As the great Ferris Bueller once said, life comes at you fast. So fast, in fact, that you may well find yourself in your mid thirties or beyond with no serious financial plan and many financial mistakes. Without seeking financial advice to keep you on track, it is easy to forget to make it a priority. You may associate managing your finances with being on a strict budget that sacrifices all of your fun. Nothing is further from the truth; a good financial plan does allow for discretionary money, whilst also balancing it with solid investments. There are innumerable mistakes people make when it comes to money and finances, but they all really come down to not doing these five fundamental things.
- Investing in retirement
- Making—and sticking to—a budget
- Having an emergency fund
- Taking on too much debt
- Social pressure to spend
Not Investing in retirement
Your super is a great starting point for your retirement income stream, but chances are that you will want to maintain your lifestyle after you stop working. That will require more income than your super's going to provide, so you should start investing now to ensure the retirement you desire. People are working longer, but even if you retire in your 70s it's realistic to expect 15 or 20 years more of an active lifestyle. Also, consider that your spouse may outlive you, and you would not want their standard of living to suffer because they only had their own super to fall back on.
Not Making a Budget
When you're making plenty of money and can easily pay your bills, it's easy to think you don't need a budget. When you're young and single, you can get away with this mindset for a few years. But as your responsibilities grow—you marry, buy a house, have kids—a budget becomes an imperative. One mistake couples make is not discussing budgeting and finance, but no matter how uncomfortable it seems, it's critical that you're both on the same page when it comes to managing your finances.
Here are a few tips for setting a budget to avoid financial mistakes.
- Only count your net salary towards your budget. If you have bonuses, consider those windfalls—don't count on them when you're setting your budget.
- Categorise your expenses into routine (rent, car payment, utilities, credit cards, student loans) and optional (entertainment, dry cleaning, travel, clothing).
- Review your budget each quarter so that you can evaluate your spending habits and make adjustments if your outgo is outpacing your income.
Most people are shocked when they actually sit down and calculate all of the money they spend on things like lattes and streaming services in a month. While you're setting your budget, cancel any subscription services that you're not using.
Not Having an Emergency Fund
Your parents may have drilled into your head that you need three to six months of cash on hand in case of an emergency. You should have a savings account that is dedicated exclusively to emergencies. If something unexpected happens, like an accident, illness, or unemployment, you'll be able to ride out the storm without having to ask friends for a bail out or get a bank loan to cover your expenses. Your emergency stash should grow with your expenses—the amount that was fine when you were renting an apartment with your mates won't cut it when you have a family of five. Once you have this stash of cash, you'll be surprised with the peace of mind you'll get from knowing you've got that level of financial security.
Taking on Too Much Debt
Accumulating too much debt is just about the biggest mistake you can make with your finances. Debt is a drag on your life in several ways, not least of which is that you waste thousands of dollars every year in interest payments. Too much debt prohibits you from making important purchases, like a house or apartment, and ultimately can really harm you in the long run by lowering your credit rating. Debt is an insidious thing that creeps up on you, which is another reason that a budget is so important. So much debt is accumulated on high-interest credit cards—if you don't pay your balance every month, that $4 latte is costing you 18% interest carried over months. This is what we call "bad" debt. Other debt, like student, business, and home loans, may have some tax benefits. Ask your tax advisor if you have any "good" debt, and pay down your bad debt as quickly as possible. We discussed good and bad debt in an earlier article, but the bottom line is that you can make debt work for you, but not with revolving credit cards.
Bowing to Social Pressure to Spend
Otherwise known as keeping up with the Joneses, trying to keep up with your friend's spending is just a bad idea, especially if your income isn't as high. This could mean anything from eating at restaurants that are really splurges for you, to buying a house in a neighbourhood you really can't afford because that's where your friends are. Keep in mind that no matter how successful you are, there will always be someone with more. Spend within your means, and when you can really afford it, upgrade your house and cars, and take those luxe vacations. Lots of people discover that when they can really afford that $120,000 4WD, they really don't want it all that much, anyway—but there is tremendous satisfaction in knowing they can.
Not Seeking Professional Advice
If you've noticed a common thread throughout all these thou-shalt-nots when it comes to your finances, it's that a budget and planning are critical to your monetary health and avoiding financial mistakes. Spend within your income, and set up a financial plan that grows and evolves with your needs. A consultation with a financial advisor at
Super Network is the first step to long-term financial security, so set one up and stop making the same mistakes with your money.
