A guide to making your financial plan more secure and tips to avoid common financial mistakes
The world of personal finance is a complex one, and all the moving parts can overwhelm even the most financially savvy. We have more options to choose from every year, and the list of decisions to make is sure to grow even more in 2023.
Whether it’s due to analysis paralysis and inaction or under-analysis and fast actions, financial planning can be precarious—but that’s why we’re here!
Let’s start with what the costliest mistakes are and how to avoid making them.
Not Having a Plan
Most great actions are preceded by a great plan. This couldn’t be more true than in the world of personal finance, where planning is king and chaos is a recipe for disaster.
Although there’s no one-size-fits-all approach to planning your financial goals, there are certainly some parameters to follow:
- Start at the end: By starting with the end in mind, you ensure that all actionable parts of your plan fall in accordance with the end goal.
- Adjust accordingly: Life is full of surprises, so a good plan has some built-in bandwidth for adjustments when necessary. Sure, don’t compromise on the things you value most, but be willing to adapt along the way. We love the idea of being stubborn with your goal and flexible with your method.
- Start early: It’s easy to push financial planning to the future, especially when we’re young, but this is a big mistake. The power of compounding applies to years and actions, too, not just interest.
Not Handling the Essentials
Life comes at you fast, and almost everything it throws at us involves money in one way or another. Without having your financial essentials set up, life’s unexpected turns can make bad situations worse and turn minor hiccups into major ones.
Squaring away the essentials like your budget, emergency fund, savings goals, debts, insurance, and even taxes are all key components of a healthy financial life—and costly mistakes when avoided.
- Basics: If you’ve yet to establish an official budget, or maybe just haven’t finalized it yet, it’s more pressing than it seems that you take care of this. Not having a budget is a foundational bookkeeping mistake and one that can easily leave you confused amidst all the numbers from month to month.
- Progress: They say a good salary isn’t based on how much you make but on how much you keep. Debt eats away at exactly that and can be a poison to your financial progress. Not having a plan to control, minimize, and eliminate the debt in your life can be a detrimental choice that has lasting effects for years to come.
- Damage control: Arguably, the most important aspect of your financial infrastructure is the safety net, especially things like your emergency fund and insurance. Approximately 56% of Americans can’t cover a $1,000 emergency, and 43% of working-age adults are underinsured. Failing to plan is planning to fail here, and so taking the time to budget for savings and update your insurance is of the utmost importance.
Don’t Wait Until Next Week, Month, Year
Some of the most expensive mistakes we make aren’t the result of bad actions but rather inactions—especially when it comes to saving and investing.
It’s super easy to fall into “analysis paralysis” when it comes to the markets, especially when they’re as volatile as 2022. While your gut reaction may be to try to time the market or wait for a better opportunity, that strategy may fail you and end up costing you thousands by the time you reach retirement.
- Better to be early: As it pertains to investing, it’s always better to be early than late. While being early might cause a little stress testing during times of uncertainty, it’s the road less traveled that will ultimately pay off in the long run. For what it’s worth, you can even be the worst investor ever and still come out on top—all it takes is investing early and often.
- A scary example: If you invested just $6,000 per year at an average return of 8% annually for 40 years, you’d end up with a total of $1,684,686. However, if you waited just one year and cut your timeline to 39 years? The total would be $1,554,339—a difference of more than $130,000 in just one year. Waiting is expensive, so it’s paramount that you start as early as possible and avoid procrastination.
Conclusion
At the end of the day, there is no perfect path to financial wellness —that’s a myth. We’ll have to make some mistakes along the way, and that’s okay, it’s how we learn. Nevertheless, it’s crucial we use those learning experiences to improve our financial planning decisions in the future and avoid costly mishaps whenever possible.
Life happens, and you never know what’s around the corner. So, there’s always a little room for improvement, right? Thankfully, your Pocketnest app has you covered. This is your friendly reminder to keep a check on your to-do list items in your app and don’t forget to log at least 3 minutes per week en route to achieving financial wellness.
Via Pocketnest
*For educational purposes only. This material is not intended to be used as financial, investment, or legal advice.