Financial mistakes nearly everyone makes and how to avoid them. Part 1

Financial mistakes nearly everyone makes and how to avoid them. Part 1

Ahhhh why did I do that? We have likely all made financial mistakes. Bought the thing that we couldn’t afford, wasted money on things that didn’t last or regretted buying that thing we didn’t need. The worst thing you can do is repeat the same mistake — so learn from it or even better learn from other people’s mistakes.

Not having a financial plan

In almost every other thing in your life, you probably have a vague plan.

I doubt you turn up to the airport and just pick and flight to go on? If you do you probably at least pack a bag which requires some thinking.

Or just jumping into your car and driving round and round until you decide where to go.

Nope all of us need to have some sort of destination before we head off in any direction.

The same goes for your money.

How to avoid this financial mistake

  • Write down what you want?
  • When do you want it?
  • What’s your reality now?
  • Can you guesstimate what it’s going to cost?
  • What are your ideas to reach your goals or amount of money?
  • What will you do first, second and third?  

Saving for children — but not yourself

I’m sure when you are on a plane, you will have heard “put your own mask on first”. This means that you need to ensure your own safety to then be of any use to anyone else.

How to avoid this financial mistake

Buying too much house

I know you just want a bigger house. At least the same as your parents, or at least as big as your friend with the huge house.

A big house could be a massive financial trap for you. It will likely be the biggest debt you spend paying off for the most prolonged period of time. That could be a significant financial milestone to carry around for a long time.

How to avoid this financial mistake

  • Buy the house you can easily afford – factoring in that sh*t happens, and you need to be able to cope with losing a job, significant fixes, car or home and or a global pandemic closing everything for 3+ months
  • Don’t max yourself out with nothing to spare on the mother of all mortgages – sleepless nights about repaying will not be a good price to pay for that extra room.
  • Live your own life, and choose your own house.

Financial mistakes

 

Nope not going that way again

Forgetting that you are mortal

What! I’m in my twenties; this is going to go on forever, right? Wrong.

I’m now in my 40’s, and it doesn’t feel like it’s going to go on forever anymore.

Once you start experiencing the deaths of grandparents, parents, sibling and or people your age from ill-health or bad luck, it’s clear we can all go at any time.

If you have or have had an unhealthy lifestyle or already suffer from underlying health conditions you are unfortunately tipping the odds even further into it isn’t going to last as long as you think bracket.

As a result of you realising you aren’t mortal you might want to sort your finances out for those that are left behind. Either those who will have a pleasant surprise or those that need to clean up the mess. But especially for those who depend on you and will now struggle financially without you.

How to avoid this financial mistake

  • Admit it’s not going to go on forever
  • Set up a will and keep it up to date
  • Think about those that will be left behind – how will they cope?
    • Given the above, do you need life, critical illness, or income protection?
  • Keep your finances and paperwork neat and tidy – meaning easy for someone else to follow
  • Share the financial management with another so not all the burden or knowledge is with one person.

Bomad -bank of mom and dad

Borrowing or receiving gifts from the BOMAD can be great but don’t forget someone else is “losing” that money.

Make sure you aren’t creating financial problems for your parents.

Be clear on what it is and what the conditions are. Is it a loan or a gift?

And don’t forget one day you might become the bank of mom and dad so save and invest wisely.

But not forget to put your own oxygen mask on first.

How to avoid this mistake

  • Keep conversations about money open with your parents to understand each other’s situation
  • Is it a loan or a gift? Get this clear from the start to avoid later arguments over repayment or the lack of them
  • Start saving it’s your turn next to be the bank of mom and dad if you have or want children.

Being underinsured 

Forgetting that bad things happen and if they do it’s going cost someone something.

Not being able to work and losing all or part of your income because of this.

Needing to pay for care or needing to do it yourself could be tempered with relevant insurance before significant changes in your or a family members health.

How to avoid this financial mistake

  • Guestimate what it’s going to cost you or your family if you die, get ill or are too sick to work?
  • Put in place adequate protection to cushion any such shocks.  
  • Make sure you have taken into account some of the likely basics e.g. a mortgage for x years, childcare costs to 18, relocation costs or whatever other shocks the survivors are likely to go through.

Financial mistakes

 

Ahhh not again!

Not understanding your cash flow

You earn a lot of money so everything must be alright, right?

That depends how much you spend?

If it goes out as fast as it comes in and if even just one more £ $ € goes out than comes in, then you have a problem no matter your income.

How to avoid this financial mistake

  • Set up a budget detailing incoming and outgoing cash
  • Understand your burn rate – how much of your money do you burn a month – it’s it 50%, 80% or 101%
  • Or the other side of this, figure out how much of your paycheck you get to keep? That’s your saving rate

Having no financial goals

If you have no financial goals, you probably have limited reasons to save or invest. Hence why you probably don’t have any savings.

Without a goal, you are rudderless and likely just drifting. Where will that get you? Let’s hope nowhere near the rocks.

How to avoid this financial mistake

  • When would you like work to become optional?
  • What would you like to do that costs money? And when do you want to do it?
    • Travel
    • Study
    • Get married
    • Buy a house
  • Write the above down with a timeline and a money amount. Now figure out the steps in between now and then.

Not keeping and sticking to a budget

Would you get into a boat without a rudder? Nope, because you can control where it’s going.

It’s the same for not working with or a to a budget. You are at risk of drifting onto financial rocks.

How to avoid this financial mistake

  • Set up a simple budget
  • Track your spending and adjust the budget to your reality
  • Give every $ £ € something to do.
  • Check you are happy with where your money is going
  • Get an app to make it easier to track and analyse what is going on with your money.

Financial mistakes

 

Right I need to think this through this time!

Too much risk or having all your eggs in one basket

It’s seldom a good idea to have all your eggs in one basket.

More or less putting it all on black and hoping for the best. Good luck with that.

Having all your investments in the same company that you work in. Investing in one or only a few companies, sectors, or countries could be concentrating your risk in one or more house of cards.

Investing in the latest thing, that has no track record.

How to avoid this financial income

  • Diversify your savings and investments
  • Try to have multiple sources of income
  • Have an emergency fund in place
  • Have the right level of insurance in place
  • Never risk everything
  • Make sure that if it goes wrong, it won’t destroy you.
  • Plan for things to go wrong.

Not taking enough risk

Are you petrified of losing it all, all the time?

Classically this is often about investing in the stock market.

Everything has a risk. Keeping all your money in cash is risky because it’s losing its value to inflation all the time.

Investing has risk but more chance of reward.

How to avoid this financial mistake

  • Realise that you must take some risks
  • Cash is not an investment and is losing value to inflation all the time.
  • Understand the connection between risk and return, especially on your path to building wealth.
  • Now thy self. Work on understanding your risk appetite, but not forgetting that everything has risk. Which risks are worth you taking for a better-expected return?

Not saving enough

Probably more, that’s what you should be saving.

The more you have saved the more options you have. To travel, study, work part time, take a break and many more.

How to avoid this financial mistake

  • Write down what you want, what you really really want. What will this cost?
  • Set up savings accounts called the things you want, e.g. round the world trip, new bike, start own business.
  • Pay yourself first. Don’t spend and then save what’s left. Flip that around. Save first and spend what’s left.
  • Set up an emergency fund of 3-6 months savings or more if you feel its necessary in your case.
  • Give yourself a buffer for when you might want more flexibility to change jobs, reduce your ours or want a complete break.
  • Start saving now and more than you think
  • Automate the savings. Make it easy for yourself and do it automatically without even thinking about it.  

Think it through

 

Do I not like that

Not investing enough

For work to become optional, to go on that round the world trip and or supporting your kids later in life is going to take money. It’s going to be difficult just to earn and save that in cash.

You will need to invest it and have the chance of higher returns, whether in the stock market or property investments.

Investing your money into the great companies of the world has a higher chance of growing and keeping pace with inflation than keeping it in cash – which will lose value every year.

How to avoid this financial mistake

  • Start small when you start investing – test the waters and see how you feel with the rises and falls.
  • Diversify your investments – you could choose funds that hold hundreds or thousands of companies across the world.
  • Understand compound interest and how it’s your friend
  • Invest for the long term
  • Understand the difference between short term drops in the market and the permanent upwards trend of the global stock market.

Ignoring your pensions

Your young so can’t be bothered to get interested in pensions its never going to happen anyway.

You don’t understand pensions so can’t, or won’t get interested in them.

We all just need to remember a pension is your future spending so one day it’s going to be really interesting or the only thing that you will live off.

How to avoid this financial mistake

  • Sign the forms you need to sign at work.
    • Check if the default pension is right for your age, risk tolerance and likely financial needs.
    • Make sure you name the person you want any funds transferred to in the event of your death.
  • Keep track of your pensions – who there with and where they are – keep this info up to date and in a safe place. One day you will need to start spending this money.
  • Track the value of your pensions yearly to understand that is happening.
  • Remember a pension is your future spending. It’s likely where a lot of your wealth will come from.

Racking up consumer debt

Buying more and more stuff on credit, probably because you can’t really afford it. You just want it.

The more and more debt you take on the more and more you will need to work to pay it off.

Debt compounds and continues to grow if you aren’t paying it off. If you are only paying off the minimum, you might spend years or decades paying it off.

This deadweight of debt is dragging your wealth-building down and down. The more debt you have, the longer and longer it will take for work to become optional.

How to avoid this financial mistake

  • Don’t but things you can’t pay for in cash or at least pay it off straight away
  • Pay off your credit cards in full every month. Automate it to make it just happen.
  • Keep your credit cards to a minimum. Get rid of store cards. Use credit carefully
  • Get rid of emails and alerts about the latest products you know you will be tempted to buy
  • Save up for things.
  • Delay spending money. If you see you want something, can you wait 24hours or 30 days? If you can, this gives you time to review if you really want it and how you are going to pay for it.
  • Keep a budget and live within your means
  • Accept that someone will always have more than you.  

Keep you money safe

 

You left it in a safe place right?

Quitting your job without a plan

I know what you’re thinking that’s it I’m outta here. I’m going to launch the next Google from my garage.

This might be true, but it’s a steep curve to climb as well as burning all your bridges and your one real source of income.

Starting a business or finding a new job might be harder than you think.

If you quit your job, but then can’t create or find another source of income quickly, you might find it a growing financial problem. This lack of income has the risk of creating massive pressure on you and others to make it work asap.  

Write out a plan for what you want to do, talk it through with someone (probably not your manager). Think about how long you can go without earning an income.

How to avoid this financial mistake

  • Keep the 9-5 for now
  • Can you work part-time?
  • Build up a cash buffer to cover you for 12 months to reduce the pressure to earn straight away
  • Test and prove you have a market or customers to sell to before quitting.
  • Give yourself as long a runway as possible before money starts to become a problem.
  • Try and leave on good terms in case you need to go back!
  • Keep your contacts up to date in case you need to find a job at some point.

Drop us a line if you would like a free 30-minute conversation on you and your money. And how to avoid some of these financial mistakes Contact

Read part 2 of financial mistakes to avoid here

Read part 3 of Financial mistakes here

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

 

This Post Has One Comment

  1. Andrew

    Congrats on the piece getting featured in PFB newsletter this morning.

    Buying too big of a house can be crushing for folks. It’s crazy to think the average person spend 1/3 of their income on housing.

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