Managing your current and future finances successfully can be a minefield in today’s economic climate. There are a few major pitfalls that could be costing you your financial future. Acting now is vital: it is so easy to leave financial tasks for later, for a quiet day, but so rarely do those days come around. This blog highlights the five financial mistakes to avoid at all costs.
1. Not having a plan
If you have no idea of your destination, how will you know which way to go? Going through life without any sort of financial plan can result in making decisions based on guesswork, or just drifting along until it’s too late to achieve your goals.
Having a clear plan will help you to make mindful choices and know where you want to be at certain points in your life. Whether that is a five-bedroom house in Surrey, your children privately educated in an excellent school, or retired by 55 and cruising the Med in your 40-foot custom Wooden Boat.
Your financial planner partners with you to discover what you want from life. They then build a plan with you based on your finances, lifestyle and expenditure to get you to where you want to be in life. You will know exactly how much you should be saving each month and where to save it. And, most importantly, you will know how much is enough to achieve your ideal lifestyle.
2. Spending everything you earn
Putting money aside for your future is essential to ensure you have financial security in the long-term. Spending every penny you earn now will be a detriment to your future finances.
Great fortunes are often lost in many smaller transactions. Fancy caramel lattes, dining out at nice restaurants, designer clothes, luxurious holidays and fast cars can blow even the largest budget and can result in living from one payday to the next.
If something was to happen and the next payday didn’t come or you had a big unexpected extra expense, you may find yourself in a sticky situation if you haven’t followed a financial plan. Bank loans and overdrafts can get very expensive and end up costing you a lot more in the long run.
Take a look at this blog to find out where for advice on how to start with your savings strategy, how much you should save, and where.
3. Not investing
For long-term goals, investing can be a great option. The stock market tends to do better than cash over the long-term. This provides an opportunity for you to achieve greater returns on any money invested over time.
Before investing you should ensure you have paid off all short-term debt and are in a financially stable position. You should also only invest money that you will not need in the next five years.
It’s essential to have an emergency fund as well, which should be equivalent to at least six months of spending, if not more. This will prevent you from dipping into your investments when the markets are low or occurring unwanted charges.
There are many investment options available and a well-diversified portfolio of company stocks and shares, plus an element of government bonds and index-linked gilts, makes for a good mix.
4. Paying too much in investment fees
If you do choose to invest for the future, then the number one rule is not to allow your investment fees to eat into your returns.
Investment costs might not seem like a big deal, but they add up, compounding along with your returns. In other words, you do not just lose the fees you pay out – you also lose all the growth that money might have had in store for you for years into the future.
Expensive fund managers can mean that any returns they generate for you are all too soon spent paying their fees. Opting for a low-cost investment portfolio can mean that you keep more of those returns for yourself, compounding your future growth.
For more information on how to avoid overpaying on investment fees take a look at this blog.
5. Not saving for retirement
Retirement may seem a lifetime away right now, but starting early on saving for this time of your life is crucial to ensure you are financially stable in your golden years. Plus, starting early means you benefit from many years of compound interest, and time is on your side. Albert Einstein wasn’t wrong when he claimed that compound interest was the eighth wonder of the world!
How much money you will need to see yourself comfortably through retirement varies massively from person to person, depending on the lifestyle you would like to live, your potential healthcare needs, whether you are renting or paying a mortgage, and many other variables. However, to have enough money to last 20–30 years without working requires a substantial pension pot for anyone, regardless of these factors.
Fidelity’s research found that any households who save seven times their annual household income by the age of 68 should be able to retire and maintain a similar standard of living as they had in their working life. This is based on average household incomes in the UK, with typically two working adults and two state pensions.
For help working out how much you should be saving for retirement, visit this blog.
If you need help with any aspect of financial planning, investing, budgeting or retirement planning, our chartered financial planners would be happy to help. Contact us today.