Last Modified on February 17, 2020

The first step towards achieving financial security in life is to make and follow a sound financial plan. Financial planning is critical towards amassing enough wealth to lead a comfortable life. However, even with a good plan in place, there are many pitfalls that need to be avoided at all times. Unnecessary mistakes in financial planning can cost thousands of dollars in the long run. So, one should always be informed about such mistakes and know how to avoid or fix them.

Common Financial Planning mistakes and how to fix them

Financial planning, when done the wrong way, can have serious implications on an individual’s life. These implications may range from a sub-standard quality of life to outright financial doom. However, with a bit of diligence on your part, you can steer clear of common blunders that have the potential of making you lose money.

Here are a few common financial planning mistakes that many people make:

1. Failure to set clear goals

It would be fair to state that a number of Americans are not very adept at financial planning, and many are quick to dismiss it as ‘unnecessary’, ‘too complicated and time-consuming’. Even the ones with a financial plan in place only have a vague idea about their goals in life and are hence unaware how to manage their finances accordingly.  Having a clear financial goal enables you to focus better and avoid behavior that can be detrimental towards achieving your goals.

So, always have a specific goal in mind instead of a vague one. For instance, when thinking about your children’s education, focus on specific topics such as the school or college do you want them to attend and the financial planning that is involved. Once you know what you want, set a plan and go about achieving your goals. A clarity of vision can work wonders when it comes to successful financial planning. 

2. Frivolous or excessive spending

It’s very easy to spend a dollar here and a dollar there on frivolous items that are not really needed. However, such seemingly ‘small and insignificant’ expenditures can put a serious dent on overall finances in the long run. Ultimately, every dollar counts, and one of the biggest mistakes to make is to spend hard-earned money on extravagances that can be done without.

It is wise to cut down on wasteful expenses, track your spending and stick to a pre-set budget. While you don’t need to keep track of every cent spent, you do need to know where your money goes – primarily which expenditures are justified and which ones need to be avoided in the future. This is an elementary step you need to take if you want your financial plan to be successful. 

3. Living paycheck-to-paycheck

In March 2018, Federal Reserve data suggested that the personal savings rate in U.S. households was just 3.1%. Numerous American families have developed the risky habit of living paycheck-to-paycheck. The kind of lifestyle led by such families means that every dollar that they earn is needed to make payments every month and a single, missed paycheck could derail their finances considerably. This is not a situation anyone wants to find themselves in.

The uncertainties of life mean that you could lose your job without much warning, and if such an unfortunate event were to take place, it could spell financial doom or you. This is why many financial planners advise that you keep at least 3 months’ worth of expenses as a safety net. In case next month’s paycheck doesn’t arrive for whatever reason, you’ll have something to fall back on rather than running pillar to post with worry. 

4. Credit card abuse

The proliferation of digital payments in our society has led to a huge problem that is plaguing many people, especially young adults, nowadays – credit card debt. Buying something on credit, i.e., not having to pay for it upfront, can be a tantalizing temptation that anyone can succumb to. However, the interest rates that credit cards levy mean that you are paying a lot more for something that actually costs lesser. 

Once you start depending on credit to sustain your lifestyle, chances are that you will develop a habit of spending more than you earn, which is a dangerous proposition. So, always keep a check on your credit card usage and ensure that you make payments on time. Do not spend money that you don’t have yet – it won’t come to any good.

5. Wrong or risky investments

Investing money is advisable for anyone who ultimately wants to stop working and have a nice and carefree retired life. After all, money needs to be worked for it to increase even more. However, the investment industry can be quite tough to maneuver around, and there are many wrong or risky investments that need to be steered clear of. A single bad investment has the potential to make an individual lose everything he/she has in the blink of an eye. 

When investing, understand what you are getting into and the risks that are involved. Assess whether you can tolerate the risks involved and if you can dedicate the time that an investment requires to grow significantly. If need be, consult a professional financial advisor who can help invest your money in the best manner possible. Ensure that you do not end up losing money on a wrong investment that could’ve been avoided. 

To sum it up

The common financial planning mistakes mentioned in this article have the potential to risk the stability and comfort of your future. However, you can avoid them altogether or fix them in time easily. All you need to do is to manage your finances responsibly by monitoring your expenses and cutting down on unnecessary expenditures whenever possible.

If you want professional assistance with your financial planning, get in touch with top financial advisors today.