Avoiding the costliest mistakes that shake power packed finances
Avoiding mistakes can do wonders to your personal finance portfolio, but even the most meticulous veteran of many a financial battle would remember mistakes that cost him dearly and jeopardized his financial future. Here we present some age old wisdom that holds well even in today’s deadly world of financial adventurism.
Your first glaring mistake: Ignoring to cement your last testament
Somehow a will or last testament is something that we consciously choose to ignore or postpone to a lazy Sunday afternoon that never actually arrives, and procrastination has its fateful consequences. John slept over his will and passed away without mentioning his wife and lone daughter, as a result of which his estate (at least substantial parts of it) passed on to his parents (still living) and his sister. The vast majority of the population never spares a thought about their will, and allows father time to ravage helpless dependents. The consequences, as John’s dependents will tell you, are frightening.
A factor that weighs on people’s minds is that they don’t have an estate the size of Bill Gate’s, so there is no need to bother about a will, but if they total up their home equity, car and household possessions it is not an insubstantial figure. What you need to do immediately (this very moment) is to consult an attorney that is experienced in estate planning (and please don’t confuse this with your real estate agent!). This highly specialized legal eagle will prepare an estate plan for you and your legitimate heirs, a plan that can be reviewed periodically.
Review is a must because of two simple reasons – your finances will change over the years, and more importantly tax laws will also keep change, redefining the estate tax threshold. These crucial changes can influence your decision either to give away money in your lifetime or to set up trusts that can efficiently manage the net estate proceeds and pave the way for your legal heirs to get their rightful share. If these basic precautions are not taken, you could leave your dependents fighting a costly legal battle for gaining what is rightfully theirs.
Your second conspicuous mistake: Taking a punch through lifestyle inflation
Alexis the famous writer landed a windfall $1,000,000 publishing deal for his latest book, and even before the ink had completely dried on the paperwork, the starry eyed author splurged a major portion of the money on luxuries like high end yachts and automobiles, not to speak of a gigantic home in Florida. Soon enough, his extravagant lifestyle caught up with him and took a way a major chunk of his savings. Alexis plunged into a debt trap from which the only escape was discharging his retirement spend, selling his major possessions including the home, and resulted in his taking up an assignment as visiting faculty at a University (something he was dead against when success was at his beck and call) to keep the home fires burning. Alexis’s plight represents what we refer to as lifestyle inflation, and is a disease that plagues all those who voluntarily chose to live life in the fast lane, maintaining a spending rate far in excess of legitimate income. The crisis is precipitated by a person’s desire to move a level higher in social status even at the cost of imprudent financial decisions. These people want to live a lavish lifestyle often far beyond what is healthily desirable or ideal for them.
The truth lies in realizing that there will always be people around you that are wealthier or more successful or more lavish than you will ever be, but you need to avoid the trap of making comparisons, and instead make lifestyle choices that agree with your financial health and protect the health of your body as well. Where expenditure beckons, you need to plough in more savings to gift yourself a sturdy umbrella of protection even in the stormiest of weather. If that yacht is unavoidable, can you cut back on other luxuries to make your one passion sail through? Or can you at least open a savings fund and ensure that a major earnings-cut gets routed to that account periodically to buffer future expenses?
It is wisely stated that if inflation doesn’t get you, taxes will. You must be constantly aware of the tax implications of financial decisions and the need to buffer savings and investments in a manner that helps you meet your tax obligations.
Your third obvious mistake: Ignoring the taxman
Every other day we read about celebrities that have landed millions in tax arrears resulting in the I.R.S placing hefty liens on their properties and possessions. Nothing can be worse than waking up to a tax call stating that you were sleeping over tax arrears for years, and now it’s payback time. Many April 15 deadlines would have flown by and these celebrities never realized that they were heading for disaster, and a few would groan that they remained in the dark because “others” were handling the money while they were “busy” with their work. You can’t behave like the ostrich that hides its head in the sand hoping its enemies will run away. When you blindly pursue the path of earnings, you can’t forget you tax obligations to Uncle Sam. You do so only to your peril, as rich and famous people found out to their amazement.
Failure to pay taxes has its pitfalls. On the unpaid sum (what you owe Uncle Sam) you pay a monthly penalty of 0.5%. If you never paid any tax to begin with, the fine goes up to 5%. The torture doesn’t end there. You receive what could be called the long end of the stick – the federal short term rate with 3% added to it – as additional interest payable on your unpaid tax, till the sum is finally paid. If you are in danger of drowning in unpaid taxes, experts say there’s a way out.
If you sign up for the “Fresh Start Program” the I.R.S gives you the option to pay the tax arrears in convenient installments over the six-year tenure. There will be some nominal interest added on but the penalty climbs down to 0.25 percent which is mega-buck savings if you happen to be a zillionaire.
If you believe prevention is better than this type of tax cure, agree to pay taxes at quarterly intervals, readjust your withholdings if you anticipate windfalls through bonuses or salary hikes, and plough more money into your retirement fund to reduce your tax liability.
Your fourth manifest mistake: Tying the knot without a prenup
The much debated prenuptial agreement (or prenup for short) can be a lifesaver in more ways than one. This is a legal document that spells out precisely what happens to your assets following your divorce or death. It protects the assets you already own, and leaves you free of all liabilities where the spouse incurs debts through her actions. It also extends an umbrella of protection over your future income. The famous divorce of Madonna and film director Guy Ritchie is a case in point where the substantially richer Madonna dispensed with a prenup and had to shell out almost a fifth of her total assets to her ex.
In any marriage both partners may be at the same level financially, but over time one partner may gradually coast over the spouse in terms of aggregate earnings. Without a prenup, the disadvantaged partner can sue for half the earnings of the higher income partner. It’s not a comforting thought that being a high earner enables you to make up such losses, because what you have really lost is years (or decades?) that you faithfully invested in retirement funding that cannot be replicated easily. A postnuptial agreement after the wedding may not carry the same fizz as a prenup, but better cutch something than nothing at all.
The best approach is one that carries the weight of honesty. Tell your would-be spouse that there are assets that need to remain in your side of the family for various reasons and there is no point exposing the partner to your debts that are huge. Free and frank discussions can do wonders to clear the air and help each individual find his or her financial feet in an uncertain world. An unseen, and as yet unacknowledged, advantage is that before the prenup gets signed, both the parties have to declare their full assets and liabilities without hiding anything.
Last but not the least; ensure that you engage a true blooded professional to handle your finances while maintaining complete control over the bulk of the transactions, withdrawals and investments that affect your future. Hiring a personal financial advisor is fine, but one shouldn’t extend a blanket license to any professional to mess with your money without your say so.