The Top 7 Financial Planning Mistakes You Might Make

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By Michael Conway, CFP®, ChFC®

Without initiative or proper guidance, many of us never learn about fundamental financial planning steps until we’ve already made a mistake. Here’s our list of the top seven mistakes that hurt your chances to achieve financial security.

1. Waiting to Make a Financial Plan

In 2015, just 38% of investors reported having a plan to reach retirement goals, according to a Gallup survey. Meanwhile, finances rank as the top stressor among Americans, according to the American Psychological Association. Unfortunately, like other things that cause emotional distress, we tend to avoid our financial issues rather than face them head on. Without a plan, many Americans don’t save enough, spend beyond their means, and make irrational investment decisions. Planning often starts after it’s too late, proving that waiting is a mistake that breeds mistakes. (For more, see: America’s Epidemic of Financial Avoidance.)

The fix: Stop what you’re doing and take action. To start, write down your current financial needs and future goals. Next, create a budget and begin to systematically save. Even small changes like skipping that $5 latte every day can prove significant thanks to the power of compounding. About half of U.S. families have no retirement account savings, according to the Economic Policy Institute. The sooner you can save, the more likely it is you can accomplish objectives. Most important, seek help. Professional advisors can see the hidden gaps in your planning that might hurt your financial future.

2. Reaching for Income

Many investors like the idea of living off of bond income rather than appreciating principal, based on an inherent human bias called mental accounting. It’s the same reason blackjack players would rather bet with their winnings than the money they brought to the casino. Such investors often don’t realize that reaching for income creates exposure to risks in various segments of the economy. Portfolios heavily invested in bonds miss out on growth assets like stocks, meaning the portfolio is less likely to grow over time.

The fix: Educate yourself or seek guidance in understanding all aspects of investment risk. At a minimum, remember to not just build a portfolio around income needs. The portfolio must also reflect your goals, time horizon and risk tolerance, among other factors.

3. The Piecemeal Approach to Finances

People tend to address specific issues as they arise rather than looking at the broader picture. Many people know to purchase life insurance, for example, but may not realize how that can affect cash flow for things like paying for college. Unfortunately, such a piecemeal approach can result in unintended consequences. Instead, elements of planning like insurance work best in sync with all other parts of the plan. (For more, see: Behavioral Bias: Avoiding Mental Accounting.)

The fix: Seek help in building a comprehensive plan. Certain financial advisors can oversee all the moving pieces and ensure each fits with a client’s needs and goals.

4. Timing the Market

You’ve heard it before: Buy low and sell high. It’s easy, right? Sadly, this seemingly logical and simple strategy has fooled millions of do-it-yourself investors time and again. But like most conventional wisdom, that strategy overlooks an important nuance that can define investment success. To win the timing game, investors need to guess both the right time to get in and the right time to get out. But here’s the catch: markets are fickle and ultimately unpredictable. Every data point on the planet may suggest a stock will soon fall, but an irrational market may decide otherwise. Worse, the entire market could move in the opposite direction of widespread sentiment. Remember when most people said the market would nosedive if the U.S. elected Trump?

The fix: Build a diversified portfolio and maintain a long-term mindset. Stop trying to pick and choose specific sectors or companies. Data shows how often such a strategy fails when compared with the success of long-term, passive investing. Block out the supposed market gurus claiming to have the silver bullet. It’s noise.

5. Misunderstanding Wealth

We’re taught to perceive wealth as limitless, even capable of eliminating our biggest fears and fulfilling our deepest desires like buying a garage full of brightly colored sports cars. Advertising reassures us that our life’s success and happiness hinges on our decision to spend on that new necklace, TV, or truck. Regardless of wealth level, spending tends to run on a sliding scale in parallel with income. That’s why we shouldn’t be so shocked to discover that despite a raise at the beginning of the year, our savings accounts look eerily similar to the prior year. This means that even the ultra-wealthy are often prone to running the well dry. In fact, of the 38 million Americans living paycheck to paycheck, two-thirds are considered wealthy Americans, according to the Brookings Institute. Meanwhile, science proves that frivolity almost never leads to true happiness.

The fix: People can best create balance in their financial and personal lives by recognizing these misconceptions, resisting the temptations of overspending, and planning for long-term goals. Those that seek professional guidance for their investing, retirement planning, budgeting, tax liability limitation, insurance, and college savings are most likely to enjoy sustained wealth for their entire lives.

6. Losing Perspective

We all want to see our money grow. Watching our accounts increase in value over time instills a sense of confidence and security in our future. As a result, investors begin to assume that investment returns define financial security, family livelihood, and true happiness. Suddenly, watching CNBC and staring at account balances become more important than living a balanced life by design.

The fix: Turn off the TV. Steer yourself away from the minute-to-minute gyrations of markets and toward real joy in life. Forty years from now, will you really care whether or not each position in a portfolio beat benchmarks in a given year? Or will you care that you lessened stress, spent more time with family, and began to do the things you loved? Financial advisors can help build tailored portfolios while reminding us to escape the routines that only cause emotional distress.

7. Racing to a Finish Line

Rocking chairs. Sunsets. Golf. Maybe a boat? If you watch enough financial planning ads on TV, you’ll notice a consistent theme: you should plan so that you can retire at a specific age of your choice, then sail off into the sunset without a care in the world. There’s nothing inherently wrong with looking forward to no longer working, but we tend to get so wrapped up in the utopian promise of retirement that we forget to live happy lives every day. Financial planning should be about more than racing to a finish line.

The fix: Always have long-term dreams, but remember to work toward aligning life and wealth on a daily basis. Pay attention to passion, and remember to enjoy day-to-day life and to work toward shorter-term goals. Your financial planning should follow suit. Start to think about how proper planning might allow you to make changes you didn’t think possible until retirement. (For more, see: Diversification and Lessons from a Normalizing Market.)

This article was originally published on Investopedia.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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