DIY…Do-It-Yourself is the rage. Home Depot, E-Trade, TurboTax, LegalZoom, all have DIY business models, and the list goes on. In this age of do-it-yourself, I caution you not to fall into the potential trap of doing the following 3 things yourself: Do not do your own taxes. Do not invest your own money. And do not do your own legal work.
One way to learn something from other people is to model a specific behavior they are exhibiting to achieve success in a specific area. My suggestion is, if you are striving to either be rich or stay rich, then model — or at least be aware of — some of the ways that wealthy people grow, preserve, and protect their wealth.
Today I see a lot of self-made financially independent investors. However, I also see a few common mistakes being made by many of these investors that ‘trust fund babies’ or ‘multi generation heirs’ seem not to be making, because the original person who made their money set things up in advance so these mistakes would be avoided. Irony? I feel that many financially independent investors do not rely on professionals to the extent the multi generation heirs do, as an example. DIY behavior might have served a person while he/she created the wealth, but I contend, it may not serve them well in both maintaining it and/or passing it on to their heirs.
In my opinion, the three services that persons should not DIY are:
Taxes: GOBankingrates.com polled 5,028 Americans on their tax-filing plans for the 2016 tax season by posing the question, “How do you file your taxes?” 36.8% responded that they will be hiring a professional to file their taxes. Although I do not have data to show who these taxpayers are, from my experience, I believe many are likely to be affluent. Okay, let’s look at this from a financial perspective. According to the National Society of Accounts, the typical fee for an individual return was $273.00. For many investors, this fee is going to be higher because of partnerships, Schedule D, etc… but the minimum IRS penalty is $135. And it can be as much as .5% of the amount of unpaid tax per month. Robert Wood recently wrote on article for Forbes about how the IRS can audit as far back as 6 tax years. The point here is yes, you can save some money doing your taxes yourself — but make just one mistake, and the money you saved and more could be taken from you, and that does not even take into account the emotional toll or the worrying.
Investing: If you are investing your own money, you may not be taking advantage of laws in place to help people with wealth. Acting as a Fiduciary. The law’s history goes back to “The court of chancery, which governed fiduciary relations in England prior to the Judicature Acts” . Though it has been updated and re-worded over the years to make it clearer, at its core it means a person is legally bound to act in the investor’s best interest. It’s a well-established legal principle, backed by decades of precedent. This is one of the most powerful tools to help both current investors and their heirs maintain and preserve wealth. What is interesting is the reason why all investors don’t leverage it. Cost, trust, cynicism, control, maybe a little of all these factors plus a few more,. U.S. Trust found that just 47% of multimillionaire millennials use a financial adviser. My suggestion is to spend the time it takes to invest one’s own money into finding the right Registered Investment Advisor who is legally bound to act in your best interest.
Legal Work: Of the three services we are discussing here, doing your own legal work just might be the most costly. Primarily because it can be years or in some cases a lifetime (heirs find out after death) before an investor even knows they made a mistake. Adam Heitzman wrote an article on the “4 Common Legal Blunders Many Entrepreneurs Make”. They are:
- Not protecting intellectual property.
- Choosing the wrong business structure.
- Not clarifying roles of individual team players.
- Handling business legalities yourself.
This is just for entrepreneurs; it can be equally complicated and risky when you look at Wills, Trusts, and legal documents to transfer assets after death. Steve Parrish shares three real life examples in an article he wrote for Forbes.
- No buy-sell agreement means no sale. Selzer v. Dunn.
- A “DIY” last Will and Testament is “DOA” in Court. Aldrich v. Basile.
- The consequences of lying. PHL Variable Insurance Company v. Bank of Utah.
The point here is do not do your own legal work!
In summary, there are a lot of books out there that share the principles and habits of millionaires. One of the better known titles is “The Millionaire Next Door” and again, it is just one of many that share some of the basic differences between what rich people do…and everyone else. My goal in this article was not to make an attempt to boil down financial success into three simple buckets. It is more to provide observations that might help an investor avoid a few known and unknown financial mistakes in the future. And while I do not contend to know the secrets to getting rich, I do contend that most of the rich people I know and work with do not do their own taxes, manage their own money, and/or do their own legal work.
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