Our last blog talked about the best money advice people have received. It caused us to think about the mistakes we’ve seen our clients make. We thought a summary of some of the common mistakes people make would be beneficial to our readers. Here’s a list of some we believe to be most detrimental to your financial well being:

(1) Running up too much credit card debt – Nearly everyone is aware of this problem. It’s so easy to pull out that credit card and buy whatever you want. If you’re not paying off your balances each month, you’ve got a problem. Seek help if you don’t know how to eliminate it.

(2) Lack of financial goals – Everyone’s budget is limited. Therefore you need to sit down and decide what’s important to you. Take time to analyze where you are currently spending your money and then re-align your spending to address what’s really important to you.

(3) Lack of an emergency fund – We used to recommend three to six months of living expenses set aside in liquid assets. With the recent volatility in our economy, we now believe that nine months to a year of living expenses might be more prudent.

(4) Lack of saving - Too many people focus too much on investment returns, when the best way to increase their net worth is to reduce their spending and save more. Benjamin Franklin’s saying “A penny saved is a penny earned” is just as valid today as it was back then. And, there’s no tax on the dollars you save. That’s a big benefit!

(5) Lack of portfolio diversification – We recommend eleven different asset classes for clients to invest in. Having five different large stock mutual funds provides large stock diversification but not true portfolio diversification. And having five large stock mutual funds most assuredly results in significant overlapping of the same holdings. True diversification across a variety of uncorrelated asset classes can increase your portfolio returns and lower your portfolio risk. If you don’t know how to do this correctly, seek professional help.

(6) Lack of basic insurance protection – An accident, sickness, death, disability, fire or lawsuit could wreak financial havoc. You need adequate medical, home, auto, disability, life and umbrella liability policies to protect you and your family. You want adequate coverage with deductibles designed to protect you against the large loss. Assuming the cost of small losses keeps your premiums down and will save you in the long run.

(7) Lack of focus on investment fees and taxes - Too many investors focus only on investment return. They forget that with high promised returns comes higher risk. Don’t ignore investment management fees, fund expenses and taxes which often significantly reduce returns. Investors frequently have no real idea of what fees they are being charged. Make it a point to find out what you are really paying.

(8) Letting emotions or taxes drive investment decisions - Investors are loss averse. They hold on to their losers too long and hold on to their winners too long. They are always “just sure” their poor investment will return to its former value. When an investment has a poor outlook you are better off selling it, write off the loss on your tax return and invest in something else with good prospects. When you buy a stock, set a target price at which to sell and then sell when it reaches that price. And don’t let taxes get in the way of selling. You will ultimately have to pay them anyway, so if it makes sense to sell, do so and pay the taxes. Many bad things can happen if you delay just because of taxes.

(9) Lack of estate planning – many people have not taken the time to even create a basic will. If you die without a will (intestate), state laws will determine the distribution of you assets. You may not like how the state does it. And if you have children, who will have custody if something happens to you and your spouse? Many clients come to us with detailed estate plans that include revocable living trusts. It’s very common for the trusts to be unfunded (e.g. the trusts contain no assets because the client failed to re-title their assets.) It’s also common for beneficiary designations to be incorrect. If you have no estate documents or it has been some time since they have been reviewed, we highly recommend you seek professional help.

Keep these in mind and you will be well on your way to personal financial freedom.