As an individual begins to accumulate wealth, one of the best things they can do for themselves is invest in a financial plan — one that is based on evidence, experience, and market knowledge. After all, you’ve worked hard to get where you are. Unfortunately, this is the point where many people get in the way of their own success.
Thomas Corley, author of "Rich Habits: The Daily Success Habits of Wealthy Individuals," emphasizes four major mistakes that will bar you from the wealthy future you’re envisioning. Much of his research boils down to removing our own fears and self-destructive tendencies from the equation. The research suggests that ego, emotion, ignorance, and stress are the drivers of some of the worst financial decisions people make.
This is where a fee-only financial advisor can bridge the gap. A tempered, third-party advisor effectively removes the threat of these four potential pitfalls — one of the unsung perks of partnering with a fee-only CFP® and fiduciary.
1. Letting Your Ego Drive Your Decisions
In the depression-era movie, Cinderella Man, the camera pans to a well put together Paul Giamatti character wearing a high-class fancy suit, but as he steps into his apartment, we see that it is barren, full of dust with nothing but a simple chair.
This is one example of how ego-based financial decisions can look. When we try to prop up the facade of wealth, the wealth we do have often pays the price. Whether it’s buying expensive items to create a perception of success, or thinking you have more knowledge than you actually do, the common denominator usually comes down to allowing external factors to impact your financial decisions. Automobiles, clothes, and jewelry tend to be the biggest culprits — Keeping up with the Joneses’ comes to mind.
The ego effect is also often why many people refuse to hire a professional. These individuals believe they don’t need an advisor because they understand their finances just fine on their own. Unfortunately, if this decision isn’t based on actual experience and comprehension, it can lead to serious consequences.
2. Adding Emotions into the Equation
We’re all guilty of emotional spending from time to time. For many people, a wealth advisor can be just enough of a safeguard, providing guardrails and accountability checks to deter rampant spending. The recommendations and advice you receive from your wealth advisor are removed from the passion and variables of your daily life; they are the emotionless, calculated suggestions of an experienced professional. Before you make that spur-of-the-moment purchase in reaction to how you’re feeling at the time, they can talk you through the pros and cons to make sure it makes sense long after that feeling is gone.
3. Operating Out of Ignorance — or Overthinking It
Most individuals are not market experts. And that plays a big role in making sound decisions. This concept is probably an obvious one at face value, but there are actually several facets to it. A good wealth advisor won’t get exasperated and just make a decision out of fear or impatience, for one.
For example, liquidating long-term investments during a downturn isn’t always the best move, but it’s not uncommon for people to reflexively make this decision when they don’t have a full understanding of how the market acts.
On the other hand, many people tend to overthink their choices, simply out of ignorance. Integrating market expertise into your finances is as much about stamina and stability as it is about experience and logic.
4. Making Decisions Out of Stress or Fear
This mistake goes hand in hand with our downturn example in #3. We’re talking about the type of high-level stress that forces a person into a corner where they make bad fiscal decisions. A wealth advisor can not only remove that sort of stress from the equation, but they will also take a good deal of general effort-based stress off of your shoulders. While we encourage everyone to know the state and functionality of their finances, the oversight of someone dedicated to making calculated, market-savvy decisions in your favor does act as a sort of relief valve for financial worries.
Afterall a great fee-only advisor has already worked with you to create a well crafted financial plan personalized just for such occasions.
Questions About Best Financial Practices in 2022?
From tax prep to home sales, there’s a whole lot of conflicting information out there. That’s why we provide a wealth of consolidated resources to guide you on your financial journey. Browse our article archives or access your dedicated resources as a K Wealth client. Your financial future is in your hands, and we’re here to support that in every way we can.
Building wealth is a long-term commitment, one we help folks develop strategies for every day. If you’re interested in learning more about the role of a wealth advisor in your corner, K Wealth Advisors can help put you on the right track today. We’re happy to schedule a GoodFit meeting to discuss your goals and options. #KWA