Financial planning may sound ominous, but really, it’s actually not so difficult. Sure, we’d all like to have so much money that we don’t have to worry about budgeting and saving and compiling cash for a comfortable retirement, but the truth is, most people will have to carefully and strategically scheme their way to that end.
So, what makes a successful financial plan? Well, you have to train yourself to spend less than you earn, for starters. Then you have to figure out what to do with the money you save. Do you save more, invest in shares, super, long or short-term deposits, or property? The list is endless. Once you’ve invested your money, you then have to learn to spend less than your returns.
If you follow these steps, you’ll have a modicum of financial success. But as foolproof a formula as that is, there are still plenty of reasons your financial plan will fail. So, take care to avoid these pitfalls along the path to financial success.
Postponing your plan
Many people develop a plan then put it off, and put it off, and before they know it, they’ve missed out on years of saving. Same goes for spending. If you set a budget, stick to it sooner rather than later, or else you’ll run out of money sooner than later.
Not knowing your goals
Comprehension of your assets and the amount of money you’ll need in retirement is essential to any successful retirement plan. Find a tool to help you work out how much you’ll need to fund your ideal retirement. Use it, then begin to plan for it.
Not planning for the unknown
The old saying about assumption rings as true for retirement planning as it does in any other context. Study the annual rates of return of your investments, compare that against the Consumer Price Index (CPI) and inflation rate to see how far you come out in front – if at all. Plan for factors such as health issues for you, your partner or children; your tax position in retirement; required cash flow versus spending at different stages of retirement; price rises on insurance, energy and fuel, and real estate matters, such as devaluing markets.
Not creating a retirement budget
If you haven’t retired yet, try living on 70 per cent of your current income. If you can do it, work out how many years of income you’ll have based on your current savings. If it’s more than 20 years, you may find you’re ready to retire. If not, you may have to adjust your expected standard of retirement or go back to the drawing board (or retirement calculator).
Leaving money in the bank
Leaving your savings in the bank is great for everyday use, but when it comes to investment cash, get it out right quick. Leaving money to earn interest in the bank may yield negative returns when inflation is higher than interest rates. Investing in shares may be riskier than cash but shares and property initiate capital growth over the long term.
Investing has its share of risk, but the only time you’ll lose money is if you sell. So, don’t panic at the first sign of trouble, but make room for contingencies. High-risk, big return investments may sound appealing, but slow and steady wins the race. Focus on the potential of your investments, rather than current returns.
Putting your eggs in one basket
Not spreading your wealth among different asset classes can leave you open to ruin. Consider property, technology, shares and local and international stocks and don’t try to ‘beat the market’ by going all in on what you think may be a share on the upswing.
Not staying the course
Stick to your plan even when the going gets tough. Investing is a long game, so focusing on the short-term gains and losses will only lead to false security or unwarranted worry.
Not paying off your mortgage
Retirees who own their home are way better off than renting retirees. So, even if you have to increase repayments to clear your mortgage before you retire, you’re better off doing so. It will be the best investment you make. Even if all your savings disappear, you’ll have a much better shot at a modest retirement living solely on the Age Pension, as long as you own your home.
Retiring too early
Even if you have sufficient super, or what you think is sufficient, you’re better off transitioning to full-time retirement by doing some part-time work in between. That way, you can leave your money in super to earn more for you in the long term, or even keep topping up your fund with some of your part-time earnings.
You may even be able to make super contributions through a salary sacrifice agreement, which means you’ll be taxed less, and you’ll save more towards your future full-time retirement.
Not keeping it simple
As Scott Phillips, general manager of finance site Motley Fool, wrote for The Age: “Whether you’re charting your own course, or getting a professional to draw the map for you, simplicity is the key. The plan needs to be easy to understand, easy to follow, and with enough wiggle room to allow for changes and unexpected obstacles. Then, as the captain of your financial ship, you need both confidence in that plan, and the discipline to stick to it, even as the storms roll over you. It’s not the pace or style that matters – slow and steady really will win the race.”
What’s your formula for financial success? Do you know of any financial traps that others should avoid?
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