Managing personal finances can sometimes feel like navigating through a never-ending maze. There are so many decisions to make, and unfortunately a few of us can fall into these traps that can hinder our financial success. Let’s take a closer look at the 6 most common mistakes and how to avoid them.
- Not setting financial goals
Many people go through life without setting clear goals. How can you achieve financial freedom or independence if you don’t know how much you need? Without a clear milestones or end in mind, it is easy to keep lose track and not achieving things that aligns with your long-term interests.
Steps to take
- Have goals with different milestones by breaking down your goals down to different timelines. For example, if you want to retire by 55 then set monthly and yearly targets of what you need to have a comfortable retirement.
- Set goals by using the SMART principle, so Specific, Measurable, Achievable, Relevant, and Time-bound. For example, instead of saying ‘I want to have an rainy-day fund’, state ‘I want to have a rainy-day fund of $8000 in the next 6 months.
- Write it down – write your goals down and keep it visible. It will help you to review them on a regular basis, not to mention to keep you on track and motivated.
- No budgeting or impulsive spending
Not everyone has to track their every dollar in a spreadsheet. In fact, most bank apps are pretty good nowadays at categorising your spending. Life isn’t about knowing where every cent is going, but being mindful of your outgoings. It is easy to underestimate of how small purchases can add up. Excessive spending, especially for non-essential items to keep up with the Joneses may bring you momentary joy but impact on your financial health.
Steps to take
- Develop a budgeting system that works for you – whether it is a spreadsheet, or an app, or divide your money into different funds. Allocate specific amounts ahead of time and keep to the limits you have set
- Use delayed gratification – set yourself a waiting period for the ‘want’ purchases (not the ‘need’ ones) before buying.
- Avoid temptation – don’t do things that would tempt you! If you know you love online shopping, then try not go on when you’re bored and unsubscribe from their marketing emails. Perhaps don’t save your payment details to make that checkout part a little bit more difficult.
- Living pay check to pay check
Living pay check to pay check means your outgoings equal to your income, which means there is not much left for savings, investing, or when life throws something unexpected your way. That awful feeling when you don’t have enough money to have your physiological needs met, is something I hope you never have to go through.
Steps to take
- Build an emergency fund – start off small. Put away 20% if you can and put it somewhere not easily accessible. The goal is around 3-6 months’ worth of expenses
- Increase your income and/or adjust your expenses – look for opportunities to increase your income. Passive income from investments, side hustles, asking for a pay raise… Can your outgoings be adjusted? Are there areas that you can cut back?
- Develop good financial habits. They provide the framework to manage your income and outgoings responsibly. Be consistent.
- The lifestyle creep
Life is about balance. You can’t always be saving and scrimping. It’s important to treat yourself on the occasion and enjoy the rewards that you worked so hard for. But lifestyle creep starts with incremental small changes becomes the norm when your income increases. And before you know it, your expenses have sneakily increased to match your higher income.
Steps to take
- Maintain and keep a consistent budget – stick to it, especially when your income grows. Allocate a portion of the increase to savings and investments.
- Set limits – it’s still good to reward yourself but decide on a percentage you can spend and stick to it.
- Eye on your goals – keep your goals visible so they can keep you motivated and accountable. Maintaining a balanced lifestyle can help you achieve them faster.
- Ignoring investing
Some people avoid investing due to lack of knowledge, fear of risk or thinking they don’t have enough money to. Investing can seem intimidating if you’re not familiar with it, but it’s a powerful way to make your money go further and your wealth grow over time.
Steps to take
- Start small – you don’t need to be wealthy to start investing. There are micro-investing apps and platforms that allows you to start with as little as $5. Start small and increase the investment amounts as you become more comfortable.
- Education – knowledge dispels fear. If it’s fear or risk that’s holding you back, then educate yourself so you can understand it enough to remove the barrier. You are already taking action by reading this!
- Seek advice – spend time asking questions and talking to people you know that are successful investors. Use resources and workshops from experts to gain insights. Seek professional advice if you’re still uncomfortable.
Avoiding these top 5 financial mistakes can be easy – stay disciplined, be proactive and stay aware. Start by setting clear goals to help you with direction and purpose. Be mindful of your spending habits and maintain a balanced approach for living and spending. Invest your money so your wealth can grow over the long term. Now is always the perfect time to make smart and impactful financial decisions for your future.