Below are some common pitfalls that I have observed over the last seventeen years as a financial planner. You may have a smoother journey toward reaching your financial goals if you can avoid some of the hazards along the way.
Living Beyond Your Means – Take the time to review your monthly expenses and compare them to your income. Establish a budget where you spend less than you earn. A good way to deal with unforeseen financial issues is to always save at least 10% of your income and avoid unnecessary debt.
No Emergency Fund – Everyone should maintain an emergency fund of at least three months of expenses. This should be higher if you don’t have a lot of job security or your income fluctuates. Without an emergency fund, large unexpected expenses can quickly throw you into a negative debt spiral.
Too Much Debt – Avoiding debt is a mindset. There is good debt and bad debt – it may be wise to secure a low interest, tax deductible mortgage when purchasing a home. This enables you to start building equity and reap the benefit of appreciation as the value of your home increases. However, it is generally not advisable to finance personal items such as furniture and appliances. If you can’t pay cash, you should probably wait and save up for the purchase. Avoid credit cards if you can’t pay off the entire balance at the end of the month.
Overspending on Vehicles – Financing the purchase of a new vehicle can negatively impact your monthly budget. I have seen clients and friends take on car payments in excess of their home mortgage. Vehicles are depreciating assets and they are not a good investment. When possible you should buy a used vehicle and save your money to purchase your car with cash. Unless you have a lot of disposable income, minimize your vehicle expenses and buy with functionality in mind.
Putting Kids Through College at the Expense of Retirement – I know you love your kids and you want to give them a good start in life but don’t sacrifice your retirement. There are many ways to minimize college expenses and finance a college education. You can’t take out a loan to finance your retirement.
Get Rich Schemes – I’ve heard them all – every few months someone will ask me about some new product or investment scheme that promises low risk, double digit returns. There is no free lunch, if it sounds too good to be true, it is!
Emotional Reaction to Movements in Market – Stocks are long term investments, you need to be willing and able to ride out the fluctuations in the market. Over long periods of time, the stock market has trended upward; however, there will be periods with negative returns. Avoid the natural tendency to react emotionally to market downturns. Stay the course and follow your long term plan.