Kelly, a certified financial planner, delves into the top five detrimental financial decisions that can significantly hinder one's financial journey, especially for high-income earners like physicians and attorneys. He discusses the pitfalls of living beyond your means, the importance of starting to invest early, the necessity of tax planning, having a proper estate plan, and protecting income and assets through insurance. Real-life examples and practical tips are shared to help listeners avoid these common mistakes and stay on the fast track to financial independence.

00:00 Introduction to Financial Pitfalls

01:35 The Danger of Living Beyond Your Means

06:34 The Cost of Delaying Investments

08:59 The Importance of Tax Planning

11:44 Why You Need an Estate Plan

14:01 Protecting Your Income and Assets

17:20 Conclusion and Final Thoughts

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Transcript

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And welcome back to retire early retire. Now I'm hunter Kelly, certified financial planner and owner of Palm valley wealth management. And today we're diving into the top five worst financial decisions that can set you back years or even decades on your financial journey. I've seen these mistakes firsthand in my practice. Uh, working with high income earners like physicians and attorneys, but the good news is that if you avoid these pitfalls, You'll be ahead of the curve on the fast track to financial independence. And so we're going to talk about those today. So listening to a podcast that I love listening to is called animal spirits. It's a run. Uh, by a YouTube channel called the compound. They also, uh, Brian and work with clients through an RA like mine. Uh, but they were talking, they talk a lot about the markets and things of that nature, and they got on the topic of credit card debt and how that can be a, one of the worst financial decisions that you can make is his wedding. Uh, those balances roll over to the next month, making minimum payments because the interest rates on those are crazy high. Um, sometimes 25 to 30%. Um, and so. It got me thinking, what are some more financial decisions that I see my clients make or prospective clients make, uh, that I can help them avoid and educate them on. Um, and so that's what we're going to jump into today. And talk about, but before we do that, go ahead and head to my YouTube channel, hunter, Kelly, CFP subscribe, and like this video. If you're listening to it on a podcast app, go ahead and leave a five star review. Uh, and share this with a friend. Well, let's go ahead and jump into number one. Number one. Uh, is one of the easiest things that you can control, but sometimes that is the hardest thing emotionally to control. And especially if you're making a fair amount of money. Uh, if you're one of those high income earners and that is living beyond your means. So it's not what you make. It's what you keep a high income earners often fall into the trap of lifestyle inflation or lifestyle creep. We've talked about this on previous podcasts. So go ahead and find that one. Uh, in your podcast app, but. Uh, I often see, uh, whether it be attorneys, when they make partner, they think they're going to make. A ton more money or whatever the case may be, or even, uh, physicians, when they go from residency to becoming an attending physician, they want to go buy those new fancy cars or, uh, extravagant house. Uh, go on all these trips and things of that nature. Um, and, and that money that they now started earning starts to dwindle away fairly quickly. Um, and so just because you make$500,000 a year, that doesn't mean you should spin.$500,000 a year, right? So there's a hidden danger in buying and financing, those luxury cars and the price of homes and vacations that we just mentioned. Right. And so we want to, uh, be mindful about what we're spending. Yes. Are you going to be able to spend a fair amount and live a very comfortable life? Yes. But there are limits to that. And it doesn't really matter how high your income is. Uh, you can always find ways to. To overspend. And so, uh, So what I have found, um, kind of a story that I worked with a client when I first got into, uh, working with clients and becoming a financial advisor, um, I just quit my teaching job. I had just got in, so I wasn't making much money. And I was meeting with whoever I would meet with. Uh, and somehow I came across. Uh, a pretty prominent, uh, position at a large insurance carrier. Uh, here in Florida and he's making very good money. Um, and I was. Floored on how much debt he had, how much he was spending and not saving. Right. It really opened my eyes to, um, wow. He's making north of$500,000 and he's not. Um, necessarily saving anything. And so, uh, it took a lot of, uh, Behavioral changes and working with him and meeting with him a bunch to get that. Uh, that habit changed and now he is. Is debt-free except for his mortgage. Um, no consumer debt, things of that nature and, uh, saving quite a bit of money each month now relative to his income. And so. Uh, this is where I really started to learn, um, and start to like the idea of reverse budgeting. Uh, reverse budgeting is what I find to be the most practical way to budget. Uh, for most people. Um, you listen to people like Dave Ramsey and they want you to track every dollar and things of that nature. It's very cumbersome. I think it can help some people, especially early on understanding what you're spending and where you can cut if you're spending too much out to eat or. Uh, certain types of subscriptions, things of that nature. Um, but once you kind of get through a month or two of that, Uh, it's like counting calories. You don't necessarily want to count calories your entire life. Uh, it can feel restricting and things of that nature. So that's where I really like the reverse budgeting or pay yourself first is what I like to call it. And that is a understanding, Hey, I have these priorities, whether that be retirement or taxes or, um, vacations and things that I want to make sure that I save for. And I put that money away and I, I work with clients to help them implement this as well. Put that money away first and then anything left over. At that point is extra money or money toward my fixed expenses, things of that nature. Right. And so we want to prioritize those fixed expenses, those savings, all of those things first, and then anything left over. Uh, we can spin with whatever we want. Right. And so what this does, it allows you to make sure that you were hitting those check marks. Uh, hitting those goals each month to reach whatever long-term goals. That you have for yourself, whether that be. Extravagant homes, cars, vacations, uh, helping kids with college, whatever that may be. Right. And so, uh, living beyond your means, I think is one of the easiest things to fix, but also can be one of the hardest things to fix because, uh, tailoring down your lifestyle, especially if you're a high income earner. Uh, if you're trying to keep up with the Jones's can be emotionally hard. Um, but, uh, you do have room. To make changes and you can start to accumulate wealth pretty quickly. Uh, the next thing is putting off investing. Uh, so. A lot of times. Uh, people just don't prioritize investing, uh, many professionals delay investing because, uh, they have more time or they think they're making a money that they can make it up later. And so, uh, the opportunity cost of waiting even five years, um, can be hundreds of thousands of dollars, depending on how much you're saving and what type of return you're getting things of that nature. Right. And so, uh, even if it's a very small amount start trying to put away in your Roth IRA or your 401k, getting your match, uh, maybe opening up a brokerage account and putting some amount of money away, investing that money for your particular need or want. And, uh, and yes, upfront, it may not look like. A lot of money, but a lot of times you just get into that habit and then each month or each, uh, twice a year, once a year, you add a little bit more to that monthly, uh, Contribution that you're making and you pick your head up in 10 years and you go, wow, that's, that's a significant amount of money. Right. And it's growing. And now the interest is kind of taking over where. I'm earning more interest than maybe I'm actually putting in each year. And things of that nature. So I'm investing 50 K at$30,000 in waiting or versus waiting until 40. Um, is going to make an in. A huge difference. Right? 10 years of compounding interests that you would not. Um, not have right. And so, uh, the first thing is really, again, if you have an employer match, go ahead and get that employer match. If you have debt and things of that nature that you're trying to pay off, that makes sense. But get that employer match. Nobody's going to give you a hundred percent return on your money. Uh, and so the only way to do that is to get it through the employer match. I mean, if you have things like debt and. And stuff like that, that you want to get paid off. That makes sense. But as soon as you can start investing now, because the best time to start investing is yesterday. The next best time is today. Right. And so. Um, Yes, don't put off investing. It's super important. And then number three. Uh, one of, one of the things I see a lot of high-income earners avoid, or just not know what they don't know. Is ignoring tax planning. Okay. Working with a CPA does not always guarantee that you're getting tax planning. They're not going to dive deep into your, um, tax return because they have thousands of tax returns that they're potentially doing or hundreds of tax returns that they're doing every. Uh, January to April and sometimes even going further, or if they have businesses and extensions and things of that nature. And so they're not diving deep into your situation. You need to work with somebody or you need to do the research to. Uh, do tax planning where now, when I look at my situation from a tax standpoint, how can I save money over a longterm versus just trying to find an extra deduction here or there? Um, so on and so forth. And so, um, it's not just about making money. It's about keeping uncle Sam from taking, uh, your fair share, right? Uh, if you ask anybody in America to tip the IRS, I would say the vast majority of them are going to say no 99.9%, because there's always one that went. And go against the grain. But most people are not going to tip the IRS. So let's find ways within the tax code. To keep as much money in your pocket as possible. So. What I find is high income earners often are overpaying in taxes. Not leveraging certain types of tax strategies, deductions. Uh, tax advantage accounts, um, income shifting strategies, things of that nature. And so, um, examples would be not maximizing like a backdoor Roth IRA contribution, Mac. A mega backdoor door Roth as well. I'm not taking the time to really, uh, analyze, should I be putting into pre-tax versus PO. Uh, Roth money in my 401k. Uh, things of that nature and all of those things, all of those decisions. Can add up to be. Uh, lots and lots of money over time. Right? And so. Um, Real life situation. If you can set yourself up properly. I mean, you can save over six figures in taxes each year. It's going to be. Your largest expense over your lifetime. I've said that multiple times on this podcast, just go look at what you're paying in taxes this year and look at all your other expenses. That's probably going to be your larger expense, uh, by a long shot. And so if we can do things to mitigate that particular expense on your line item each year, Uh, you're going to gain wealth much quicker. And so number four is not having a proper estate plan. Uh, I can't tell you how many times I meet with, uh, couples that have multiple children and have not even sat down to do anything. Uh, as far as the state planning, Um, and, and you're really putting your children at risk when you do that, you're putting your family at risk. When you do that, as far as, um, paying more taxes, more attorney fees. I'm not protecting your family right. And so, uh, at the very least, if you're married and you own. Uh, property. Uh, if you have a lot of, uh, assets and a lot, meaning if you have a 401k, if you have a real assets like cars and things of that nature, um, all these things have to go. Somewhere if you pass away. And so the way to make that happen most efficiently is to have some sort of plan in place to avoid probate, avoid court fees, family disputes, things of that nature. Right. And so getting a, will getting some sort of living trust or local trust. If you, especially, if you have young kids, Um, understanding your power of attorney and healthcare directives. Um, so that your spouse understands what your wishes are when you become, or if you become incapacitated or even further, maybe someone else, if you and your wife or husband, or. Just significant other. Both have, uh, an incident where you become incapacitated, right? Having proper, uh, beneficiary designations on your life insurance. This is something that is probably the most forgotten, uh, and could be the most headache in the worst, uh, worst times. Right? Um, the last thing you want is to have to deal with. Probate for 9, 10, 11 months after your spouse. Um, passes away. Right. And so having a proper estate plan can avoid a lot of this, if not all of this headache and avoid potentially lots of taxes and fees from the courts and attorneys. So. Uh, having a proper estate plan. Um, because, uh, It'll save your family a ton. And so number five. Uh, not protecting your income and your assets. So this kind of goes along with the estate plan. Uh, but really making sure that you're properly insured, especially if you're a high income earner, like a doctor or attorney. Um, having disability insurance is key to making sure that if you become injured, Uh, you're not going to lose all of your income and essentially, essentially. Kill your wealth, right? And so that, that would be one of the biggest killers of wealth is if something happens to you and there's no insurance. Uh, to guarantee to, to basically replace that income or those assets. Right. So a common mistakes that I see, especially with insurance is relying too heavily on your employer provided disability coverage. Uh, often it's somewhere between 40 and 60% of your income. And if you're a high income earner, you'll have to go out into the private market, um, and supplement with that and having the right definitions for your disability insurance. Um, so whether it be own occupation, things of that nature. Um, especially if you're a surgeon. Uh, so if you need your hands for surgery, Uh, if you go out and you break your hand. Uh, maybe in a car crash or what have you. Um, and now you can't perform surgery. Uh, well, how are you going to make up that income? And so there's certain, uh, insurance policies within disability insurance that would cover you. Uh, for some amount of, uh, benefit if that were to happen, right. And so not having a personal umbrella policy. So as you gain wealth, What a, what an umbrella policy will do is cover, uh, Anything above what your normal property and casualty insurance would not up to whatever limit that you purchased. Right? So if your car insurance only covers$500,000 of liability on the other party, Well, now, if you, oh, if you're liable for a million and you have this umbrella coverage, well, the in the car insurance would cover up to that 500,000 and then the umbrella policy would kick in. Um, and cover the next 500,000 so that you would not be personally liable for that. So, um, the umbrella policy is super inexpensive relative to what you think it would cost. So have you bundled this with the current carriers that you have? You're talking a few hundred dollars for a. Hundreds of thousand dollars of coverage. Uh, that would protect you from having to potentially pay out. Uh, that amount, if for whatever reason you got into a situation where you were liable for an amount above. Uh, while your insurance company would cover. Um, And then reassessing life insurance policies each year. Uh, just making sure that you have enough life insurance policy to our life insurance benefit to. Uh, keep your family whole. As far as financially, obviously they would. Um, it's not an easy situation to lose a spouse and parents and things of that nature. Um, but the last thing you want them to be worried about is how they're going to pay their bills. Um, and so making sure that your, um, Uh, reassessing that every year. And so. This is, uh, the five things, the five killers of wealth. If you will, I've done a podcast on that as well. Um, but these are some five mistakes that I see commonly, uh, that people make. And I want them to avoid, because if you can avoid these things, Uh, like living beyond your means avoiding or ignoring tax planning. Putting off investing, uh, meeting with an attorney to get a proper estate plan and protecting your assets. You can do those five things a year on. You you're over and above the vast majority of high income earners. Uh, and in your beat, you'll be on the fast track to, to building wealth and meeting those goals. So, um, like I said, Go ahead and share this with a friend. Uh, this is not necessarily the prettiest podcast. It's not the most rosy and Daisy, but it is good information to help you keep building that wealth and avoid those pitfalls. So subscribe to my YouTube channel, hunter, Kelly CFP. Uh, and linear review on your favorite podcasting app. And we'll see you in the next one.