Making mistakes in life is inevitable and sometimes we learn the most after making a mistake. However, if we can avoid making some crucial mistakes, particularly financial ones, we will be much better off.
Finances are highly personal and I’ve seen common problematic themes arise throughout my time as a Personal Finance Coach. These themes include living without a financial plan, not being financially educated, and having investment portfolios without any diversification.
My goal is to help you avoid these common mistakes so you can live your best life and reach your financial goals.
Mistake #1: Living Without A Financial Plan
Living without a financial plan or financial discipline can prevent you from accomplishing your dreams and potentially lead you to financial ruin.
Maybe you’ve felt like you don’t make enough money to have any sort of financial plan or perhaps you feel like your income is significant enough that you don’t have to have a plan at all. Maybe you’ve felt overwhelmed and don’t know where to start or you simply don’t have time for another to-do.
Regardless of where you’re at, it’s never too late to create a plan. A financial plan can have many moving parts, but we’ll cover the top components below.
How To Avoid Financial Wandering
Budgeting and Money Management: A budget is the best place to start your financial plan. First, determine your net income. Then find an app on your phone or pull out a pen and paper and track your expenses for a couple of months. Tracking your expenses will give you valuable insight into your habits and help you see where you can cut back. Use your tracked expenses to create a budget and then commit to sticking to it. Create budget line items for debt payments, savings categories, and investing.
An important part of money management is avoiding lifestyle creep. This can happen when you receive a significant raise or earn a promotion and your monthly cash flow increases. Once your start earning more there’s a tendency to “upgrade” your life. This can look like leasing a newer, more expensive car, buying a more expensive home, eating at fancier restaurants, etc. We are certainly not against treating yourself or enjoying your income, but you have to make sure the upgrades don’t happen to every line in your budget.
Having an emergency fund is also crucial to your financial plan. Life is unpredictable and you’ll sleep better at night knowing you have a financial cushion if something were to happen. I suggest having 3-6 months of living expenses saved.
Retirement Strategy: It’s best to think about your retirement as early as possible. At what age would you like to retire? What kind of lifestyle do you want in retirement? How much money do you think you’ll need?
It’s impossible to predict the future, but having a strategy for saving and investing is crucial to a successful retirement. The sooner you start, the easier it will be to achieve your goals and fund your dream retirement.
Debt Elimination Strategy: If you carry debt, it’s important to have a payoff strategy. Start by writing out all of your debts, including their balance, interest rate, and any other important loan terms. Then choose a payoff strategy that best fits you.
Three common debt payoff strategies include:
Debt consolidation: Combine all of your debts into a single account. You can receive a lower interest rate and it helps you focus your efforts on one account.
Debt snowball: Pay off the smallest debt first while making minimum payments on all the rest.
Debt avalanche: Pay off the debt with the highest interest rate first while making minimum payments on the rest of your debt.
Saving Goals: In addition to retirement, there will be many other items and experiences you’ll want to save for. Would you like to buy a home soon? Is your car on its last couple hundred miles? Do you have any big trips you’d like to take?
All of these things can be funded through sinking funds. A sinking fund is a chunk of money - ideally held in a high-yield savings account - that is earmarked for a certain expense. You can make your sinking funds large, like for a down payment on a home, or small, for things like holiday gifts.
It’s not enough to just hope you’ll be able to afford something or charge expenses to a credit card. You have to have savings goals in your financial plan.
Mistake #2: Not Being Financially Educated
No, I’m not suggesting you need to go back to college or even take any formal classes. There is a wealth of information in books, on the internet, and from personal finance coaches (like myself) and advisors who love sharing their knowledge.
Getting educated and being prepared is crucial to your financial success. It also helps if you start learning and preparing as young as possible.
If you’re in your 20s and 30s, you have decades of accumulating wealth and investing in front of you. The possibilities are truly endless, you can do so many wonderful things with your money with a little knowledge and effort. If you’re in your 40s and 50s, you can share your knowledge and experiences (good or bad) with the generations below you to set them up for success. If you’re nearing retirement, you need to be educated on your investing options so you can adequately preserve your wealth.
How To Avoid Being Financially Uninformed
Reading is one of my favorite ways to educate myself. There are incredible financial books you can find at your local library. Choose a topic you’re interested in or wish you knew more about and just get started! Don’t overwhelm yourself, but try committing to reading 3-5 personal finance books in the next year. You’ll be surprised at the nuggets of information you’ll come across.
Podcasts are another great way to increase your financial literacy. Pick one and listen to it the next time you take a walk or drive to work. Try out a couple and pick which personalities and content you like best.
If you’re on social media or in your inbox a lot, find financially influential people to follow or subscribe to their newsletters. Small, bite-sized doses of financial information can slowly build your knowledge and make it feel more approachable.
One of the best ways to learn something is to talk to a professional. Not only can they share their expertise with you, but they can also show you gaps in your knowledge and financial plan. They can also encourage and support you on your financial journey.
Mistake #3: Not Diversifying Your Investment Portfolio
Investing all in one place is risky and can lead to lower overall returns. If all of your investments are in your company’s stock and your company goes out of business, you not only lose your job but also all of your savings.
A well-diversified portfolio involves investments that negatively coordinate one another, so when one investment class is performing poorly, you still have other investment classes that are performing well.
If you’re young, you have a longer “time horizon” - this means you can take on riskier asset classes because you won’t be needing the money soon. More risk can often lead to higher returns. On the other hand, if you’re close to retirement, you want to stick to safer investment classes with less risk.
How To Avoid a Non-Diversified Portfolio
The first thing to do is to learn about the different types of investment options.
Diversification in assets can include investing in a mix of stocks (both domestic and international), bonds, commodities (gas, oil), real estate, and cryptocurrency.
It’s important to only invest in what you understand and be aware of the fees that are associated with different investments.
Avoid These Money Mistakes With the Help of a Financial Coach
The confidence that comes from having a financial plan can help you feel in control and avoid aimlessness. The skills you obtain from getting financially educated will help you see opportunities and grow. Building a diversified portfolio will help protect you from market volatility and grow your wealth over time.
At Wealthly, I love providing you with the financial tools you'll need to succeed. Helping you create a financial plan, providing financial education, and helping you diversify your investment portfolio is what excites me.
There’s a lot out there to learn, but it doesn’t have to be complicated. To see if we can help you avoid these money mistakes and others, email me at firstname.lastname@example.org or click here to fill out a contact form today!
Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual.