Richard Little, CEO of Serenity Wealth Management, on Common Mistakes Young High-Earning People Make (And How to Fix Them)

CHICAGO, IL / ACCESSWIRE / June 9, 2021 / It’s not news that many people struggle with financial literacy. Many Americans don’t save enough for retirement and 35% of Americans don’t have retirement savings set aside at all.

Many people grow up without the proper knowledge concerning long-term investing, saving, and building good credit. This is true of the younger generation as well. As the next wave of wealth has now spent a decade in the workforce or more, they are faced with the same issues as the generation before them but with a few additional challenges, including a lack of proper financial literacy education amongst them. Education is essential to building long term sustainable wealth.

This impact on HENRY’s (High Earners but Not Rich Yet) is even more severe.

A huge part of becoming a responsible and financially secure adult is to stay on top of your finances and invest in your future. Proper knowledge paired with consistent action can help reduce the stress of adulthood and make it much more enjoyable.

Here are 5 common financial mistakes young adults make (and how to fix them):

1. Student Loan Debt

You’re newly out of college and realize just how much money it cost you. Now it’s time to pay it back. However, most students find that their first job won’t cover all of their bills.

It is common for recent graduates to come out of college choosing the income-based plan to pay off their student loan debt since it is a great way to lower their current expenses. The assumption is that the calculation is composed in the debtors favor to eventually pay-off the debt.

This is not the case!

This income-based plan is meant to collect as much of the new graduate’s income as allowed. It is not correlated with a payoff schedule and often results in having more debt than when they graduated.

The income-based option should only be used if the graduate truly can not afford the full payments. If this option is chosen the graduate should add at least $50-$100 dollars to each monthly payment. This will help offset the negative impact of this option.

Be sure to run the numbers. There are plenty of free online calculators, but no matter what the lender comes back with, be sure that your payments are paying your interest so that your balance does not increase and eventually balloon.

In addition, recent graduates will try to use the Forgiveness Plan not realizing it only applies to federal loans, not private loans. Therefore, they’ll be responsible for repaying the remaining balance.

Those looking to use the Forgiveness Plan are also sometimes unaware that in most cases the amount forgiven is considered a ‘taxable event’. This means that although the total amount of the loans may be forgiven, that amount is then taxed as income by the IRS and the debt is now with the IRS.

2. Hoarding Cash

For the HENRY’s (High Earners but Not Rich Yet) out there and those that are just good at saving, it is common when you first start earning significantly more than you are used to to do one of two things…hoard it or spend it.

You should never just leave your cash in your checking or savings account. Instead, you should invest regularly. Whether it’s bi-weekly or once a month, it’s better to get into the habit of investing on a schedule.

This can happen because of several reasons. Either you are not sure what to do with this much money, you feel you need to have a certain amount in cash, or the most common reason, you are too busy making money to think about what to do with the money you already have. What happens is either it gets spent and is now gone or you build up more and more cash and then when you are ready and have the time to invest you end up putting it all into the market at one time. The risk here is timing. If it happens to be a bad day to buy you’ve lost, if the market has gone up while you saved your cash you’ve lost, so you need to average it from the start.

Here’s the hard truth: it’s hard to become rich, but it’s easy to stay rich. Why is this? Because your income is taxed, your investments are generally not. This depends on your taxable income. This is why it benefits you to invest your money instead of letting it sit. Because your (active) income is taxed at some of the highest rates out there, but investments (passive income) are taxed at some of the lower rates available, by using your cash to invest and increasing your overall income, you may actually lower your effective tax bracket.

Investing your cash is not just about earning, it’s about compound interest and it’s about creating wealth with tax advantages in mind.

Let’s break this down: If you invest $2,000 a month averaging 8% a year, you would have $2,718,797 in 30 years. If you waited 1 year to start and invested for those remaining 29 years you would only have $2,495,182. That 1 year of hoarding $24,000 would cost you $223,615 dollars! Two years would cost you nearly half a million. You could be investing monthly and allow your money to grow overtime instead of letting it sit in your checking account or savings account and missing out.

Unsure how much cash is too much? Register for access to this financial literacy course and exercises here and use the emergency fund calculator or the budget tool to see where you are spending your money and how to potentially save more.

You may think, ‘I thought financial advisors were only for the rich.’ In actuality financial advisors should make you rich.

It is much better to seek help early on than to wait. Fixing basic mistakes while you’re young can save or make you millions over your lifetime. If you are not sure if it is time to speak with an advisor, then it probably is. Look for an advisor who enjoys working with younger clients and is ready to do the hard work of growing your wealth with you.

Look for an advisor who will work with you over the course of your career. Working with clients who are working themselves is much more difficult due to constantly changing circumstances, significant tax implications that need to be taken into account, and between work and family time constraints can be detrimental. Find an advisor who is used to working with clients like that to make sure you’re following your plan, but more importantly, that you have someone who will take care of your money for you when life gets in the way.

3. Avoiding Good Debt and Not Bad Debt

Debt comes in many forms. Many people prioritize paying their student loans and not their credit card debt. This is important because while it’s the balance most people focus on, it’s more important to focus on the effective after-tax annual interest rate of that debt.

It’s common to pay more attention to larger numbers. It’s why products are always listed at 99 cents and not the next dollar up. It’s the same concept; the higher the number the more intimidating it becomes.

Why this is important is that when paying down debt it’s common to focus on the wrong number; the balance. Where you should always focus is the effective after tax annual interest rate of your debt.

This sounds more complex than it is.

Your first step should be organizing your debt by the highest rate to the lowest. Next, find out which rates are tax deductible, such as mortgage or student loans. That will tell you where to focus your repayment efforts. It’s not about the balance, it’s about finding out where each dollar you have can do the most good. Typically you should focus on credit cards first because they will carry the highest interest rates and should be paid down to zero before investing. Then any other high interest debt. Then based on your cash flow you can start to look at a blend of investing and paying-off other debts such as your highest interest student loans. Pay-off your mortgage last because those rates are not only typically the lowest, but they are also one of the few tax deductions left.

If you need help organizing and calculating your debt payoff plan use Richard’s free tool. Register and use the Fast Path to Financial Freedom course to find out how to structure your debt and see how quickly you will be able to pay it off.

4. Diversifying Incorrectly

People often think they have diversified portfolios when in reality they may not. For example, if you Invest in 20 different technology companies you are not diversified, you just own a lot of tech stocks. There are dozens of asset classes and sub asset classes that you can invest in. Proper diversification means owning some portion of all or most of these. The reason why this can be so detrimental to investors is because advisors will often hear, “I don’t like investing. I invested in the past and lost money when it seemed like everyone else was making it.” It almost always traces back to them owning a lot of one specific sector that just did not do well. Such experiences can create a false sense of skepticism about investing that can then delay investing longer or cause them to invest less over their lifetime because they don’t see the value.

Diversification of an investment portfolio is about spreading your investments so your exposure to any type of asset is limited. This practice balances risks and rewards in your investment portfolio.

5. Not Using a Roth IRA

A Roth IRA is one of the best ways that young people can start saving for retirement. Don’t assume you make too much to use a Roth IRA, you may be wrong. There are creative ways to be able to fund the Roth IRA’s regardless of income.

There are several benefits of opening and investing with a Roth IRA.

Roth IRAs may not get the same tax break that traditional IRAs do, but they do grow tax-free. Which means tax-free income in retirement.

If you believe you make too much to contribute you may want to look into a Back-Door Roth IRA. Be aware that there are some rules that go along with it that you must follow when using a Backdoor Roth IRA. Work with an advisor to make sure you adhere to all of these rules because if you don’t, not only will you have to take it back out you may be hit with additional penalties.

The annual contribution limit for the Roth IRA is $6,000. Avoid leaving money sitting in your account. You’ll want to create a diversified investment portfolio using Mutual Funds and Exchange traded funds to make your money grow.

Secure Your Future With Serenity Wealth Management

CEO Richard Little, CFP®, started investing at 11 years old. He learned about the stock market from his grandfather who bought a couple of shares of Coca-Cola for him. His grandfather told him every coke someone buys Richard would get a penny. Despite the math being a bit wrong there, this inspired Richard to learn more about investing.

When he was 11, he saw that his district had been installing new computers at every school and he asked about it. He went home and asked his dad to sell his Coca Cola shares and buy shares of the company that had a “fruit icon with a bite out of it” on the side of its computers. Swayed by the media’s advice to invest in Lucent Technologies, his father ignored his advice and bought shares of Lucent Technologies instead.

Richard missed out on his chance to invest in one of the biggest multinational technology companies: Apple. He could’ve been a millionaire by high school.

After years of working as a financial advisor, he decided to open Serenity Wealth Management, a financial planning and advising firm.

Serenity Wealth Management offers mandatory financial plans, full investment management, 401k planning, asset allocation, small business retirement plans and more. The firm also offers free college planning and free 529 plans at no charge to all current clients.

For 11 years, Richard Little has focused on educating and empowering his clients to invest strategically to secure their financial future in retirement. He prioritizes developing personal relationships with clients to ensure all their financial bases are covered.

If you need help building your retirement plan, contact Serenity Wealth Management today.

Company Name: Serenity Wealth Management
Contact Person: Richard Little, CFP®
Address: 333 S Wabash Ave Suite 2700, Chicago, IL 60604
Phone Number: 312-734-1415
Website Link:
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SOURCE: Serenity Wealth Management

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