Yahoo Movies 7 Mistakes To Avoid If You’re Trying To Build Long-Term Wealth
If you want to stop living paycheck-to-paycheck, retire comfortably or have a legacy to pass on to your children, there’s no get-rich-quick scheme that can guarantee you reach your goal. Instead, building long-term wealth takes a lot of patience and planning, and it’s important to know these common mistakes to avoid.
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1. Not Having an Emergency Fund
When focusing on building long-term wealth, it’s easy to neglect cash reserves, said Nick Vail, a CFP with Integrity Wealth Advisors. However, failing to build an emergency fund can hurt you in the long run. “It’s like going out and investing in expensive windows and kitchen upgrades while you have cracks in your home’s foundation,” Vail said. “Without proper cash reserves, you’re likely to tap into the wealth you’re trying to build when you’re in a pinch, slowing down your progress.” So before you get too far along in your investing plan, be sure to get your basics taken care of first.
Related: 23 Tips To Build Your Emergency Savings
2. Ignoring the Power of Compound Interest
Saving money is great, but to really grow your wealth over time, it’s necessary to invest. In fact, money invested wisely will generally double every seven to 10 years thanks to compound returns, according to Scott Alan Turner, a CFP and consumer advocate.
“The problem is at the beginning, it’s pitifully slow,” he said. That’s because it takes just as long for $50 to double to $100 as it does $500,000 to $1,000,000. But Turner noted, you can’t get to $1,000,000 without first saving $50. “Patience grows wealth.”
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3. Waiting Until You Make More Money To Start
It can be hard to set aside money for far-off goals such as retirement. Plus, many people inflate their lifestyle as their income grows. So it can be tempting to keep putting off investing until you have an even higher salary. “Bigger apartments, nicer cars, eating out at better restaurants — people never seem to make enough because they consistently blow it year after year,” Turner said.
To build real wealth, it’s important to start saving early and often so you can take advantage of those compound returns. “You have to set aside something every paycheck,” Turner added.
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4. Trying To Time the Market
Making investment decisions based on what you predict will happen is almost always a losing proposition. Even the savviest investors can’t guess what the market will do in the future. “Instead, people should invest in a low-fee, diversified equity index fund and continue to invest consistently whether the market is up, down or sideways,” said Robert R. Johnson, a CFA and professor with the Heider College of Business at Creighton University.
Dollar-cost averaging can also be a helpful strategy, which involves investing a set amount of money at regular intervals, regardless of what the market is doing. “For the vast majority of investors, the ‘KISS’ mantra should guide their investment philosophy,” Johnson added. In case you don’t know, that means keep it simple!
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5. Failing to Diversify
Too often, people have an overly concentrated portfolio, Johnson said. For example, you might have a large portion invested in your company’s stock or stocks of companies you personally like. However, failing to spread your money across many different asset types can cause you to lose quite a bit of money if one fund drops significantly. “Investing in a broadly diversified basket of securities is a prudent strategy,” Johnson said.
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6. Holding On to Losers
Johnson said that some investors believe the mistaken adage that “a loss isn’t a loss until you realize it.” So, they hold on to losing positions by telling themselves they will sell once they break even. “The phenomenon of loss aversion leads to what many described as the ‘disposition effect,’ which is the tendency of investors to sell winners and hold on to losers,” he explained. But this effect tends to accelerate tax bills and defer tax credits, which is the opposite of what you want. So if you have an investment that’s dragging down your returns over time, don’t be afraid to sell. “Even the world’s most successful investors have their fair share of disappointments,” Johnson said.
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7. Listening to the ‘Gurus’ for Advice
People such as Suze Orman, Robert Kiyosaki and Dave Ramsey have all shared solid tips for growing wealth. But it’s important to understand that every person is different, and one-size-fits-all financial advice isn’t always beneficial or applicable. Plus, “not a single personal finance guru got rich following their own advice,” Turner said. “They got rich selling products and convincing people that their system was the path to wealth.”
So take this type of advice with a grain of salt, and seek a well-rounded point of view from many sources when it comes to managing your money.
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This article originally appeared on GOBankingRates.com: 7 Mistakes To Avoid If You’re Trying To Build Long-Term Wealth
