We all have had different experiences in the financial planning arena. Most of us have had some that were not so good. I don’t know anyone who has not made some mistakes in the world of financial planning. The reasons that most of these are committed are ignorance, ego, fear or a desire to have immediate gratification. These are all things that go contrary to financial planning. The thing all these have in common is they involve emotion. When we allow emotions to become the guiding factor in our decisions it can be dangerous. If you are going to take a step forward in your search for successful financial planning you have to eliminate emotion. Here is a list of the 10 most common.
1. Having no financial goals or any plan to achieve them is poor financial planning – For most people their financial planning hinges on the lottery or their rich uncle dying and leaving them a fortune. This means that the chance of them achieving any measure of financial success is zero. You must first determine what you want to accomplish, start with the end in mind. If you are going to drive from Los Angeles to New York you know what you destination is. Financial planning for your financial future is no different. The key thing to understand this is all in your control. If you make it happen it will if you don’t then it will happen to you. The sooner you begin the process of financial planning the better your chances of success.
2. Not accepting the responsibility for financial planning – For many people it is always someone else’s fault that things did not happen for them. If they actually examined their history they would find the person in the mirror bears most of the responsibility. A common example is living beyond their means. Tracking your expenditures is an excellent way to accomplish this. Having that cup of coffee or latte everyday is nice but you can buy a pound of coffee for the amount you spend on two of those drinks. This can add up over time. Look at the things you are spending money on and decide are there any alternatives? Do I really have to spend money on this item? Could this money be better spent funding my retirement? Do not automatically grow into your paycheck. Take the time to allocate increases in income towards your goals.
3. Carrying a balance on your credit cards – Good credit is a good thing. Credit can be a convenience that will come in handy in difficult situations. Carrying a balance on your credit cards and not paying them off each month or as soon as possible can cost you hundreds of thousands of dollars. This can become overwhelming. Pay off credit card balances as quickly as possible and only use them for emergencies or for amounts you can pay off within a month.
4. Not saving at all or not saving enough – Pay yourself first should be your motto. This means out of every check some money should go first to an emergency or rainy day fund. The next thing should be towards funding your retirement. The emergency fund should provide enough to cover three to six months of your living expenses. This money should be in a very liquid account and the rate of return is not as important as liquidity.
5. Thinking that I can always get started later – Time is the biggest asset that will have. The longer you wait to start planning and saving for your financial goals the less time compounding will have to work in your favor. An automatic draft or direct deposit from your paycheck is the best method.
6. Not taking advantage of any benefits offered by your employer – Taking advantage of a 401K is the best financial decision a person can make. You should maximize the matching that your employer provides. If the matching stops at 5% then you should contribute 5%. If they offer life, disability, health or any other insurance benefits you should consider taking advantage of the group costs. This does not mean you should not have any of these things on your own. Portability is a consideration but group costs are many times lower.
7. Not having enough life insurance – If you are the primary bread winner you should have enough life insurance to provide income for your family until what would have been your retirement age. Additionally you should consider eliminating all of your debt. Above that you may consider funding the surviving spouses retirement or children’s education but the first two are a must. None of us are getting out of here alive and none of us know when our last day will be. A stay at home spouse should also be insured since without them you would have to pay someone to do the things they do on a daily basis.
8. Not having disability insurance – If you had a machine in your closet that produced enough money on a monthly basis to pay your bills you would carry insurance on that machine. You are that machine. Almost one in three people will be unable to work because of an accident or illness during their lives. That period usually lasts for at least 3 years. Think about how your family would be affected if that occurred.
9. Having too large a percentage in company stock – If you have more than 20% of your portfolio in company stock that is too much. Diversification is important.
10. Making your financial decisions based on emotions – Take a long term view when making financial decisions. Don’t be afraid by temporary dips in the economy. Look at the length of time until you will need the funds. There is a rule of thumb called the rule of 100. This says that if you subtract your age from 100 the remainder is the percentage of your retirement funds that should be in equities. This is not a hard fast rule but it is a great guideline. Allowing your emotions to guide you is a sure way to make mistakes.
11. Choosing a loan based on the monthly payments alone – This is a huge mistake. You must look at the details. Is the rate adjustable, is there a prepayment penalty or there hidden fees. Look at the total cost of the loan not just the monthly payments.
12. Trading an automobile in when you owe more than it is worth – This only makes a bad situation worse. Keep the automobile until you at least owe less than it is worth. Keeping the car until it is paid off is better and keeping it until you can pay cash for a replacement is even better. This may mean downsizing or purchasing a used car but having no notes will allow that money to be put to other uses.
13. Not having an estate plan in writing – Many people think you have to be rich to need a will. That is a myth. The distribution of your assets after your death is important. If you don’t put something in writing your assets may not be distributed according to your wishes. An example is that in many states the surviving spouse as no claim to the assets of the deceased spouse. This can cause problems. This can all be changed with a will.
14. Not preparing for the possibility that you may need someone to care for you in your retirement – Many people don’t realize that this could be a possible retirement draining event. To stay at home and have someone care for you can be expensive. For example if you pay someone $10 per hour for 24 hours per day 7 days per week that would cost $87,400 per year! The level of care at $10 per hour may not be what you are looking for. There are people who take your order in drive through who make that much. If you are like me there are times where that experience leaves much to me desired. There are policies that can help offset that cost.
This is a list of areas that many people take for granted. Taking the time to address them will put you ahead of 90% of the people you know.