Lots of folks take lots of powders on lots of financial decisions. Doing so is never as effective as not taking a powder.
Today’s Top 10 list is all about financial decisions that lead many people to simply shine-it-on as well as to take a powder. My hope in presenting these powdery-yet-shiney problems is to help you, dear reader, avoid the powder-taking and the shining-it-on’ing.
Here, then, presented in no particular order (though Numbers 9 and 10 are the most Whole-Shebang’y, while the earlier items are the most one-off, single point-in-time sorts of decisions) are ten financial decisions you should do right by — and thereby do right by yourself.
Top 10 Financial Decisions Most People Take a Powder On — and Shouldn’t
1. When to turn on your Social Security retirement benefits. This decision is a lot more complicated, and a lot more long-term momentous, than many people know. This is especially true for those who are married currently, and for those who were at some time in the past married for ten years or more. Please do smarten up on it before making your decision!
2. Whom to hire to be part of your financial brain trust. Many folks simply hire a friend or someone their parents used. The former is usually far less than ideal for everyone involved, and the latter is purely hit or miss and usually subject, at least a little bit and sometimes a whole lot, to privacy and loyalty issues. Better is to talk to a handful of prospective brain-trust’ees and see who feels just right.
3. What mortgage to have. Most people ignore the impact their mortgage decisions make on their personal balance sheets, and instead focus their decision-making solely on the amount of their monthly mortgage payment. Doing so is a surefire way to make less than great decisions because the monthly payment and the balance sheet play off of each other like a seesaw — that is, if you want to reduce the amount you pay on your mortgage each month, then, all things being equal, you have to reduce the size of your mortgage, which means reducing the assets you have on your balance sheet, i.e., you have to give the bank some of your assets. So, yea, your monthly payment is lower, but that’s because you just gave the bank a whole lotta money! So when it comes to mortgage decisions, being happier with your monthly nut goes hand-in-hand with being less happy with your stored up wealth, and vice versa. It’s math. I’ve seen very smart, very able people fail to grok this idea, and if that’s you and you don’t understand this paragraph (it is more Mortgage 301 than Mortgage 101), then please don’t make a mortgage decision until you do!
4. Whether to roll-over retirement plans at former employers. Most people just assume that it’s a good idea to take a retirement plan they had via a former job and roll it over into some other retirement account, such as an IRA. Often it is, but many people decide to do a rollover without giving it a thought one way or the other. And gosh knows that money managers love to see rollovers and might, just might, be a bit biased in their usually unequivocal praise for doing rollovers. Please smarten up on this before rolling anything over.
5. Whether to do Roth conversions. Most people view paying taxes before the absolute last minute the taxes must be paid as, to use the take-a-powder definition above, “an unpleasant situation to avoid.” And that means that very few folks ever give a thought to converting a traditional tax-deferred retirement account into a tax-paid, pretty-much-forever-outside-the-tax-code Roth retirement account. They should!
6. How to invest. By and large, in this country we do not have classes in which normal folks can learn, at a youngish age, about investing, do we? As a result, many folks start investing by mimicking the kind of investing a family member or a friend is pursuing, while others read books. Most, though, simply take a powder, at least initially, and enroll, if at all, in the Investing School of Tough Lessons and Hard Knocks. That’s a powder-taking, right there, for sure, with the powder perhaps coming in handy to cover up the resulting black eye.
7. End-of-year tax planning. Very few people go about actively designing their 1040s. They let the forms roll in come January and then plug the numbers in, and then, looking at the number they see towards the bottom of the 1040 form, they thrill themselves with their money-come-in-uppance or gird themselves for their money-go-out-uppance. It’s all one big surprise, and it’s all one big powder-taking. A far better approach is to see if there are steps you can take — usually no later than the last business day of the tax year — to improve your overall tax situation. This could involve selling off investments outside of retirement accounts, or doing a Roth conversion, or prepaying some property or state income tax, etc., etc., etc. Refusing to take-powder on this item means getting into gear on your end-of-year tax planning right after Halloween and, most often, dealing with a tax professional. The dollars saved, though, often make it well worth the effort.
8. Who gets what. All of us should have written down by now some directions about who should get what when we leave this mortal plane (What’s that you say? You don’t have any of your estate planning done? That’s not good. But it is common. Please get in gear on it and be better-than-common.) When first deciding who gets what, most people simply default to their family members getting everything. That keeps it simple. But it’s also a good idea to think about who — other than those in your family — could benefit from receiving a little something something from you upon your demise. Maybe you could change someone’s life with a gift of, say, $5k? And maybe that $5k could have a bigger, more positive impact on that person’s life than, say, the $100k you are splitting up between your family members?
9. How to be mindful of your financial life. We get to the two biggies last. First up is mindfulness. Many of us take a powder from our entire financial life, as in, Back off, buster, I’d really rather not think about it, OK? That can work well some of the time for some people, but this is one context in which ignorance is most assuredly not bliss and in which what you don’t know most assuredly can hurt you. So here’s a tip: one hour each month of attending to your financial life, over and above the day-to-day of paying bills and such, is enough for most people. It’s easy to do if you have a mind to. Why, I bet you can think of a handful of things you devote more hours to each month that are as close to wastes of your precious time as you can get, e.g., sitting in traffic, sitting in meetings, etc. And attending to your financial life is so not a waste of your time
10. How you make a living. Perhaps the biggest powder-taker of all is that, at some point or another, most of us get ourselves slotted into doing something to make a living and then, somewhere further down the line, we then all but stop thinking about ever doing anything else to make a living. That’s great if you love love love the way you make a living. It can be quite terrible, though, if you do not. Please please please never take a powder on how you make your living: always keep wondering about ways to take it to the next level and/or ways to put the dice in the cup and toss ’em out, to see what there is to see.
Some items on this list involve point-in-time decisions. Please do your best to be present and smart when you are at that point in time, and get in the habit of making great financial decisions.
Other items on the list involve major components of the way you design your financial life and, via that design, the way in which you then go about making your way through the economic world in which we all live. Please do your best to present as the design takes shape and evolves. Steer it. Drive that car. Do not be a passenger in the back seat, texting away, blissfully unaware of your surroundings.
Your financial life will be designed one way or the other — with you or without you — and, if left unattended, it’s much more likely to veer away from a good design and towards one that’ll take your overall financial health down a peg or two or perhaps even a great deal more.
So be here now and be smart. OK?