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  • Writer's pictureHolzberg Wealth Management

6 Mistakes Young Professionals Make With Their Money

Biggest Mistakes Young Professionals Make With Their Money

It is common to believe that wealthier individuals are automatically better with money than the average person or somehow have unlocked financial expertise that propels them to greater riches. Often, this could not be further from the truth. Just because someone has a high salary or net worth does not mean they are immune from making the same financial mistakes as everyone else. Here are six common mistakes we see young professionals make that you can easily avoid to help you build wealth for the long term.

Overcomplicating Your Finances

There is a misconception that many people believe that building substantial wealth means making your finances more and more complex. Often, this can be the farthest thing from the truth. To be fair, for certain ultra-high net worth individuals, complicated estate, income tax, and investment planning strategies are implemented for those who meet those qualifications. But those strategies are built on top of existing fundamental financial planning principles that apply to everyone. We often see that as people start making more money or receive large inheritances, they want to take big risks with their money – maybe they want to invest in something without fully understanding the risks involved, or chase a short-term trend, or make overly aggressive money moves into illiquid investments, or they take on too much debt.

We frequently see that these individuals lack the basic building blocks of financial wellness. Often, the best strategy is to keep it simple and go back to the basics.

Misunderstanding Your Risk Tolerance

One of the first items we address with new clients is the importance of understanding risk. We have a process for discerning, as objectively as we can, your capacity to take on risk and see where it aligns with your risk preference. We often find that new clients' preferences for risk are unaligned with their capacity. As your wealth builds, it is very common to gravitate towards either end of the risk spectrum. In other words, individuals commonly believe they are fundamentally risk-averse or, alternatively, want to take on too much unneeded risk.

Once you have a good grasp on your risk tolerance, the next step is to diversify your investments to get (or stay) on track for your fundamental goals: retirement, kids' education, family planning, etc. Once that is in place, you can take on added risk with additional money. However, you do not necessarily have to do this to get wealthier or for your fear of missing out.

Think of your investments as a pyramid – at the base is a foundation of well-diversified stocks and bonds based on your risk level, and at the top is a small allocation to riskier investments should you so choose and so long as it aligns with your risk preferences. However, it is important to remember that certain investments may not be worth the additional risk.

Living At or Above Your Means For Too Long

Typically, expenses rise to meet your income, and inflating your lifestyle too quickly can be costly. What often happens is that when individuals receive a higher income – maybe they just earned a promotion or bonus, or they finished graduate school and landed a great job – they start overspending immediately. This could leave you financially overburned by living above your means, especially if you locked yourself into high recurring expenses such as a mortgage or car payment you could not sustainably afford.

It is a good idea to ease yourself into a more expensive lifestyle by getting used to having the extra income and slowly adjusting. As your income grows, so should your savings rate. Saving more is always better to give yourself a bigger safety cushion and further advance towards achieving your long-term goals.

Putting Off Long-Term Life Planning

Planning for years or even decades down the road can be difficult, especially when you are young. It is easy to delay making decisions or preparing for something when you feel you have plenty of time before you need to start thinking about it. This can result in deferring decision-making to a point where achieving your goals becomes more difficult than had you started planning sooner. This can include:

  • Not setting aside enough money for your goals, such as saving for retirement,

  • Not having an emergency fund as a safety net for a rainy day,

  • Not protecting yourself, your assets, and your financial goals by having inadequate insurance coverage (including health, life, homeowners, disability, umbrella, auto, etc.),

  • Not performing proper estate planning or updating outdated plans. We wrote an article about the three essential estate documents everyone should have to discuss this topic further.

These topics are crucial for everyone to consider. We have seen plenty of individuals with high net worths who still have not taken care of these basic needs. Without question, it can be challenging to think these topics through, and once you have made your decisions, it can take time to implement your wishes. It is important to remember these pieces of your overall financial well-being to protect the life you have built for yourself and your family.

Not Diversifying Your Assets and Being Overconcentrated

This often goes hand in hand with complexity and can lead to an illiquidity issue. Some individuals with high incomes start investing heavily in things like real estate, private placements, collectibles, commodities, alternative investments, etc., all of which can be very illiquid. Moreover, someone may participate in an employer stock purchase plan and, after a while, not realize that a substantial amount of their net worth is tied up in company stock.

More often than not, new clients with this issue come to us stressed and anxious about their lack of liquidity or overconcentration of wealth. While these investments are not all bad in and of themselves, it is vital to look at them as part of your overall wealth while maintaining liquidity for the inevitable tough times in life. It is worthwhile to figure out if there is a way to move towards a more balanced and flexible portfolio systematically. In addition, it is often worth exploring strategies to protect those investments.

Thinking You Can Do It All On Your Own

Lots of young professionals manage their finances on their own for various reasons – perhaps you prefer a do-it-yourself approach, perhaps you think financial advisors are too expensive or you would not meet asset minimums to be considered a client, or perhaps you do not see the value of bringing in professional help. Your time is precious, and you should focus on where it is best spent. Moreover, understanding that certain financial decisions can be intimidating and may not be your area of expertise affords you the opportunity to allow a professional to alleviate some stress you may be feeling. Bringing in professional help and receiving that invaluable second opinion means you are not in it alone and can ensure you are getting on (and staying on) track by looking at your situation through an objective lens. Finding a fee-only financial planner who is a fiduciary can give you the support you need by acting as a personal CFO who is always in your corner.

If you are a young professional and need a financial planner, check us out! You can schedule a complimentary, no-obligation call with us here.

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About the Author

Holzberg Wealth Management is a family-owned and operated financial planning and investment management firm based in Marin County, CA. As your financial advisors, we serve you as a fiduciary and are fee-only, so we never receive commissions of any kind. We help individuals and families like you in the greater San Francisco Bay Area and virtually nationwide with the financial decision-making process to organize, grow, and protect your assets.

** This writing is for informational purposes only. The author and Holzberg Wealth Management do not guarantee or otherwise promise any results that may be obtained from using this report. No reader should make any investment decision without first consulting their financial advisor and conducting their own research and due diligence. These commentaries, analyses, opinions, and recommendations represent the personal and subjective views of the author and do not constitute a recommendation, offer, or solicitation to make any securities transaction. The information provided in this report is obtained from sources that the author believes to be reliable. External links to third parties are being provided for informational purposes only. Holzberg Wealth Management is not affiliated with the third-party websites linked to, unless otherwise explicitly stated, and does not constitute an endorsement or approval by Holzberg Wealth Management of any of the third party’s products, services, or opinions.


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