Everyone has made mistakes, after all, we’re only human, and it’s likely that some of our mistakes relate to finances. While mistakes can’t always be avoided, you can try and learn from them, including those commonly made by others.
Some financial mistakes are more common than others so YOURLifeChoices thought it would be a good idea to ask Craig Hall at the National Information Centre on Retirement Investments Inc. (NICRI) to list those which occur most often. By avoiding these mistakes, you can give yourself and your family a better chance of securing a stable retirement.
If possible, avoid getting into debt when purchasing assets that do not offer growth or income returns. This means items such as cars, holidays and electrical equipment. As there may be valid reasons such as needing a car to get to work, or essential items for the family home, this can’t always be avoided. But the effect of this is that you end up paying interest on top of the purchase price and by the time the loan is paid out, you end up with an asset that has depreciated in value. Consider if it is possible to save for these items if you don’t need them straight away.
Budgeting is important as this can give a true picture of your ability to make ends meet. It can also highlight potential savings, which can accumulate to meet future goals and/or repay debt faster. It also shows a true reflection of your cash flow, which allows you to manage your money in months of high and low expenditure. Keeping extra expenditure low in months where outgoings are low allows more funds to cover ‘high expense’ months in future.
Keep credit card balances to a minimum. You may have different reasons for keeping credit cards, such as convenience when travelling, a back up in case of emergencies or to pay all your expenses. Interest rates on credit cards are comparatively high, so the trick here is to repay the credit card as soon as possible to reduce the interest charged. The second tip is to keep your credit limit to a minimum, thereby reducing the risk of purchasing goods without saving for them. You can also opt out of credit limit increases from your financial provider.
Pick investments according to the time frame which you’re happy to have your money tied up for and keep cash reserves so that you can use them in times of need. This will help avoid the need to sell off assets at a reduced value (see next point). Diversifying and sticking with time frames means that if markets are volatile, you can draw on cash while giving your growth assets time to recover and hopefully give a good average return by the time you do require the funds. It is essential that you set yourself goals for both the long and short-term as, without them, the choice of investment may be inappropriate.
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Try to avoid selling ‘growth’ style assets when the market values are down. It can be unsettling knowing investments such as shares or property are going through a bad patch, but selling them crystallises your losses. Consider why you invested in these types of assets originally and determine if they are still appropriate to meet your future needs and objectives. Remember, ‘growth’ assets are longer term investments, so it pays to have a cash reserve in a safe, short-term investment to cover unexpected costs and emergencies. For more information on investment risk and time frames refer to NICRI’s Risk Meter.
Save regularly – this is where budgeting comes in handy. Identifying savings and investing those funds, even if you don’t have any specific goals, can increase your wealth, which can improve your quality of life down the track. This includes saving for retirement. Taking advantage of the Government’s superannuation co-contribution or concession contribution caps can help boost your retirement savings.
A potential advantage of saving regularly is the effect of ‘dollar cost averaging’. Dollar cost averaging generally applies to investment funds that are ‘unitised’, such as managed funds. If the value of the fund has reduced due to factors such as a dip in the share market, then these continued contributions simply buy more units in the fund. This means when the unit price (hopefully) recovers, you will be left with more units to sell at a higher price. It’s similar to buying shares at a low price; you would be able to buy more for the same amount of money.
Consider life insurance and income protection (if applicable) not only for yourself, but encourage your children to consider it as well, especially if they have children themselves. If something were to happen to your child you may be put in a position where you may need to look after or raise your grandchildren. This can be extremely draining, both emotionally and financially. It may mean that all those plans which you had for retirement are put on hold, or even cancelled and it is likely that you won’t enjoy the standard of living you have worked hard for all your working life.
If you don’t have expertise in making financial decisions, seek advice. It is often cheaper to pay for professional advice than deal with a bad decision that wasn’t properly considered. Making rash or unconsidered financial decisions could mean that you overlook potential tax savings, miss investment opportunities or simply invest money inappropriately.
Avoid scams and dodgy deals. Of course this is easy to say, but in reality they can be hard to pick as they are designed to deceive. Scams come in many different forms from bogus emails wanting personal information, bank account details and/or passwords, to requests to send money overseas in return for cash payments. Other common scams include computer hacking, bogus charities, ‘guaranteed’ gambling systems promising success and financial scams such as pyramid schemes. Whatever the scam the main objective for scammers is to make money and there is often little or no recourse if you are a victim. For more information on scams as well as financial risk refer to NICRI’s booklet Safety, Risk and Scams. To research or report scams, visit the Australian Competition & Consumer Council’s (ACCC) website www.scamwatch.gov.au. And remember, if it sounds too good to be true, it probably is.
Article written by Craig Hall
The National Information Centre on Retirement Investments Inc. (NICRI) is a government-funded, independent consumer agency providing information to the general public on investment products.
Prior to acting on information provided in our articles, NICRI strongly recommends that you confirm details in relation to your personal circumstances with any relevant government department.
If you require further information on investments, superannuation, income streams or the financial planning process please contact NICRI toll free on 1800 020110, email [email protected] or write to PO Box 1339, Fyshwick ACT 2609. Our information leaflets are also available on our websites www.nicri.org.au or www.moneymap.nicri.org.au.