Even the best-laid plans frequently go awry, but that shouldn’t stop us from planning. In fact, a solid financial plan is capable of incorporating as many of life’s “what ifs” as possible and helps people adapt to change. No matter how difficult it may be to achieve perfection in our planning, there are still some important things we can do to avoid making big mistakes. Here are a few examples of financial choices that you could spend decades trying to recover from:
Trying to Float Through Life Without a Budget
The term “budgeting” often leads to frustration and unrealistic expectations. So, let’s give the budgeting process a more empowering name—it’s a “personal spending plan.” A personal spending plan provides awareness of where our money is going and helps us prioritize financial decisions. Budgeting is not just for those who are struggling to make ends meet. Everyone needs a personal spending plan, and yours needs to be more than just a loosely defined set of good intentions—your plan should always be written down. Fortunately, these spending plans do not need to be perfect or overly complex. Yours can be as simple or complicated as you want it to be. Remember to try and make saving money, paying bills, and paying off debt automatic.
Using Credit Cards to Pay for Wants and Needs
Debt becomes a major obstacle on the path to important goals like retirement. Credit card balances can pile up in a hurry, and stress will continue to increase with that debt. If you routinely carry a balance on your credit card, these lifestyle choices could end up costing you hundreds, if not thousands, of dollars over time. Knowing that you have a tendency to spend more when you use plastic, compared to simply paying with cash, is another reason to change those credit card habits. It is important to understand that credit cards are not necessarily a bad thing—especially if you have the discipline to pay them off in full each month. For those who do, capturing credit card rewards—such as cashback offers and travel perks—can be advantageous. One effective way to help make sure that you’re not using credit cards the wrong way is to create a 24-hour rule for your credit card purchases. Always try to avoid using credit in situations where you are not able to pay off your balance full within 24 hours. If you consistently find yourself unable to follow this policy, it may be time to cut up those cards (or freeze them in a block of ice).
Falling for the Newer, Bigger, Better Trap
Every single day, we are inundated with marketing messages and subtle hints that we deserve the next “big” thing. Whether it is a new car, real estate, technology gadget, dream vacation, wedding, or home improvement project, it is easy to fall into the trap. Buying a new car that you cannot afford is a common problem that plagues households throughout the Land of the Free. To avoid falling into this trap, you can go ahead and work any potential major purchases into your spending plan. Don’t just focus on the monthly payments. Take a look at other financial priorities to ensure that you are on solid financial ground and can afford the purchase without compromising your financial future.
Taking on Too Much Student Loan Debt
Student loan debt in America has grown to $1.73 trillion as of 2021. This is proof that change is needed on both a personal and institutional level to control education costs and improve the value of college degrees. It’s too late to go back now if you’re already swimming in an ocean of student loan debt, but if you are contemplating pursuing academic endeavors or have a child nearing college, create a financial plan prior to taking on student loan debt so you know what you’re getting into.
Not Doing Enough to Protect Your Wealth
When it comes to insurance planning, we usually start with protecting our cars, homes, and personal assets. That normally doesn’t go far enough, as many people lack umbrella liability coverage, an affordable policy that covers any potential liabilities that exceed your regular coverage amounts. It’s also important to think about those often-taboo subjects of death and disability. Regardless of age or whether or not you are married or have kids, make sure you have adequate life insurance coverage by running a basic analysis at least once every two or three years. If you were to have an accident or illness that would cause you to miss work for an extended period of time, would you and your family be alright?
Thinking That Retirement Planning Is Just for Old People
Waiting too late to begin saving for retirement is a big mistake. It is often difficult to begin our careers with the end in mind, especially when life is throwing countless challenges at us that complicate how we manage our day-to-day finances. So, maybe it’s time to re-frame the discussion and call it what it really is—Financial Independence Day.
Not Paying Attention to Fees on Financial Products
The financial services industry hasn’t always been as transparent as necessary regarding the true costs of investment and insurance products. In fact, most people aren’t even aware of how different financial professionals are compensated or what the term “fiduciary” means. Financial advisors can be an important source of knowledge and guidance in the wealth-building process. But that doesn’t mean you should blindly pay those fees, because they matter a lot more than most people realize. Improved awareness of the fees you are paying in various financial products can help you keep more of your hard-earned money.
Financial Avoidance
If you want to align your most important life goals with your money and other resources, you have to pay attention to it. You don’t have to be a financial genius, you just need to take action and do something. For couples, financial avoidance has potentially devastating consequences such as money arguments and stress. As Liz Davidson points out in her book What Your Financial Advisor Isn’t Telling You, your life partner may be your worst financial enemy. Not talking to your spouse about financial matters has many risks. If you have a financial partner, you can talk about your financial goals during regular money talks. If you’re riding solo on this financial journey, seek out professional guidance, or share your goals with a trusted friend or coach so you have some accountability and encouragement. As you can see, there are many financial decisions that can throw our retirement plans off track and hurt our chances of achieving other important life goals. A written financial plan is a helpful tool to help you avoid big mistakes.
