3 savings mistakes I see over and over as a financial planner

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  • As a financial planner, I help clients manage their money, and that includes saving for retirement, specific goals, and emergencies.
  • There are three mistakes I see most frequently, including not making saving a top priority, and not maintaining a balance between your different savings goals.
  • I also frequently see clients who aren’t saving enough, no matter their income level.
  • See Business Insider’s picks for the best high-yield savings accounts »

Making a commitment to a consistent savings plan is an integral part of accumulating wealth. Depending on the individual, there are varying attitudes toward saving money, and there are also some common mistakes.

Here are three savings mistakes I see over and over as a financial planner.

Not making savings the top priority

In many instances, clients might indicate that they are not able to save money for several reasons, which could include not enough income, high expense levels, etc. These reasons are valid, but I believe they can be overcome with a simple shift in mindset. 

Generally, individuals will mistakenly spend first and then try to save whatever money remains. To change this behavior, one should save first and then spend. I understand that this concept is easier said than done, but one way to do so is to think of the savings goal/amount as a “monthly bill” that has to be paid.

Not having a balance between emergency cash, money for specific goals, and retirement accounts

Savings amounts basically fall into three categories: emergency savings, goal-specific savings, and retirement savings. I recommend that my clients maintain a level of balance with their savings. Although individual client situations vary, each savings category can have a purpose in someone’s financial life.

Emergency savings

Emergency cash provides liquidity and generally has a zero- to two-year timeframe for use. This category can include checking/savings accounts, money market accounts, and certificates of deposit (CDs). Although these types of funds provide a low return on investment (ROI), they are essential in any solid financial plan and are in place to cover financial costs related to unexpected events (e.g. home/car repairs, loss of job). If one of these negative events occurs, having emergency cash means an individual can continue funding their retirement savings without having to use that cash. 

It is important to note, however, that maintaining too much liquidity is not optimal either. Let’s illustrate with an example. Eric is a teacher and hired Emily, who is a Certified Financial Planner. Given Eric’s job security via tenure at his school, Emily recommended that he maintain emergency cash that totaled only three months of living expenses ($15,000) and allocate any additional funds to other growth opportunities (e.g. investment account, real estate opportunity, etc.). Eric does not feel comfortable with the recommendation and decides to keep a cash amount of $60,000 instead. The opportunity cost of saving that much cash is the money he could have made on the excess $45,000 if he’d invested it.

Money for specific goals

Money allocated for specific goals provides clarity in an individual’s financial plan. Depending on a client’s risk tolerance and time horizon, my recommended vehicles for these types of funds can vary. Some goals include college tuition, wedding expenses, business opportunities, career change, and real estate (home/rental). The key characteristic that I note to clients about these funds is having complete control of the assets (versus retirement plans). You shouldn’t plan to draw on your retirement savings until you’ve reached retirement age.

Retirement savings

Retirement accounts are designed to fund an individual’s lifestyle and future spending after they are no longer earning working income. There are various types of vehicles to accomplish a client’s retirement goals and my recommendations depend on their specific circumstance. 

Some examples include IRAs, 401(k), 403(b), profit-sharing, and defined benefit plans (e.g. pension). These funds are designed for long-term planning and have the best ROI over time. 

Not saving enough

There are times when I see clients who have great intention and a desire to save, but might be uninformed on how much saving is “necessary” to reach their specific goals. I put the word necessary in quotes because there are many factors that go into determining this amount. 

Clients have varying target retirement ages, spending habits, charitable desires, etc., so each person’s individual savings plan will be unique. However, clients still should base their action on reasonable assumptions (e.g. ROI, inflation, and tax rates). 

No financial model or planning software will ever be perfect because we cannot predict the future and economic factors can change quickly, but it is important to have some type of guide about appropriate savings amounts. Generally, I recommend that my clients make a goal to save at least 20% of their income. As previously indicated, there is a constant changing of factors in our economy, so my advice is for individuals to focus on what they can control, which is how much and often they save.

Martin A. Scott, CFP, is the founder and financial planner of Lasting Wealth Principles.

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