High net worth individuals have a lot to protect. For many, their wealth is something they have built from scratch and it’s not something that can be replaced easily or quickly.
Whether you’re a high net worth individual or someone who works with or for one, read about the biggest financial mistakes high net worth individuals make.
Not Having a Financial Plan
The number one most common financial mistake high net worth individuals make is not having a financial plan. It’s something we take for granted for the rest of society, but for those with hundreds of thousands or millions in assets, this is a huge oversight.
A plan will help to ensure your assets are being managed correctly, as well as help protect your family from making potentially harmful decisions down the road.
Not Having a Business Plan
Whether you are a high-net-worth individual or a CEO of a major corporation, you should have a business plan.
It does not have to be complex and it does not mean that you will commit to everything you plan for 100% of the time. What it does mean is that in times of trouble or when you are just starting something new, there will be an Action Plan in place.
It’s a myth that business plans are only for new businesses. In fact, having a business plan at any stage of your business is vital.
For one thing, it forces you to think through your business strategy and how your business fits in the market. And of course, when times get tough, it shows you how to stay afloat and ride out the rough patches.
Not Reviewing Your Portfolio Often Enough
The “set it and forget it” mentality is a major mistake that high net worth individuals make.
The more money you have, the more important it is that you monitor your portfolio. This is especially true for those who have inherited their wealth and are not used to managing money.
You wouldn’t leave your home or car unlocked and unattended, but too many people do this with their investments. You have to check in on your portfolio from time to time and make sure it’s doing what it’s supposed to be doing.
Not Taking Tax Considerations into Account
With their vast wealth, high net worth individuals (HNWIs) create a large tax burden for the government. The IRS is always on the lookout for ways to claim more from this group. Thus, it’s imperative that wealthy individuals take every tax advantage available to them and do everything possible to avoid mistakes that could put them in the crosshairs of the IRS.
It’s not always easy for HNWIs to avoid costly mistakes, particularly when it comes to taxes.
Failing to Consolidate Assets
For high-net-worth individuals, the financial mistakes can be more costly than for the average person. A small investment error can make a big impact on your bottom line.
Many wealthy individuals make money in different places and don’t keep everything consolidated. It can be challenging to track all your finances if you have accounts at multiple banks, brokers or other financial institutions.
For example, your old 401(k) plans may still be out there gathering dust at former employers instead of working for you.
Tracking down your old accounts, consolidating them into one place, and then keeping an eye on their performance is a good way to ensure that you’re not wasting time or money managing your investments.
Forgetting about Estate Planning
When you have a large estate, it is even more important to have a good estate plan in place. A good estate plan will help your heirs avoid probate and pay as little taxes on your estate as possible.
Without an estate plan, your heirs may face unnecessary taxes and lengthy probate proceedings that may cost them a significant amount of money.
Too Many Loans
It’s understandable that people who have a lot of money can be tempted to borrow even more.
After all, it’s easy enough to pay off credit card debt when your balance is only a few thousand dollars and you have tens of thousands of dollars in savings. But when people get too comfortable with their credit lines and start getting carried away, they can run into trouble.
Too Many Cash
Cash is a safe investment, and it’s an asset many high net worth individuals feel comfortable holding onto. However, keeping too much money in cash means they miss out on the chance to grow the funds they have now, which could be done by investing those funds.
High net worth investors can use stocks, bonds, and other investments to grow their wealth over time. While these are riskier than simply keeping money in cash or a savings account, they offer returns that can help high net worth individuals build a strong financial base for themselves and their families.
Lack of Diversification
One of the biggest mistakes affluent individuals make is putting all their eggs in one basket. This can occur when an investor is too successful at something, like real estate.
They make a lot of money for years and end up putting all their savings into real estate, thinking that this is a safe bet. However, real estate can be a risky business because it’s not always easy to sell properties quickly. If the market turns and there’s nowhere for you to put your money, you can lose everything.
Lack of Research
The other thing that many high net worth individuals do wrong is they don’t do enough research before they invest in something.
They rely on financial advisors or common knowledge instead of looking into things themselves and finding out what will work best for them as an individual. This can lead to poor decisions that may result in losses if they’re not careful.
Not Properly Using a Trust
A trust is an important tool for passing assets to heirs and beneficiaries, but many people don’t take advantage of the benefits a trust can provide. For example, a trust can help avoid probate and disputes among heirs and keep assets out of the hands of an irresponsible beneficiary. A well-drafted trust also helps protect assets from creditors and lawsuits.
But not everyone who needs a trust has one in place. And those who do have a trust often fail to make sure it’s properly funded with assets that will pass through the trust at death.
These oversights can mean extra costs, taxes, and legal complications for your heirs – making what you hoped would be an easy process much harder for them.
Conclusion
Many of the financial mistakes high net worth individuals make can easily be avoided.
Maintaining financial stability is important for everyone, but it’s especially crucial for high-net-worth individuals. The kind of wealth possessed by those with substantial assets demands a different level of financial discipline.