10 biggest mistakes Gen Xers make with their money

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The straight-line fallacy

You're 45.?

Twenty years ago you came out of college with a starting salary of $50,000. Since then, you’ve saved and invested 10% of your income in your company 401(k).?

If you averaged an 8% investment return over those 20 years, math says that you should have somewhere around $370,000 saved in your 401(k).?

But you don’t.

Why is that?

There are two reasons for this:

The first is luck.?

If you were born in 1970, you would have turned 25 in 1995.? If you followed the prescribed path above and invested in a fund that tracked the S&P 500’s performance, you’d have roughly $364,000 saved in your 401(k) at the age of 45.?

However, if you were born in 1975, just 5 years later, and followed the same path, you would have accumulated nearly $475,000 during the first 20 years of your career.?

That’s more than a $100,000 difference based solely on the year you were born.

You can’t control when you are born.?

However, you can control another factor that will largely influence your investment success.?

Investing in expert performance

Malcom Gladwell popularized the concept of expert performance requiring 10,000 hours of practice in his book Outliers.? This idea is based on the work of Dr. Anders Ericsson who posits,

“Expert performance as the end result of individuals' prolonged efforts to improve performance while negotiating motivational and external constraints.”?

The path to 10,000 hours starts early for many PGA Tour players.?

Jack Nicklaus picked up the game of golf when he was 10 years old.?

Tiger Woods first picked up a golf club when he was two.?

You’re familiar with Tiger Woods and Jack Nicklaus.? You’re probably not as familiar with Dan McGlaughlin.

Dan McGlaughlin considered himself “slightly above a couch potato,” but at the age of 30 he decided to conduct his own 10,000 hours experiment.? He began to practice golf with the goal of making the PGA Tour.? He called it, “The Dan Plan.”?

Through four years and 5,000 hours invested, he did quite well.? McGlaughlin worked himself into a golfer with a handicap in the threes, which was good enough to put him in the top 10 percent of all male golfers with a handicap index.?

However, while his mind was focused on the goal his body would not cooperate.?

Shortly after notching his 6,000th hour of practice, a back injury derailed Dan’s progress.? The Dan Plan was stalled and eventually put to rest.? ??

The biggest mistake Gen Xers make when investing

DALBAR is a research firm that examines investor behavior and performance.? They have been putting together their QAIB report (Quantitative Analysis of Investor Behavior) since 1985.??

The report looks at the performance of individual investors compared to market indexes like the S&P 500.

Year after year, they find the same thing:? Individual investors tend to underperform the market indexes over the long term.

For example, in 2023, when the S&P returned 26.3%, the average equity investor earned just 20.8%.?

This performance gap is often attributed to factors such as emotional decision-making, market timing errors, high trading costs, and chasing past performance.

Like Dan McGlaughlin, when it comes to investing there are two opposing forces that create the gap between goal and reality.? This time, instead of mind vs. body, it’s our mind vs. our best intentions.?

Our own mental biases – overconfidence, loss aversion, anchoring, mental accounting, etc., lead us to make suboptimal decisions.?

We try to time the market to avoid losses.? We move money around into funds with better historical performance assuming it will continue.? We hold on to bad investments too long hoping that they’ll recover.? We invest in things we know and avoid unfamiliar geographies or asset classes.

All of these behaviors lead to the gap between market performance and the performance of our own investments.?

This underscores the point that when it comes to investing:

It’s not “us vs. the market” but “us vs. ourselves.”

9 other financial mistakes you might be making as a Gen Xer

Somewhere around your 40s, finances start to get real.?

Your account balances are larger than they ever have been.

Your net worth is growing rapidly, along with your responsibilities.?

A 10% market movement can cause a 5 or 6 digit move on your balance sheet, up or down.

The stakes are much higher and mistakes are much costlier.?

Here are 9 of the biggest mistakes you should avoid -

1. Not Planning for Income Changes

Layoffs, cutbacks, and job changes happen.? You need a margin of safety to prepare for these fluctuations in income.? Having this cushion can help mitigate financial stress during unexpected changes in employment or income.

2. Making Your Finances Too Complex

Money does not have to be complicated.? One of the easiest, and often overlooked, ways you can keep things simple is by consolidating accounts and investments where possible.? Streamlining your finances reduces the administrative burden and gives you time to focus on more meaningful activities in life.?

Keep it simple:

Roll your old employer 401ks over to your new employer’s plan or an IRA.

Put your savings on autopilot through payroll deferrals or automatic bank transfers.

Focus on the most important numbers

3. Taking on Too Much Risk

The amount of risk you take should correspond with your time horizon and your own risk tolerance.? As these change, you should adjust your investment portfolio accordingly.

Diversifying investments across different asset classes can help mitigate concentrated risks, especially if you receive company stock as part of your compensation from your employer.?

4. Lifestyle Creep

Avoid lifestyle inflation by living below your means and prioritizing savings and investments. Set a budget, track expenses, and resist the temptation to overspend as your income increases.

Establish a “pay yourself first” mentality and avoid spending just to “keep up” with others around you.?

5. Not Having the Proper Insurance

Protect yourself and your family with adequate insurance coverage, including health, life, disability, and property insurance. Review your policies regularly to ensure they align with your current needs and circumstances.

Four essential policies you should own:

• Life Insurance
• Disability Insurance
• Home and Auto Insurance
• Personal Liability Policy or an Umbrella policy

6. Not Having an Estate Plan

The truth is, even if you don’t have a will, you still have an estate plan.? However, without a will, you have no control over how your assets are distributed after your death.?

Creating an estate plan will outline your wishes for asset distribution, guardianship of dependents, and healthcare directives.

Make sure to update your plan regularly to reflect major life changes and ensure your affairs are in order.

7. Being Too Illiquid

In a financial sense, liquidity refers to the degree to which an asset or security can be quickly bought or sold in the market without significantly affecting its price.

Cash in the bank is highly liquid.? Real estate is not.?

Ensure that you have enough liquid funds to cover expenses and take advantage of investment opportunities without resorting to high-cost borrowing.

8. Failing to Do Proper Tax Planning

This should probably be number one on the list.?

While your income is high, look to take advantage of tax-advantaged retirement accounts and all the deductions, and credits available to you.? When income is low, you want to pay taxes at the lowest rates available.?

When things get too complex, hire a professional tax preparer who can help you make informed decisions.?

9. Not Finding Purpose Beyond Work

You trade your time for money.? At this stage in your career, you’re probably being paid very well for your time.?

However, your time outside of work is also very valuable.? Find the right balance.? Pursue hobbies, interests, and build relationships that bring meaning and joy to your life.

Cultivating a sense of purpose beyond just work will enhance your overall well-being and contribute to your long-term fulfillment.