Whether you’ve mapped out your financial future or not, avoid making these mistakes – they’ll only stand in the way of your ultimate goal.
When it comes to financial goals, most people say they want “financial freedom”. While that term might mean different things depending on who you ask, most people simply want to stop worrying about money. Life goals – be it a new car, property purchase or retirement – are easier to achieve if we know exactly what we’re working towards. The way to do that? Sort out a proper financial plan. Getting started doesn’t have to be complicated. Tip: you can do it without a financial advisor, too! Here are some common pitfalls to avoid.
5 mistakes that stand in the way of your financial goals
1. Not quantifying your goals early on
When it comes to financial goal-setting, many forget to quantify the outcome. Whether it’s your dream holiday or a new car, the first step is to put a number on it. Do your research and take note of this amount, so you know what you’re (realistically) working towards. The other important factor: when. For larger goals that require more time to achieve, we need to take into account inflated prices. If you have your eye on a property in five years, that price tag is unlikely to be the same in the future, so keep that in mind.
For longer-term goals like retirement, account for the effects of inflation. If you need $2,000 for today’s expenses, that amount will double to $4,200 in 30 years. Try out a simple retirement calculator to help you figure this out.
With your amount and timeline set, break down the goal into smaller, achievable steps. For example, that dream holiday will cost you $9,000, and it’s scheduled in 18 months. That means you need to save $500 each month for the next 18 months. If that’s too high an amount, you can either delay your trip or relook at how you can travel with a lower budget.
Don’t forget to track your financial goal! This might be taxing with the many tasks we’re already handling, so try to automate the process. Tip: use an automatic standing order to transfer funds from your salary crediting account into your savings account each month. Set it for the period you’ve determined for your goal.
2. Not having an emergency fund
For expected surprises, this will catch your fall. An emergency fund should be in the form of liquid cash and not investments. You should have at least six months’ worth of monthly expenses as liquid cash in case of unemployment. For those higher up the corporate ladder, or for freelancers, make it 12 months, as it may be harder for you to find an equivalent job.
It’s also wise to have more cash on top of that fund, depending on your situation. For instance, if you have elderly parents without medical insurance, or if you own a vehicle that might need to go for unexpected repairs. It’s essential to account for this before you start using your savings for other purposes.
3. Not accounting for lifestyle inflation
We often fall into a rut where getting a bigger salary means we raise our expenses. By thinking we need to “treat” ourselves, we end up not knowing where our money leaks. As a result, we don’t save as much as we can. Lifestyle inflation keeps us in a state of constantly working just to pay for our current expenses, with very little to nothing left for the future. We get it; you want to reward yourself for all the hard work you’ve put in.
But it can be like a hamster running on a wheel if you don’t keep track of what you’re spending on. It may seem tedious, but tracking is a proven method of growing your early wealth base. This will also instill discipline in you. Luckily, these days we have automated tools that can do this, without the traditional stresses of keying everything into a spreadsheet.
Money trackers that sync your bank accounts and credit cards offer visibility over your spending. They can quickly pinpoint surprise leaks. Many of these tools are available on apps, so you have the convenience of carrying around your personal planner in your pocket.
Start small with a feasible monthly savings goal that you can achieve with minor lifestyle changes. While some aspects are non-negotiable, explore ways you can cut down on other categories. When it comes to food, eating out is notoriously expensive. Why not try honing your MasterChef skills and cooking your own meals instead? Otherwise, set a limit for your weekly meals (and stick to it!).
4. Thinking you don’t need life insurance because you’re young and healthy
Perhaps you’ve just entered the workforce and consider life insurance an unaffordable purchase. Or maybe you’re healthy and feel your money is better spent on investments. Although you might be young and in the pink of health at the moment, there’s just no telling when something unpredictable may occur. If you wait until the diagnosis of a medical condition, you’ll likely have to deal with additional premiums, or you may not be able to purchase an insurance plan at all. So safeguard your future as soon as you can.
Tip: insurance premiums are cheaper for both term and life insurance when you’re younger. Waiting it out means incurring additional costs. Most life insurance plans have different premium prices for different age groups, with an upward trend. It’s important to find out when you actually need to buy insurance.
5. Not investing excess savings
Excess savings refers to savings you’ve set aside for the future. This is money on top of your emergency fund and the money you need within the next two years. These extra savings will be subjected to inflation, so you want to take care of that.
In addition to mitigating inflation, if you start earlier, your investments will roll over with compound interest and allow you to achieve your financial goals earlier. Depending on your investment budget, you can find an option to suit you. It’s possible to invest with as little as $100 per month into unit trusts. If you have a larger budget, you can look into stocks, which have a minimum number of 100 shares. It’s often recommended to look at stocks with a minimum investment budget of $10,000.
Avoiding these common pitfalls will set you on the right path towards your goals. Go get that financial freedom!