Here’s a quick list of the 10 most common financial mistakes that I see. I hope they help you sidestep some of these potential pitfalls.
The amount of people I hear with variations on “I should have bought that property 5 years ago”, or “we paid of the mortgage 18 months ago. We should have been saving, but the money has just evaporated”.
It is just so important to START. There will never be a perfect time to invest. Procrastinating will not help.
2. Investing too conservatively
Shares and property go up and down in value. And for some people, the downs are distressing. So they switch to Cash. It’s safe – “my balance never goes down”. This is true, but especially in super, where you can’t access your money until after age 60, volatility really doesn’t matter. In fact whilst you are building up your super, you are a buyer of investments, so you want low prices. Too many people have too much of their long term investments in low risk investments like cash and bonds, and the return they forgo is enormous. You will have seen the compare the pair ad’s showing one funds that’s a bit cheaper than another and the difference that makes over time. We’ll the difference there is only around 0.5%. The difference between you investing in the Conservative option, compared to the Growth option is likely to be 2%+ on average, so a compare the pair analysis of these two options will show an enormous difference in outcome over the long term. be sure to avoid this common financial mistake.
3. No budget or handle on cash flow
There’s no need to track every cent you spend, but you need to have a handle on where your money goes and a system that tells you when it’s time to pull back – we can’t afford that this month. Being on top of your cash flow means you have money available when the bills come in, and you can pay cash for your holiday and not be melting the credit card. A lot of financial stress can be avoided by having a budget process.
4. Spending more than you earn
A natural flow-on to the budget comment above. We all recognise the logic of this, but at the heart of most financial disasters, is spending exceeding income.
5. Feeling the need to keep up with the Joneses
The neighbour gets a new car and all of a sudden your 4 year old vehicle starts to look a bit tired. It might be clothes, holiday’s or even a home. Peer group envy has the potential to be a financial disaster. Recognise it and avoid it.
6. Taking no interest in your financial affairs and relying on your partner
This financial mistake comes up most often after divorce or death of a partner. Even if you aren’t especially interested in the finances, attend the annual meeting with your financial planner, don’t just leave it to your spouse. Take at least some interest, because otherwise one day you could discover a nasty surprise.
7. No goals
None of us jump in the car to head off on Xmas holidays without a plan as to where we are going. Yet often people have no sense of where they are going financially. Perhaps it’s to pay off your mortgage, or an overseas trip every second year, or a comfortable retirement – determine your goals, devise a plan to get you there, and then monitor progress and adjust over time. This is the foundations of all good financial planning.
8. Not having appropriate personal insurance
The motto “hope for the best but plan for the worst” is always wise. Insurance provides a financial safety net under you. So often I’ve come across people who haven’t got things like Income Protection in place. A medical disaster happens – from a broken ankle to a heart attack, and then they ask about getting insurance! Too late by then, no insurer will touch you. Get advice on the right personal insurance for your needs, and get it in place whilst you are healthy.
9. Treating your home equity like a piggy bank
Another common financial mistake. The banks make this so easy. Never forget, the banks are not your friend. They make money by lending money out and charging interest. So they love it when you re-draw, and make no progress on your Line of Credit. The interest might look cheap compared to other alternatives, but if you take 10 or 20 years to pay that off, it will actually be very expensive.
10. Thinking you can ignore super until you’re in your 50’s
Are you someone who doesn’t even bother opening their superannuation statement envelope? I know in your 20’s and 30’s superannuation seems pretty uninteresting, but as per point 2 about, if you’ve been put in say the “Balanced” option, when you perhaps should have been in the “Growth” option, that has the potential to cost you thousands of dollars in retirement. Perhaps the insurance in there doesn’t match your needs. Or maybe you have scope to salary sacrifice. Your superannuation may end up being your largest financial asset. Don’t ignore it.
This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.