5 money mistakes that drive experts crazy and what to do instead
Cost of living has hit us hard across the board, from interest rate rises through to inflation increasing the price of a weekly shop along with a range of goods and services. As a financial planner, I spend a lot of my time talking to clients about how to get the most value from their earnings. No matter the income level, there’s often key money mistakes people make that can have a real impact on their financial life in addition to the cost of living pressures. In good news, these can easily be fixed once you start paying attention to them. Let’s take a look at the 5 most common and how to solve them.
Thinking too short term
People generally spend more time on planning their holidays than to planning their financial lives. It's easy to fall into the trap of thinking to short-term. If we get paid weekly or fortnightly or monthly we tend to think about planning and spending in the same timeframe. There is real benefit though too having some medium and long term planning. Medium term planning is especially important for paying off debts and savings goals. Long term planning is especially important for your retirement planning including your superannuation and even paying off a home loan.
So spend some time thinking about your medium and long term goals too. The average weekly wage in Australia is $1,769.80 per week. Over 12 months that is $92,029.60. Over a 45 year working life that amount is over $4.1 million. That’s a lot of income! Respect your earnings and make a plan to make the most of it, not only in the short term, but the medium and long term too.
Not paying attention to your spending
As a financial planner I’ve genuinely lost count of the number of clients I’ve had sitting across the desk from me who earn great money but don't know where a great deal if it goes. They earn a good wage and they have a sense that things are going OK, because they think too short term. They also don’t pay attention to their spending. As a result they miss out on medium and long-term opportunities to make the most of their earnings. Paying attention to your spending doesn't mean that you have to give up the things you love for example a morning coffee on your way to work either.
Paying attention to your spending is not like being on a diet. It’s not about going without. It’s about making sure when you do spend your hard earned money you shop around to try and get the best value you can. Credit cards, loans, car insurance, mobile phones, electricity bills and health insurance are all regular expenses most people have. They should however never be set and forget. Find better value and pay attention to your spending. It will give you the opportunity to save and invest more and achieve your goals sooner.
Being uninterested in interest rates
Ask anyone with a home loan right now and they will tell you about the impact of rising interest rates on their life. Interest is the cost of money. If you’re a lender, it’s what you pay for borrowing money. It might be a short-term loan like a credit card, a medium-term loan like a personal loan for a car, or a long-term loan to help you buy a mortgage. If you’re an investor interest also matters. Let’s say you’ve saved $50,000 and were getting a 4% return, that’s an extra $2,000 a year on top of your current wage or salary. I’m sure there’s lots you could do with that money.
Regardless if you’re a borrower or an investor, the interest rate you’re paying or earning matters. Over time, interest adds up. Over 5 years, for example, that $2,000 becomes $10,000, plus there’s interest earned on the interest too. If you’ve got debt pay it back as quickly as you can comfortably afford to. And if you’re about to get a debt, factor in a few additional interest rate rises. It is really important to make sure you stress-test your ability to pay back the loan under higher interest rates.
Not keeping it real
Most things we do in life have a financial consequence and it’s important to keep it real. I spend a great of my time as a financial planner asking people what really matters to them. Is life really about showing off to family and friends new purchases on Instagram? Probably not. Having a focus on your own goals makes a world of difference. It provides you with something that can drive you forward. One of the real dangers of the social media world we live in today, especially for younger Australians is the desire to keep up with their friends. What they often don’t see is the financial stress their friends are putting themselves under to have everything right now or the difficult conversations behind closed doors about how to keep it going or reduce the financial stress they’re not telling you about.
Your only obligation in your adult financial life is to yourself, your spouse and your kids if you have them. Being overconfident is just as dangerous for your financial health as being too under confident in your financial life. Being overconfident may make you take too much risk. Being too conservative might mean you miss out on opportunities. At the end of the day you need to find the right balance for you and make sure the goals you set and the financial decisions you make are within your own comfort zone.
Forgetting to reward and celebrate success along the way
If you’re going to set yourself some medium and long-term goals, pay attention to your spending and interest rates as well as keeping it real, then you also need to reward yourself along the way. Rewarding yourself for achieving goals makes setting goals much easier. And if you’ve got medium and long term goals like paying off a car loan, paying down the mortgage or saving into super for your retirement, celebrate key milestones. For example it might be going out for a nice dinner or getting concert tickets for every $25,000 that’s saved into super or paid off a home loan.
Your financial life done well shouldn’t be a chore or a bore. If it is you’re doing it wrong. Spend some time and energy to rethink your financial life, learn more about how money works and go forward more confidently to achieve your goals.
Luke Smith is a licensed Australian financial planner and author of the new book, Smart Money Strategy – Your Ultimate Guide to Financial Planning (Wiley, $34.95), published by Wiley. Luke is also the host of the popular podcast ‘The Strategy Stacker – Luke Talks Money’ and appears every Friday afternoon on Canberra’s 2CC. Find out more at www.thestrategystacker.com.au
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