Financial mistakes nearly everyone makes and how to avoid them. Part 2 of 3

Financial mistakes nearly everyone makes and how to avoid them. Part 2 of 3

Ahhh why did I do that, again?! I don’t make a financial mistake twice. No, I make it several times to really learn the lesson. Let’s have another look at some classic mistakes you may have made or wish to avoid making.

Using credit cards for everything

Putting everything on plastic can be convenient, quick, and seemingly painless. However, these factors may also encourage you to spend more than you need to or worse more than you have.

Using plastic for everything can give the feeling of limitless spending as there is no immediate pain involved.

It’s when the end of the month comes that we start to feel the pressure to repay and the pain of regret at all that spending.

The use of credit cars without a repayment plan can lead to a growing snowball of debt as it racks up, and you can only repay the minimum amounts.

How to avoid this financial mistake

  • Use credit cards carefully – understand what the repayment terms are. Would you buy a shirt with a loan of 19%? If so, this means you are willing to pay £100 for a shirt that costs £60 after all the interest charges depending on how long you take to pay it off.
  • Use can when you can. Paying cash is more painful as you can see and feel the money you worked hard for being handed over to someone else.
  • Have a clear plan to pay off everything you buy on a card each month.

 

I think I just saw my life walk by

Stagnating in a job

When you get comfortable, you tend to stay still; this can have some benefits, of course, and maybe the right thing to do at a particular time.  

But for years and years?

Depending on your job sector or role, you might find that the only way to make real progress in terms of responsibility and salary might be to move jobs and or companies.

Moving can feel risky, will it be better or worse somewhere else? The only way to find out is to give it a try and see.

How to avoid this financial mistake

  • Think about your BRIAN
    • What would be the Benefits of moving?
    • Are their any Risks of moving?
    • Do you need any more Information to make the decision?
    • Are there Alternatives to moving?
    • If you did Nothing what would happen?
  • Figure out has your salary changed over the years, and are you bothered about this?
  • Is there a way to move up, sideways or out for better prospects?

Keeping up with the Jones

Ahh, those Jones or whatever the most common family name is where you are.

They are a couple or family with all the latest stuff, house, holidays and cars and you want to be them, badly.

So badly you are prepared to ruin yourself financially to chase and or complete with them.

Only when the tide goes out, do you discover who’s been swimming naked.

Warren Buffett

What this quote means is that you have no idea how or if the Jones can afford what they have or are doing.

  • They can afford it because they have an exceedingly high income
  • Maybe that can afford it because something or someone is subsiding them – parents, grandparents or a business.
  • They can’t afford it, but they can afford the payments.
  • There not affording it at all. They are broke but haven’t hit the financial wall – yet.

How to avoid this financial mistake

  • Easier said than done but want what you have while you work for what you want.
  • Don’t compete with others, let them live their life and you yours.
  • It’s annoying I know but live within your means or increase your means.
  • Turn off the social media highlights of others that you can’t tell if its real or just someone swimming naked under the waves.  

Not living to a spending plan – where has all my money gone!

You see the cunning trick here? A spending plan sounds much more fun than a budget. A budget can seem restrictive, but a spending plan is about spending money. Your money. What could be more fun than that?

Have you ever gone down a steep hill on a bike or driving a car? Despite your appetite for danger, its likely all of us have felt the need to start pumping the brakes and start steering more strategically once things begin to speed up. You want your bike, car or money to go more in one direction than another, e.g. not off that fast-approaching cliff edge.

Well, this is the same for you and your money there will be times when you need to take more control directing it to where you want it to go and at what speed.

How to avoid this financial mistake

  • Set up a simple budget spending plan detailing where you want your money to go.
  • Track your money through your bank account, statements, or an app to see what is happening. Are you happy with where it’s going? If not, change it.
  • Save some money first and then spend what’s left not the other way around.

Financial mistake

 

Who moved my red Leicester?

Not Preparing for change

“Nothing last for every even cold November rain” Guns and Roses.

That secure job, that next contract or the best manager you ever had are all subject to change for the better or worse.

Your landlord decides to sell or up the rent significantly, you get a new housemate, and it was a mistake.

Your relationship breaks down, a loved one needs caring for, or you need caring for all requiring more of your time and money than previously.

All the above and many more might represent a significant change that knocks you off your current straight and narrow path.

How to avoid this financial mistake

  • Keep your cv and LinkedIn up to date.
  • Have savings to ride out any changes.
  • Have an emergency fund (more below) to cope and adapt to a significant bad change.

Not having an emergency fund

As above without a safety net or an emergency fund, you are at high risk of not being able to cope with a significant downturn in your fortunes.

Losing a job, incurring a large and or unexpected bill living through a global pandemic (!) can tip many of us into financial difficulty or worse crisis.

One of the critical financial foundations to prevent difficulty turning into a crisis and then a disaster is a well-stocked emergency fund. Enough money easily accessible to ride out any significant challenges.

Typically, this is 3-6 months spending money in an easy-access account. Maybe not to easy so you use it for non-emergencies, i.e. a takeaway when you can’t be bothered to cook.

Don’t be overly bothered about the interest rate as this is not what the account/money is for. It’s for an emergency so that you don’t go into debt coping with the change or expense at the time.

How to avoid this financial mistake

  • Figure out how much money 3-6 months of spending is for you. Then start saving that money in a safe place – not under the mattress. Start saving like its an emergency that you don’t have an emergency fund.
  • Set up a clear set of rules for what is and is not an emergency. This should detail when the emergency fund can and cannot be used.
  • Keep it topped up after you use it or as your expenses change.
  • Depending on your risk tolerance or need for safety, maybe it should be larger than six months costs.
  • An emergency fund is an account for when not if an emergency comes. Start saving for it now.

Just thinking about day to day money – no long-term planning/vision

If you are just head down day to day spending, you will lose sight of the bigger picture. Where are you trying to get to?

Before and when you go on a journey, you are likely envisaging what it will be like when you get there, what you will do, how it will feel, who you will be there with.

When you are actually on the way to your destination, you are usually looking into the near distance to see the road and navigate or drive in the right direction.

Its probably only occasionally that you look directly on the ground in front of you.

Are you taking a long-term view of your finances and figuring out where you want to go, what it will look like, what you will do and with whom when you get there?

What’s your vision of your ideal future?

How to avoid this financial mistake

  • Set up savings accounts for
    • Emergencies
    • Day to day spending
    • Spending in the next five years and the next ten years
    • Spending for when you want work to become optional
  • When do you want work to become optional?
  • What do you want your retirement to look like? What is that going to costs? And what does that mean you need to save and invest now?

Money mistakes

 

I only said I wanted a starter!

No talking about money before marriage / with a partner

There are many things that can scupper a marriage or relationship.

The big ones are

  • Sex – how much, how often, how and who decides.
  • Children –when or if will you have them, how many, who and how you decide.
  • The in-laws – how often you see them and who decides.
  • Money – how much is enough, what to spend it on, saving vs investing, who and how you decide.

Everyone has a different money blueprint or how they think about money for better or worse.

Some are super savers, and some are super spenders. Opposites might attract, but they might not be well suited to staying together.

Understanding you’re, and your partner’s money mindset might help avoid later pain and or avoid relationships doomed from the start.

How to avoid this financial mistake

  • Talk about money with your partner,
    • What does it mean to you, how do you feel about it?
    • How much money would be enough?
    • Will you keep your money separate, jointly or a bit in between?
    • What will you do with your individual and joint money? How much will you spend, save and invest?
    • What will happen if one of you earns significantly more than the other?
    • How will both of you have an understanding of your financial position even if one takes the lead?
    • When would you like work to become optional?

Not knowing your numbers

If you’re going on a journey your likely to need a few bits of info. Where you’re trying to get to. When you want to arrive. What you want to do there and your starting point.

All of these are part of figuring out how to get to where you want.

This is the same for your goals or desired lifestyle and how money is going to be part of the plan to get you there.

The numbers you need to know

  • Your net worth; your starting point?
  • The amount of your monthly paycheck you get to keep or your savings rate?
  • What your spending a month and a year?
  • How much is enough or your freedom number?

These number will help you figure out your starting and endpoints, what you need to do in between and indicate how you might do this.

How to avoid this financial mistake

  • Figure out your numbers
    • What’s your net worth? Everything you own minus everything you owe.
    • What’s your savings rate? How much do you save of your monthly income?
    • How much money do you spend a month/year?
    • What’s your freedom number? What you spend times 25 or 33 depending on your margin of safety.
  • How could you improve on them?
    • Raise your net worth
    • Increase your savings rate
    • Lower your spending
    • Get closer to your freedom number

Not having a will

Don’t ask for whom the bell tolls it tolls for thee

For Whom the Bell Tolls
by
John Donne

In other words, at some point, it’s going to be your turn to go. For that, you can be sure. No one is getting out alive.

So far better to accept the inevitable and plan for it.

A will can help ease your passing by clearly stating who you want to benefit from your estate, savings, investments and any death pay-outs from insurance etc.

Making this clear should help those left behind divide up the estate as smoothly as possible.

How many times have you heard of an all-out fight happening to rich or poor celebrities that have not left a will? Leaving the family to argue over who was promised what is not going to be a fun task.

There’s nothing like a death and then a will reading for the vultures and family feuds to appear or reappear once there is money involved especially if there is a lot of money.

Don’t leave a mess and unclear wishes as your last gift to those left behind.

How to avoid this financial mistake

  • Detail who and how you want your estate however large or small divided up.
  • Who do you want to receive gifts, heirlooms, or collections?
  • Do you want to detail the arrangements for your funeral, music to be played readings to be read etc?
  • Leave some funds available for the funeral and wake – they are often more expensive than you think.
  • Use a proper firm to help you pull your will together. A will is not something just to have a stab at by yourself. Get professional help.

Frivolous spending

Have you got collections of stuff that you don’t need or want? Can you even remember buying this stuff? Were you throwing your money around like confetti?

Sometimes we get caught up in the moment and spend money like there’s no tomorrow. Things we don’t need and with a bit of reflection didn’t really want either.

Maybe you are bored, showing off or encouraged by others to treat ourselves and bang the thing is bought, and our money is gone.

How to avoid this financial mistake

  • Keep a spending plan
  • Track your spending
  • Set rules for yourself about when and how you will or won’t spend your money, i.e. I won’t go shopping when I am feeling down, or I will wait 24 hours before purchasing any impulse buys that are tempting me

Money mistakes

 

Yeah I think your helping, kind of

Relying on someone else

Here’s where the fairy tales ends. No one is coming to the rescue. Or at least it’s highly likely no one is coming.

Its down to you to get yourself out of any mess and then grow your wealth.

A man or woman is not a plan.

The government or benefits systems is not a plan.

Selling your house is not a plan for your pension.

You might think you can marry, inherit, steal, beg or borrow your way out of debt or into wealth but these are massive longshots with a lot of downsides.

Better to think, realise and started acting as your own rescue service like its already an emergency.

How to avoid this financial mistake

  • Know your numbers
  • Set up an emergency fund
  • Protect yourself from disaster with insurance
  • Set up your own or joint will.
  • Improve your financial literacy through, books, blogs, podcasts and youtube.
  • Save money for your short term, midterm and long terms needs
  • Figure out when you want work to become optional and work, save and invest towards it.

Overspending, or to much house.

There are three classic areas to overspend on

Your house – buying far too much house for your means. Pumped up by what you are told you can afford you set yourself up for the biggest mortgage you can get.

The trap has been set, and you have walked straight into it. Now you are trapped paying your house off for the next few decades. No, your home is not an asset; it is a liability because it costs you to live there and not earning you anything.

Too much car is also a significant cause of overspending. Too big to fast or too expensive again, your ego has made a trap for you. You have confused what you can afford with what you can afford to repay.

Too much lifestyle- living way beyond your means. Nights out, holidays abroad, the latest gadgets and clothes all pushing your finances up to and beyond their limit.

How to avoid this financial mistake

  • Live within your means or increase your means
  • Create a spending plan and live to it. Track where your money is going and review if you are happy with this.
  • Live your own life, and accept where your limits are.
  • Be crystal clear and accept what you can afford without financial worries. Not just what you think you can afford to repay.

If you would like to talk through how to make better financial decisions, drop us a line here

Read part 1 of Financial mistakes nearly everyone makes here

Read part 3 of Financial mistakes nearly everyone makes here

Have you got any mistakes to avoid to add below?

Financial coaching

As a financial coach, I can help you to think about how to manage your money for a stress-free life and what your options for budgeting, saving and investing might be.

Through this guidance process, you will be able to make informed choices for yourself and start taking action towards your Financially Happy life now before it becomes even more painful and expensive.

I won’t be recommending specific products or trying to sell any. If you need specific debt or product advice, then a financial advisor might be your best call.

Contact me here for a free chat about what options you might have for making money work for you.  

alan@financiallyhappy.ltd

 

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