It can be a dangerous world for your money. Whether at the hands of strangers, trusted advisors, or actions of your own doing, your money faces many threats. Here are some tips for how to spot five types of thieves, and what you can do to protect yourself from them.
The Trusted Thief – Institutions and Advisors
Is your money in a safe place? Unless you are keeping your money under a mattress at home, it is unlikely to be stolen. But how safe are your bank accounts? Make sure you keep your money in a bank account that is covered by FDIC deposit insurance. That way you don’t have to worry about losing your money in the event that your bank fails. FDIC deposit insurance covers all single accounts owned by the same person at the same bank up to $250,000. If you have more than $250,000 in cash, perhaps from an inheritance or the sale of a home or business, consider depositing your cash at several different banking institutions so all of your money will be protected. Full FDIC coverage details can be found here).
Is your money in safe hands? A qualified account custodian should hold your investment accounts and should be a separate entity from your investment advisor. A custodian will provide additional safeguards against the possibility of theft or misappropriation by investment advisors with sticky fingers. One way to test this is to ask, “If I fired my financial advisor, would I have to move my accounts?” If the answer is “yes,” you should consider moving your investment accounts to a firm that is an independent third party.
Are hidden charges lurking around the corner? While not outright theft, be careful of advisors who charge high fees and/or do not operate with your best interests in mind. Some advisors sell you investment products that are suitable for someone your age or income level but that are not necessarily appropriate for your particular situation. Ask your financial advisor this question, “Are you required to act in my best interests in all your dealings with me?” If the answer is NOT an unqualified “YES,” then you have been warned.
The Legal Thief – Taxes
The taxman cometh. This one happens in plain sight, but regardless of how you feel about taxes, there isn’t a lot you can legally do other than keep good records and take all the deductions allowable. We suggest that if your situation warrants it, you hire a good accountant, and always pay your taxes. Keep in mind that contributing to a pre-tax retirement plan can reduce the amount the taxman takes.
The Sneaky Thief – Spending
Overspending. The good news is that this one is up to you. The bad news is that this one is up to you.
It’s easy to advise, “Just make a budget and stick to it!” But very few people like creating a budget, and even fewer like tracking their spending with the detail necessary to make budgeting effective.
A far easier way to “budget” is to figure out how much you need to put aside for all your taxes and for your future (savings). Once you’ve determined those amounts and have also set aside a sufficient emergency cash reserve, then you can freely spend the rest as you wish.
Spending incorrectly. Just like overspending, this one also depends on you. If the way you spend your time and money isn’t consistent with your values you’re losing limited resources that could be better spent. Ask yourself these questions, “Is the way I spend my time and my money consistent with my values? If not, what changes do I need to make?” (We have a simple exercise that helps facilitate the answer to these questions – let us know if you would like to receive it.)
The Silent Thief – Inflation
It silently creeps up on you today and takes a little bit of your money. Then it does it again tomorrow. And the day after that, and the day after that. You would think that we would learn to protect ourselves from this thief. After all, if someone walked into your home every day and took a little bit from you, wouldn’t you find a way to stop it?
The Federal Reserve Bank of Cleveland recently reported that its latest estimate of inflation over the next 10 years is 1.63%. This might seem very low, but it means that after 10 years the purchasing power of your money will have fallen by about 15%, and it will have fallen by almost one-third within 20 years.
How can you protect yourself from inflation? It’s simple. Invest in assets that can match or exceed the rate of inflation over time. An experienced investment advisor can help you do this.
The Unpredictable Thief – Volatility
It’s important to realize that market volatility is a normal part of well-functioning financial markets. No one should expect any investment to only go up. It is the risk of loss that creates the opportunity for a positive return.
Volatility in and of itself doesn’t threaten your money, but if you decide to sell an investment after it has experienced a decline, then volatility has created a loss for you. Think of it like airplane turbulence. If you fly through a storm and experience turbulence, is it better to jump out of the plane or buckle your seatbelt and ride it out?
Even better, if you are able to view market volatility as enhancing your purchasing power by allowing you to buy investments at lower prices, you can actually turn this possible threat into a reward.
Be vigilant and take measures to protect yourself from these thieves. Confronting all five of these dangers will allow you and your money to sleep well at night!
by Cern Basher, Principal