Making financial mistakes is something we all regrettably do in varying degrees – some more serious than others. Unfortunately, the closer we get to retirement, the less time we have available to rectify our mistakes and set our finances back on course. In this article, we navigate 20 common financial mistakes and why they should be avoided.
- Not living within your means: The only way to build wealth is to spend less than you earn. If you’re not doing this, you are digging yourself deeper into debt and poverty. As a fundamental starting point, take all steps necessary to bring your expenditure under control so that there is room, even marginal, to begin building your wealth.
- Living on credit: Sometimes circumstances are such that we need to access credit, such as when we need to make a large, necessary purchase. However, credit and retail debt are particularly expensive and, as such, should not be used to cover one’s day-to-day living expenses. If you’re using credit to pay for expenses such as groceries, fuel or school fees, you are placing yourself in an untenable situation which will lead to an unmanageable debt situation.
- Having too many lines of credit: Having too many lines of credit open is risky. Firstly, keeping track of the interest-free periods attached to each line of credit, the minimum repayment amounts required, and the various payment deadlines is more difficult when you have multiple credit facilities. Secondly, having too many credit facilities can adversely affect your credit score, which in turn can affect your future ability to obtain financing.
- Paying off the wrong debt first: Paying off debt should be approached strategically in order to avoid unnecessary costs. If you start paying off the debt with lower interest rates first, you’ll end up paying more in interest on your more expensive debt over time, which doesn’t make financial sense. Rank your debt in order of interest rates from highest to lowest and start by paying off your most expensive debt first. Once this is paid off, re-direct the additional monthly amount towards the next most expensive debt, and so on.
- Not having a financial plan: A financial plan is an incredibly powerful document because it allows you to document your dreams and goals and put mechanisms in place to achieve them. With a plan in place, you have a greater chance of achieving your financial objectives, keeping in mind that your plan should be sufficiently fluid to adapt to your circumstances as and when they change.
- Not having an emergency fund: In the absence of an emergency fund, you may be forced to access debt in order to pay for the unforeseeable expense you are faced with, keeping in mind that short-term debt is normally expensive. Ensure that you always have a cash cushion set aside so that high-cost, unforeseeable events don’t throw your financial plans off course.
- Buying and selling property too often: The costs associated with buying and selling property are high, so be strategic about your plans to invest in property. Transfer duty, agent’s commission, bond registration fees, connection fees, and transport costs, are just some of the costs involved in buying and selling property. Ideally, take a long-term view on owning property and avoid rushing to buy property just for the sake of it.
- Delaying saving for retirement: Life is expensive, and it’s easy to find excuses to delay saving for retirement. The reality, however, is that playing catch-up once you’ve put off funding for your retirement becomes more and more difficult over time. Commit to start saving for your retirement today.
- Not making your credit card repayments on time: At the very least, ensure that you pay the minimum repayment on your credit card on time, every time. Any late or default payments will adversely affect your credit score, and it can take years to improve your rating. Ideally, try to pay more than the minimum amount owing each month so that you can reduce your debt quickly.
- Not insuring your income: A temporary or permanent disability as a result of illness or accident may leave you in a position where you cannot work and earn an income. An income protection benefit is a form of long-term cover which insures your income. If you are rendered disabled, the insurance company will pay out your nominated income every month until you reach retirement age, thereby ensuring that you do not become a financial burden on someone else for the rest of your life.
- Trying to time the markets: If you’re invested for the long term, short-term market fluctuations should not affect you. Being too focused on daily market movements plays on our emotional biases, such as greed and fear, and can result in attempts to time the market. Cashing in when markets take a down-turn results in one effectively locking in one’s losses and missing the opportunity for returns when the markets swing.
- Falling for investment scams: As technology becomes more and more sophisticated, so too do fraudsters and scammers. Many fraudulent schemes and investment scams appear so credible and legitimate that it’s difficult for even a trained eye to identify them for what they are. Before parting with your money or investing in anything, do your research, investigate everything, ask questions, seek advice, and remain highly sceptical.
- Investing too conservatively: Investing for the long term involves harnessing the power of time and compounding interest to generate wealth over time. However, to create real wealth, it is essential that one’s investments generate sufficient returns to outstrip the effects of inflation over time. To achieve this, you will need to ensure that your investments are exposed to sufficient growth assets such as equities and property as investing too conservatively may ultimately erode the purchasing power of your money in real terms.
- Not staying on a medical aid: Any break in medical aid membership of more than 90 days can result in additional costs in the form of exclusions, waiting periods and late joiner penalties – keeping in mind that late joiner penalties are applied for life.
- Not having short-term insurance: You always think it won’t happen to you until it does. The costs of replacing your property, buildings and/or possessions are likely to be prohibitive and can seriously set you back financially.
- Not understanding the long-term consequences of your purchases: Before making a purchase, it’s important to understand the longer-term implications of that purchase. For instance, buying a bigger home involves more than just the purchase price. A larger property will involve more maintenance, more cleaning and gardening services, higher rates and taxes, more furniture and appliances, and higher electricity and water costs, to name just a few things. The same applies to vehicles, pets, pools and holiday homes. Be strategic about your purchases and consider to what extent your monthly budget will be impacted as a result of that purchase going forward.
- Not keeping your tax affairs up to date: As a taxpayer, it is absolutely essential that you remain on the right side of SARS by filing your tax returns on time and paying your taxes on time. Not only can the late payment of tax result in fees and penalties but being on SARS’ watchlist is never a good idea.
- Not diversifying your risk: Lack of investment diversification can scupper your chances to build real wealth. Having a diversified investment portfolio is a key pillar of long-term investing and is a powerful tool for reducing risk in your portfolio. Through careful asset allocation, investors are able to spread their money across different asset classes and industries, all of which have their own risk profiles and potential for return. By diversifying your investments, you are able to offset losses in one asset class and/or industry against the other as a form of risk management. Bear in mind that diversification cannot prevent risk – it can only serve to mitigate risks that an asset class or industry can be exposed to, such as natural disasters, interruptions to supply chains, trade wars, global pandemics, or technological advances.
- Not having a Will: Not having a valid Will in place, supported by a well-executed estate plan, can cost your estate dearly and can leave your heirs short-changed. Effective estate structuring can reduce estate costs and maximise the inheritance you intend to leave for your loved ones, so be sure to put a Will in place and check it regularly to ensure that it fairly represents your wishes.
- Not reviewing your plan regularly: Failing to update your financial plan regularly can result in you retaining solutions that are inappropriate for your needs and being saddled with unnecessary costs. For example, as your net worth increases over time, it is likely that your need for life cover will reduce. If you haven’t reviewed your risk cover for a while, you may well be paying for insurance cover that you no longer need. Checking in with your financial advisor on at least an annual basis will allow you to take stock of the various areas of your plan to ensure that they remain fully aligned with your objectives.
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