Well, when faced with all these financial planning questions, it is easy to lose sight of the big picture.  Sometimes, the little decisions can make all the difference.  Here is a list of financial decisions we believe could have the most adverse impact on a person’s ability to build wealth.

1. Failing to begin saving at an early age

Consider the following example: 

Smart Saver begins saving $3,000 per year at age 20 and continues saving at this rate only until age 30 when he stops saving completely.  At age 60, Smart Saver’s $30,000 of contributions has grown to $472,000 assuming an 8% annualized rate of return. 

Late Saver begins saving $3,000 per year at age 30 and continues until he is 60 years old ($90,000 of contributions).  At age 60, Late Saver has amassed only $362,000 assuming an 8% rate of return.

Not only is Smart Saver’s account worth $110,000 more than Late Saver, he has also contributed $60,000 less (a net difference of $170,000)!  Saving early is a significant factor in accumulating wealth.

2. Missing out on the 401(k) company match

There are very few financial lay-ups, but this is one!  In many cases, by contributing 3% to your 401(k) plan your employer will match your contribution dollar for dollar.  The employer match equates to a 100% rate of return on your contribution.  A 100% rate of return from any investment is unheard of – take advantage of the employer match.

3. Buying cars

It is a common fact that cars are depreciating assets - in order to accumulate wealth, there needs to be an emphasis on contributing to “working capital,” not depreciating assets.  Every dollar you spend on automobile expenses (maintenance, insurance, property taxes and car payments) is taking away from your savings – money that could be working for you.

4. Choosing a child’s education over your retirement

It’s relatively easy for a student to obtain college loans at reasonable interest rates (that are tax deductible).  However, no one has ever secured a loan to cover retirement expenses.  Save for your retirement first and then work on an education savings strategy.

5. Using life insurance as an investment

Life insurance is not an investment, it’s insurance!  The purpose of life insurance is to protect your family from the negative financial impact of a breadwinner’s death.  The need to carry life insurance decreases as asset levels increase and children become independent.  Universal life (UL) and variable universal life (VUL) insurance policies should be avoided.  There are no exceptions to this rule.

6. Changing jobs

Of course, there are times and reasons to change jobs and careers.  However, there may be more costs involved than you realize.  There are many factors to consider including the loss of unvested 401k balances, differences in fringe benefits, and the wait period on retirement plan eligibility.  Be careful to consider the hidden costs when changing jobs.

7. Taking a 401(k) distribution prior to age 59 ½

With some exceptions, taking a distribution from a 401(k) plan or IRA prior to turning 59 ½ years old is a huge mistake.  Not only will you be prematurely taxed on the amount of your withdrawal, you will also incur significant penalties levied by the IRS.  In most cases, taxes and penalties will consume nearly 50% of your withdrawal from retirement plans.  That’s right, taking a $5,000 distribution will cost you nearly $2,500 in taxes and penalties (not to mention the future growth and tax deferral of the withdrawal) – ouch.

8. Not seeking qualified financial guidance

Even for the most ardent do-it-your-selfer, there are times when qualified financial advice will pay for itself many times over.  With a changing tax and financial landscape, it is impossible for the average person to make the most efficient capital allocation decisions.

Via:Nathan Hymiller of Beacon Financial Strategies

PAYMENT – The first doctors were travelling medicine men who sold magical elixirs out of the back of a wagon.  The first dentists were barbers.  The first financial planners were life insurance agents and stock brokers.  Like doctors, dentists and lawyers, we believe professional financial planners should be paid for their expertise and their services, not for the financial products they sell.  They should be paid by so they are loyal to you, and not to the insurance or investment company by whom they are employed.

PROCESS – You would expect the doctor to ask questions and perhaps conduct tests to determine the cause of your headaches.  After the diagnosis, you would expect a plan of treatment.  You would expect the recommendations to depend on the diagnosis and range from stress management to chemotherapy.  In the 21^st century, you should expect the same kind of professional standards for treating your financial issues.  The Certified Financial Planner® Board of Standards has defined a six-step process for giving financial and investment advice.

The 6-step process for creating your financial plan is similar to the process for creating a medical plan of treatment for your headache.  Dispensing investment or financial advice without a process and plan is like writing a prescription without a diagnosis and plan of treatment.

Here is the Six Step Process as defined by the CFP® Board of Standards:

 Here are the typical events which trigger portfolio re-balancing of a passively managed portfolio:

1. Implementation of asset allocation recommendations from the financial plan
2. Re-balancing at annual review
3. Re-balancing required by cash infusion from such events such as:
   • Annual IRA or Roth IRA contribution
   • Rollover from a 401k, pension, IRA, etc.
   • Conversion to a Roth IRA
   • Transfer/consolidation from other accounts (savings, brokerage, etc.)
   • Gift or inheritance
   • Liquidation of cash value life insurance
   • Equity pulled out of home from a refinance
   • Sale of home
   • Etc.
4. Re-balancing required by cash withdrawal from such events such as:
   • Emergency
   • Major purchase (auto, new home, etc.)
   • Retirement
   • Unemployment
   • Child begins college
   • Wedding

Once you invest money into the 401(K), the employer dictates what kinds of investments your money is put into. Moving your money upon leaving gives you the opportunity to decide what types of investments you want to place your money into. When money is invested with a company, it is important for a company to invest your money to make sure the company benefits; your benefiting may be secondary.

The economy has taken a treacherous turn and it is not guaranteed your money is placed in the best places for growth. If you roll your money over you have a chance to place your money in a situation where you have more control. Leaving an employer you may have needed to draw money off of your 401(K) or you may have money coming into this account and you want all of this money accounted for before you make a 401 (K) rollover. You do not want to incur any taxes or penalties which can prove to be very expensive.

A rollover is by far the easiest way to place yourself in a position to get into an investment situation you might normally not have the money for. You will not have to pay any outside expenditures, all you will need to do is fill out the proper paperwork and have your money transferred.

Once you take the steps to fill out the paperwork and the money has been mailed to you be sure you go ahead and get your account funded. You do not want the government deciding you are keeping the money and taking penalty action which can take quite a bite out of your wallet. If you fund your account within 60 days this money can be reclaimed but it is a tedious process and you will have lost the earnings on the funds.

It is wise to do a direct rollover and to place your 401(K) in a separate IRA this way your 401 (K) will not become tainted by taxed money. The money will still be in a tax deferred account and you can decide what fund you want to invest in without losing a large portion of your investment to penalties.

In these economic times it is extremely important to keep a close watch on your finances. With the rate of layoffs and people being terminated from their place of employment it is important to understand the options you have for taking care of your 401(K). It is indeed your money, but you will need to follow up to make sure your money is place where you want it to be. The procedure can be held up by a glitch in the paperwork, staying informed of the final outcome is very important to your financial health.