3 Common Financial Planning Mistakes Millennials Make — And How To Solve Them
This article was originally written for and published on Forbes
As a financial advisor and owner of an independent financial planning firm in Boston that specializes in helping 30- and 40-somethings with wealth management, I’ve had thousands of conversations with up-and-coming professionals about their money.
A lot of those conversations focus on how to manage their challenges and maximize their financial opportunities — which include leveraging strong incomes to build significant assets.
But some of the conversations I have with people are about how they can undo some of the serious missteps they made before they reached out to a financial planner for help.
While it’s important to talk about what to do right, we also need to acknowledge some of the most common mistakes people make with financial planning. By doing so, you may be able to learn from where things went sideways for someone else and avoid some wrong turns along your own journey.
Here are some common ways we see folks get in their own way on the road to financial success — and what you can do to avoid the same mistakes or solve these problems in your own life:
1. Being Too Aggressive With Your Assumptions
The nature of financial planning requires you to do some amount of guesswork about what may happen in the future. You have to make a lot of assumptions with variables including your income, expenses, cash flow, investment returns, and more in order to model out potential scenarios.
Making these assumptions far too aggressive may be the most common mistake I see people make with their planning. In this case, “aggressive” could be a synonym for “optimistic.”
Some people feel tempted to assume they’ll make far more in the future than they do today; that they’ll earn massive bonuses or commissions even though they have no track record of those kinds of numbers.
Others believe the value of their equity compensation will only go up, and betting on their company stock is a sure thing. Or, people may find particular investment opportunities and assume they can’t lose (when in reality, all investments carry risk of loss).
Aggressive assumptions can also look like dismissing the need for liquidity or an emergency fund because someone simply can’t see a catastrophic event personally affecting their own life. It might be assuming that you’ll always have the same job you do now, and that job will always provide the benefits you currently rely on.
If there’s no room for error in your assumptions, they’re simply too aggressive to use for planning purposes. You can’t assume that things will always go according to plan, or that you’ll never need to deal with an unexpected financial setback.
A good plan is one that comes with many plans built into it, in the form of contingencies, financial buffer, and conservative assumptions — things like assuming you’ll earn a little less than you realistically expect or spend a little more than you truly think you will.
2. Failing to Account for Change
This mistake is a bit intangible, but it can still be deadly to a financial plan. If you make decisions today that force you to behave a certain way for a very long period of time, you haven’t accounted for the fact that life is change.
Who you are today is not necessarily going to be who you are in 5 years (let alone 10 or 20). Your interests shift, your goals evolve, and your priorities change. This isn’t a bad thing. It’s just human nature.
The problem is when you set a rigid plan based on your preferences in the present. While it can feel gratifying to get what you want today, you could leave your future self high and dry with a life they don’t particularly want to lead.
Here’s an example of how this commonly shows up in financial planning:
A client may want to buy a significantly bigger (and more expensive) home. We could technically make the plan work on paper — but committing to the bigger, pricier house might mean having very little available in their budget to use on other things they may want now or in the future. That could include the ability to travel, to take a sabbatical, or to achieve other goals.
In the moment, a client might say that buying the new house is the most important thing to them. It’s their number-one priority and they are willing to make a lot of sacrifices to make it happen.
And that could be true… in that moment. What this plan doesn’t account for, however, is the fact that once they get the bigger house and lock that fixed expense into their cash flow, they may have very little choice or financial flexibility to pursue other priorities for many, many years.
The future is unknowable, and that includes who you will be in that future. A good financial plan accounts for this, and tries to avoid forcing you to make a decision now that you have no choice but to live with for decades to come.
3. Thinking You Can Google Your Way To Every Answer
The power of the internet is amazing. Never before have so many people had so much access to truly valuable information.
But with such a vast wealth of knowledge comes a lot of noise. I like how Daniel Kahneman, Olivier Sibony, and Cass R. Sunstein define the idea of noise: it’s unwanted variability in professional judgments.
And you’re going to get a lot of noise in the realm of financial advice, because so much is subjective.
In the context of financial planning and investment management, noise can appear when you ask a single question get 10 different answers, ranging from the factually correct but not applicable to your specific situation to flat-out wrong and misleading.
You can research a huge amount on your own. You can teach yourself, expand your knowledge, and do things yourself… to a point.
As Noam Chomsky puts it, “You can’t expect somebody to become a biologist by giving them access to the Harvard University biology library and saying, ‘Just look through it.’ That will give them nothing. The internet is the same, except magnified enormously.”
Chomsky’s point is that it’s not enough to have access to information, which thansk to Google, anyone with an internet connection now does. You have to combine that access with the knowledge and wisdom that tells you what to look for, and what to ignore.
This is why it’s a mistake to think that you can DIY everything you need to manage in your financial life, from your planning to your investments. Eventually, you will reach a point of complexity where you may benefit from professional guidance — because it’s the professionals that understand what is significant, and what is just noise.
The people I see that reach the highest levels of financial success know what they don’t know, and they acknowledge that there are things they don’t even know they don’t know.
They may be experts in their own rights, in their own fields — but they have the self-awareness to understand the limits to their own knowledge. At that point, they seek out other experts to fill in the gaps and ensure they remain on the right track toward their goals and objectives.
Need help uncovering more strategies to use to grow your wealth and set your family up for success? A financial planner could help. Learn more about our process and what we do for our clients here.