Wrong Assumptions That Are Dangerous for Your Financial Plan

Last Modified on May 26, 2020

Securing your future starts with the right kind of financial planning. Whether you are building a corpus for your retirement or saving for a long-term goal such as a child’s education or marriage expenses, planning is an integral part of achieving your desired goal.

But financial planning is not as simple as it sounds. Even the most well-planned decisions can face unexpected and unwanted hurdles because of reasons beyond your control. For example, your planning can go haywire if your career takes a downturn or recession sets in. The increasing cost of higher education can also make things difficult for parents. It is hard to plan for every probable event in the future but preparing for the worst and hoping for the best can be your ticket to a reliable financial plan.

Here are a few assumptions that you need to avoid when building your financial plan.

Make sure that your financial goals are not isolated 

A typical mistake made by many when building a financial plan is assuming that their financial goals are entirely isolated from their other financial priorities and should appear at the end of the list. Irrespective of when you begin your career, you should start preparing for your future as soon as you start receiving a steady income. People who start working early, often think that they have sufficient time to plan for their future and end up prioritizing other commitments. 

Financial planning is as essential as any other monetary commitment. The earlier you start, the better it is. Your financial goals should also be interlinked with your income, savings, investments, and expenses. To accomplish your desired goal, you should try to follow these tips:

• Plan and save from your current income regularly.
• Create goals in conjunction with other personal and professional ambitions.
• Prioritize different targets according to their importance levels.
• Make a feasible investment plan based on your income.
• Widen your time horizon to the maximum extent so that your investments can factor in unforeseen events. 

Don’t take inflation for granted

Inflation can grow at a fast pace and affect the value of your savings and investments sooner than you expect. Many investors tend to ignore this factor. However, it is very important to plan your savings and investments in a way that their returns can effectively counter inflation. 

Inflation can be defined as the extra amount that you have to pay for the goods and services today compared to yesterday. If you fail to account for inflation in your investment plans, you might end up falling short of your goal.  The best way to tackle inflation is by extending your timeline to the maximum extent, putting greater focus on long-term goals, and starting with a more aggressive approach from the start.

Don’t think of financial planning as a one-time activity

Preparing a long-term investment plan and meticulously following it is only a small step in the journey to financial freedom. Despite your diligent efforts, all your plans might not help you achieve the desired outcome at the end of the day. 

It is important to note that financial planning is an ongoing process. You may need to revise your strategies according to market conditions and personal requirements from time to time. Your financial plan may work perfectly today because it has been built on today’s data, but the same information may not be relevant tomorrow. Based on your advisor’s recommendations or your personal judgments, you need to alter your investment strategy at regular intervals to stay abreast with the current trends. You also need to be flexible and agile with your financial planning. Regularly monitoring your investments and taking corrective actions can help you mitigate the different internal and external risks.

Don’t forget the importance of diversification

Putting all your investments in just one financial instrument is not a wise choice. Investing your money in the stock market can give you consistent returns for some time. But the market is a volatile place that can crash anytime because of drastic geo-political and economic events. As a result, you may lose not only the profit you make but also a considerable portion of your invested capital. It is advisable to have a diversified investment portfolio so that even if one segment performs poorly, the other can help cover its loss. A balanced mix of different financial instruments may not always give you exceptionally high returns but could safeguard you from exceptionally steep falls.

Don’t assume your life expectancy

Another common but critical mistake made by people when undertaking financial planning is undermining their life expectancy. If you save only for a limited number of years, there is a high probability that you may fall short of money in the later stages of your life. Therefore, when planning for retirement it is extremely critical to use life expectancy averages published by credible sources and save more to cover unexpected expenses. With the advancement in technology and medical science, your life expectancy is likely to increase. You must consider your past health history and current medical conditions and lifestyle, when preparing a financial plan for the future. Periodically review your medicare coverage, and if possible, consider contributing towards your health savings account. It can help minimise your out-of-pocket expenses and contribute more towards your other financial goals. If required, you can also undertake regular health check-ups or seek professional advice to assess your health condition and accordingly modify or prepare your plan. 

To sum it up

You should try to avoid any kind of assumptions when drafting a financial strategy as it can be detrimental to your plan. When it comes to financial planning, it is critical that you set realistic goals, take informed decisions, avoid any kind of unrealistic presumptions, and periodically evaluate your investment strategy to ensure that they are on the right track. To further prep your financial plans and goals, reach out to financial advisors to help you with the best-suited financial strategies.