If you’re a new college graduate, it’s easy to get so anxious about investing that you fail
to take care of some simple basics. And it’s not just twenty-year olds that make basic
mistakes. We often have clients in their forties and fifties, or even older, who have failed
to address the some of the following basic prerequisites to investing.
First and foremost, everyone needs to establish an emergency fund. Financial planners
typically recommend that an emergency fund equal to three to six months of fixed and
variable expenses be maintained in liquid assets (cash or cash equivalents). This is to
avoid having to liquidate investments at a possible loss as a result of an emergency.
You can also afford to increase your insurance deductibles if you have more than the
deductibles set aside. If you are single or married with only one bread-winner, we
recommend at least a six month emergency fund. If your household has two solid
incomes, then a three-month fund may be adequate. Lack of an emergency often leads
to excessive credit card debt.
When you do establish your emergency fund, don’t place it in a bank checking or
savings account earning a paltry 1% or 2% (or lower) return. Instead, you should find a
solid higher-returning money-market fund paying close to the one-year CD rate.
Eliminating credit card debt is another basic pre-requisite before starting to invest.
Interest rates of 15% and 16%, or more, are common for credit cards. It makes no
sense to invest in a stock and bond portfolio paying at best a single digit return while
you are paying nearly double that rate in monthly credit card interest. And, to earn a
solid portfolio return requires taking on the risk of the stock market. Think along the
lines that paying down credit-card debt is equivalent to earning a high-return with no risk.
Another common mistake people make is to give investing priority over addressing the
most basic everyday risks that can be minimized with adequate insurance policies.
Good medical coverage, disability insurance, life insurance, home and auto insurance
are a must to avoid large losses that could forever impact your ability to achieve your
lifetime goals. You might also want to consider long-term care insurance and/or
umbrella liability insurance.
Often our clients have no disability insurance. Your chances of becoming disabled on a
given day are actually greater than your chance of dying. A long-term disability can
seriously hinder achievement of your financial goals. Note: We’ll focus an entire future
article on basic insurance do’s and don’ts.
Besides credit card debt, other high-interest-rate debts should also be paid off before
investing. Just as with credit-card debt, paying off other high interest-rate loans is
equivalent to earning the associated loan-interest rate without taking on the risk of the
stock market.
Finally, make sure you take advantage of employer 401(k) plan-matching contributions
and stock-purchase plan discounts before dedicating other funds to new investments.
Then, once you’ve taken care of the basics, when you do begin investing, get some
unbiased help from a financial professional who has your best interests at heart. (See
our previous article titled “Is Your Financial Advisor Acting in Your Best Interest”, by
viewing our “In The News” web page on our web site noted below.)
David C. Patterson, CFP® and Erin Patterson, CFP® are the owners of Patterson Advisors, LLC, a fee-
for-service-only financial advisory firm. Patterson Advisors, LLC is a Registered Investment Advisor,
registered with the State of Michigan, helping clients in Waterford, Clarkston and Royal Oak, Michigan
as well as other Oakland County, Michigan communities . Visit www.pattersonadvisorsllc.com for more
information or call 248-674-2108.
Published in the Oakland Insider, December, 2007
Fix These Basic Money Mistakes Fast
By David and Erin Patterson