A financial plan provides a direction toward achieving financial security by ensuring you make premeditated financial choices and investment decisions. As such, right off the bat, you must avoid mistakes that prevent or delay you from accomplishing your plan.
You need to be aware of any red flags in your plan or financial habits that can cause roadblocks down the line. As you prepare your plan, you must be wary of anything that can set you back. This includes anything that can cause you loss of assets, prevent you from saving/investing and put your financial future in disarray.
This article will explore ten financial planning mistakes you must avoid to achieve your goals.
Setting too many financial goals can be a mistake that hinders your financial plan. It often leads to a lack of focus and overwhelming yourself with numerous objectives.
When your financial plan involves accomplishing many goals, it is common to feel pressure to achieve all those objectives simultaneously. These goals may include retirement planning, investing, eliminating debts, saving for a house, saving for your children's education, purchasing a vehicle, and more.
While being motivated to achieve all those goals is good, you must find a way to chase them optimally. And that will require prioritising. How you do this will typically depend on your income level, age, and responsibilities. And you can work on more than one goal at the same time, depending on your financial situation.
For instance, someone early in their 30s can prioritise investing and saving for a house, while someone in their late 40s can prioritise paying down debt and strengthening their retirement nest egg.
Instead of setting too many goals that make making your financial plan hard, you can prioritise and take small steps at a time. This can make the journey to realising your plan less daunting.
Financial planning is typically a long-term endeavour that requires consistent effort. Waiting for your finances to settle before you execute your planning is essentially putting your finances on hold. While patience is essential, it can sometimes be detrimental as delay can be expensive and jeopardise your financial future.
It can do this in two main ways.
First, expecting your finances to settle can lead to a passive approach to tracking your plan. Instead of actively monitoring and adjusting your financial plan, you might adopt a "wait-and-see" attitude, which can result in missed opportunities for growth and financial improvement.
Second, it can prolong financial stress and hinder your ability to build a solid financial foundation. For example, If you are struggling with debt, it's crucial to promptly address it, as waiting might lead you to financial instability and a debt cycle. Likewise, waiting until your finances are settled before you execute your retirement plan means you must do a lot to catch up.
Financial planning is an ongoing process that requires active participation and starting early. It is important to take action and make progress toward your financial goals. Even if your financial situation is not perfect, make do with what you currently have.
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You may feel anxious and afraid when you believe your financial plan may be off course, and you might feel over-confident when everything is going according to plan. If left unchecked, these emotions can increase or decrease your risk tolerance and force you to abandon the plan you had in place blindly.
While emotions are a natural part of the decision-making process, they should not be the sole driving force behind your financial choices. When faced with a significant financial decision, take some time to reflect and evaluate your options. Avoid making impulsive choices driven purely by emotions. Stepping back and allowing yourself to think clearly can help prevent regrettable decisions.
As you track your financial plan, it is important to keep your long-term plan and take positive steps every day to improve your financial situation instead of letting your emotions drive your decision-making.
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Living above your means involves spending more money than you can afford. It manifests itself in many ways, each posing a risk to your financial plan. An example that comes to mind is if you generate a monthly income of Ksh70,000 and spend Ksh72,000, you are living above your means.
However, there are other examples that could indicate you are living beyond your means, including:
As you track your financial plan, it is imperative to ensure that you don't put yourself in a position where living above your means destroys your ability to accomplish your objectives. This is because living beyond your means continuously harms your financial health by preventing you from saving and investing. It's a very precarious situation that can force you to abandon your plan.
Having debt doesn't necessarily prevent you from achieving your financial goals, but mismanaging or neglecting your debt can negatively affect your financial well-being. Taking control of and managing your debts is essential to ensure you can progress financially.
Ignoring your debts and not servicing them in a timely manner can lead to various problems. Firstly, the debt will continue accumulating, and you may pay more in interest and penalties when you eventually decide or are forced to repay it. This can be a significant drain on your financial resources and make it more challenging to achieve your goals.
Second, neglecting to service your loans can harm your credit ratings. If you have a poor credit history due to unpaid debts, qualifying for favourable loans in the future can be challenging. This can limit your ability to access financing options that could help you build wealth, such as obtaining a mortgage or securing business loans.
Finally, failing to address your debts may have legal consequences. If your debt is secured by collateral, such as a car or property, the lender has the right to repossess that collateral if you don't fulfill your repayment obligations. If the debt is unsecured, the lender may take legal action against you, potentially leading to lawsuits or court orders to seize your assets. These outcomes can severely affect your financial stability and hinder your progress toward your goals.
All the scenarios discussed above can prevent you from progressing financially. As you write your plan, ensure you take steps to manage your debt effectively. The more liabilities you have, the lower your net worth will be.
Tracking your spending allows you to know exactly where your money is going. It helps you identify patterns and trends in your spending habits, such as areas where you may be overspending or where you can cut back. This awareness enables you to make informed decisions about your financial priorities.
Tracking your spending encourages you to make intentional spending choices that align with your long-term financial well-being. When you have a financial plan, it ensures that your expenses align with your goals. It helps you identify areas where you can save more or allocate funds toward your priorities, such as paying off debt, saving for a down payment, investing, or planning retirement.
You can set limits for different spending categories, track progress, and adjust as needed. This control over your spending helps you avoid unnecessary debt and achieve financial stability.
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As you write your financial plan, you need to know whether your financial goals fit your wants and needs. Whether you’re saving for emergencies, paying off debt, or building retirement savings, all financial goals can be considered needs or want depending on where you are financially.
Needs are essential goals necessary for maintaining your basic well-being and financial stability. Examples of financial goals considered as needs may include covering essential living expenses, creating an emergency fund, paying off high-interest debt, and building a retirement fund.
Wants are discretionary goals that are not essential for your immediate well-being or financial stability but may enhance your quality of life. Examples of financial goals considered as wants include saving for a vacation and purchasing a luxury item.
By separating needs and wants, you can align your financial goals with your overall financial well-being, make sound decisions, and achieve a balanced approach to managing your finances.
An emergency fund provides a cushion to fall back on in case of unexpected expenses or emergencies, and not having one can have severe implications for your financial plan.
For instance, how would you survive if you were to lose your job or experience a medical emergency that requires a significant amount of money? Without an emergency fund, you would have to dip into your savings, sell an asset, or borrow money. All of these options can halt or, worse, reverse your financial plan. The long-term effect could be that it takes much longer to recover financially.
Having an emergency fund provides a safety net during times of financial distress. It allows you to handle unexpected expenses without derailing your long-term financial goals and provides peace of mind, knowing you have a cushion to rely on in times of need. An emergency fund ensures that you can handle unexpected expenses while continuing to work towards your financial objectives.
Spending as you earn leads to lifestyle inflation which happens when you increase expenditure as your income increases such that what was formerly considered a luxury becomes a necessity. This makes it challenging to get out of debt, save for retirement or accomplish other financial goals, and it can be an impediment to sticking to a sound financial plan.
If you avoid spending as you earn and live modestly, you can use the extra income to save and invest. This could grow your wealth over time through compound interest and capital gains, ensuring you achieve your financial goals faster.
To avoid this vice, you must be mindful of your spending and avoid lifestyle inflation traps such as keeping up with the Joneses. This will allow you to focus on your plan.
A lack of financial literacy can contribute to poor money management skills and below-par financial planning. Financial literacy is the knowledge and understanding of financial concepts and skills needed to make informed financial decisions.
Without this knowledge, you may struggle to allocate your income effectively, leading to overspending, debt accumulation, and difficulties in saving for future goals. Additionally, you may make uninformed decisions, fall prey to predatory lending practices, or miss out on opportunities to grow wealth. All this can make it challenging to accomplish your financial goals.
Being financially savvy empowers you to take control of your finances. And you can do this by taking a financial literacy class, reading finance literature, and consulting financial experts.
To avoid mistakes when writing your financial plan, review it consistently and ensure it aligns with your evolving lifestyle. Regularly assessing your plan enables you to identify errors or missteps and take corrective actions before they become problematic. Moreover, reviewing your financial plan allows you to adapt to personal or economic changes that may arise in the future.
Finally, if you feel that your plan is stagnant or no longer beneficial, seeking guidance from a financial advisor can assist you in creating a new plan that accurately reflects your current situation.