Financial knowledge is often not taught in school. As a result, it has costed people, especially high-income earners, a lot of opportunities to become well off from a financial standpoint. Normally, I try to keep my financial posts more relatable to a wider audience than just software engineers and developers. However, this post will be slightly different as I will be addressing financial mistakes that high-income earners are likely to make. Some of these mistakes are ones I have made or witnessed from other software engineers and developers.
Disclaimer: None of what is mentioned in this post should be considered as financial advice.
1. Not Taking Advantage of Tax-Advantaged Accounts
Maxing out all the tax-advantaged accounts available is not easy. However, many software engineers or developers are in a position to do so. As of this post (January 2020), the limit of some tax-advantaged accounts are:
- 401k: $19,500
- Roth IRA: $6,000
- IRA: $6,000
- Health Savings Account: $3,550
Keep in mind that you can only have up to $6,000 with an IRA and Roth IRA combined.
It is surprising how many software developers don’t know what any of these tax-advantaged accounts are or own any of them. Things happen in life (they tend to) which might prevent you from working your entire life. In such a case, you would really benefit from having the buffer from a large retirement fund.
What Can You Do?
Learn about the different types of tax-advantaged accounts out there and start contributing to them. Don’t try to take gambling trades in those accounts and instead invest in a mix of index funds and bonds.
2. Falls Into the Trap of Buying Things out of Peer Pressure
Some software developers fall into the trap of buying things out of peer pressure also known as “keeping up with the Joneses”. Essentially what this means is that you are buying things to keep up with others. For example, others are driving fancy cars and taking exotic vacations. So, you feel like you need to drive a fancy car and go on exotic vacations too.
This ends up putting yourself in a situation where you’re living above your means and even potentially putting yourself in huge debt. Although you might be making a big paycheck you still somehow ended up living from one paycheck to the next.
What Can You Do?
Take a step back and see where your money is going. Are they really what you need or is it just to impress or keep up with others? Do you need a massive house when you’re only using a fifth of the space? Do you need an $80,000 car when a $40,000 one would provide just about the same experience? If not then maybe it’s time to forget about what others think and make some downgrades so you can save some money.
3. Thinking They Can Easily Beat the Market
Software developers tend to be analytical in nature. So, when it comes to stocks, the idea of technical analysis has a great appeal. For those that don’t know what technical analysis is, it essentially is about looking at the chart of a stock and trying to identify patterns to determine its future price movement. As you can imagine, this can definitely bring in some amazing profits.
Technical analysis seems great in theory, but in reality, all it does is increase the chance of you being correct about a price direction of a stock. It doesn’t help you manage your risk or emotions, which are big factors in determining your success in the stock market.
Another issue that is common is that you might think timing the market is easy. Just get in at the bottom and sell at the top. Sounds simple enough. However, how do you know if something is at the bottom or at the top? Well, you don’t know until it shows itself and by that time it is too late.
A top is only the top when the price that follows goes lower and a bottom is only the bottom if the price that follows goes higher and higher until it reaches the top before the drop. By the time a price point does identify itself to be a top or bottom, you have already missed it.
What Can You Do?
Don’t try to time the market and allocate a small amount of money as “fun” money. Get into the market by a dollar-cost averaging strategy where you buy into the market at a fixed interval whether it is up or down. Use the “fun” money for your technical analysis play.
4. Not Paying Themselves First
A big mistake that people make is that they don’t pay themselves first. What that means is that when they get their paycheck instead of putting some away they start to spend it. If they are lucky there will be some left, which they can save, but in most cases, there will be nothing left until the next paycheck. This is a bad habit to get into because it means they are not putting away any money for themselves in the future. Without having a cash cushion it can get very stressful when it comes to an emergency.
What Can You Do?
Automate the saving process so that each time you get a paycheck some of it goes into your savings, investment, and retirement accounts. The money you don’t see, you don’t end up thinking about it.
5. Not Having a Financial Plan
It’s great that you want to have over a million-dollar and be able to retire living comfortably. But do you know how to get there? Usually, when you ask someone how they can reach that point, they don’t have any idea. Without a financial plan, you can’t do anything actionable and when you don’t take action then nothing will end up happening.
What Can You Do?
Figure out where your money is going. Once you know where your money is going then make a plan to save some of the money and cut back on unnecessary expenses like things that you want but don’t need. To help you out, I have a post about setting yourself up for financial success as a software developer, which gives a good checklist of items for you to do. Once you come up with a plan, go and automate it because it’ll keep you committed and make the process so much simpler.
I hope this post was helpful to you. If you found this post helpful, share it with others so they can benefit too.
How many of these mistakes have you done? What did you do to address them?
To get in touch, follow me on Twitter, leave a comment, or send me an email at steven@brightdevelopers.com.