The service period of our life is a crucial period of our life when it comes to the question of financial planning. This is the decade by when we have already figured out a career path, have a regular source of income, have family, and moreover full of responsibilities. As we have greater responsibilities in this phase, it is high time to think about financial plans to secure our as well as our family’s future.
However, before we achieve our financial goals, it is crucial to avoid a few common money mistakes.
In this blog, we will discuss 10 common financial mistakes that people usually make in their life and will know how to avoid them.
Mistake #1: A competitive mentality
In your 30s, you have a lot of enthusiasm, out of which we often make a common mistake of comparing our social status with surrounding people, which is most commonly known as “keeping up with the Joneses.” This often leads you to achieve things before you can afford them. In this stage, if you compare your assets with your peers, it becomes dangerous sometimes. You must remember that not everyone has the same financial obligations or the same income. If you are unable to recognize these basic differences it will lead you towards overspending, and you will live beyond your means.
So, you must remember the sacrifices your parents made to get to where they are today. You must try to match your lifestyle with them and remember that achieving everything earlier is the most unrealistic thought. It is your journey. Go slow and have faith that you will eventually achieve everything.
Mistake #2: Not Having a Budget
Fixing a budget is most essential if you want a healthy financial plan. It is not dependent on age and is necessary for every age. You should decide how much you can spend and what you can spend. If you don’t know where you stand, it is impossible to make the important decisions of life like purchasing a house, buying a car, or affording a fancy You cannot make important life decisions such as how much house vacation. So, if you set a budget, it becomes easy to differentiate between your long-term goals or falling far into debt.
You can set the budget by recording your reliable source of cash inflows and tracking all your expenses. Now review your actual expenses by comparing your budget on a monthly basis.
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Mistake #3: Not Having an Emergency Fund
Financial catastrophes like losing a job, economic recession, illness can happen at any point in time. So having an emergency fund is essential. How can you protect yourself? Set up a savings account for such emergency purposes. It might not be possible to fund it right away, so set up an automatic sweep from your current account. You should fund these emergency savings in such a way so that they can cater to at least 6 months’ expenses. Besides, with the increase in expense, your emergency fund should also expand.
Mistake #4: Overspending on Purchases
In your 30s, purchasing a home or a luxury car is not something unusual. However, you should remember that the more expensive these things, the more expensive the maintenance cost of them. Overspending on these things can cause debt. So, the rule of thumb is not to spend more than 28% of your income.
Mistake #5: Too Much High-Interest Debt
Credit cards are an alluring medium of purchases. You can purchase relentlessly, but you are full of consumer debt at the end of the month. Credit cards push people to spend in excess. It is easy to lose track of how much you dine out or shop. Also, with a credit card, you can make minimum monthly payments instead of paying off the entire balance at once. However, this benefit is not free and incurs a high-interest rate. AS you may not pay in full on time, the expense increases significantly.
To solve this problem, it is always advisable to pay off your credit card debt every month. In case you are unable to do so, you need to address your spending habits. But never carry debt, even if you need to pay high interest at the beginning.
Mistake #6: Investing Too Conservatively
Your target for investment must be long-term. If you start investing from your 30 years, you have 30 years still remaining till your retirement. Then another 20-30 years to live in retirement. So, you must not be too conservative because inflation will erode your purchasing power over time. You need to set your time horizon that will differentiate your short-term and long-term need for funds. You should be more conservative for short-term purchasing like a home and more aggressive for longer-term horizons like savings in retirement accounts.
Your risk tolerance is controlled by how much volatility you can withstand. Depending on this, you can set the asset mix in your investment portfolio. Equities and stocks also tend to generate higher positive returns than their fixed-income counterparts over the long term. Equities are needed in a portfolio if you want to beat inflation over the long term and maintain your purchasing power.
It is your long-time horizon that allows you to ride out stock market volatility. It has been analyzed that there has never been a 20-year period in the market where stocks have generated a negative return. So, you do not need to overthink current market conditions. Never be emotional in investment decisions.
Mistake #7: Not Having the Financial Discussion
We hardly discuss about money with others. One of the main reasons behind it is finance is a significant reason for relationship conflict. But we are not always wise enough to do financial plan without the help of other. So, it is always advisable to establish a healthy financial relationship with your close partner. The following points are essential to discuss with your financial partner:
· Do you prefer to have joint or separate bank accounts?
· Do you want to incur debt or want to live debt-free?
· Your investment risk tolerance?
You can take advice from a certified financial planner and develop a comprehensive financial plan for this discussion.
Mistake #8: Not Saving for Retirement Early Enough
Retirement is never as far away as it seems. The earlier you start saving, the more the power of compound interest can benefit you.
For example, compound interest of 5% on $100,000 would earn you $5,000 in year 1, $5,250 in year 2, and nearly $8,000 in year 10. That’s more than $62,000 in interest over ten years! Now extrapolate that over your 30-year working period, and the benefits of saving for retirement early become clear (even if you only begin with small amounts).
We recommend contributing a percentage of your pre-tax income to an employer-sponsored retirement plan (i.e., a 401(k) or 403(b) plan) if available. Note that we say percentage here rather than a specific amount. This way, your contributions automatically increase when you receive a raise.
If you do not have access to an employer-sponsored plan, consider opening an individual retirement account (i.e, a Traditional, Roth, SIMPLE, or SEP-IRA).
The bottom line is that you need a formal and automated way to save for retirement to get pushed to the back burner.
Mistake #9: Not Having the Right Insurance
We pay for insurances hoping that we never need it. So, you may consider as a luxury or burden. But when we want to protect our loved ones, it is an essential one. Whatever insurance policy you will do, be it for home, car, or medical insurance, you must be aware of the policy details, coverage, premium, etc. Also, life insurance is essential as you start a family.
Mistake #10: Not Investing in Yourself
Do you want to start a business? You may have a plan for higher studies in your career plan, which needs a hefty amount of money. Or do you eventually want to own a second home? What type of vacations do you want to take? Think about the lifestyle you want to have now, in the future, and yes, even during retirement. How do you plan on achieving each of these things?
Final Verdict
These are a few of the areas that must come under your comprehensive financial plan. Having a formal plan can prevent you from making the mistakes we discussed above. The best option is to work with a certified financial planner professional to get a personal steward and someone who will act in a fiduciary role on your behalf. All the points mentioned above are not expensed an intelligent investment in yourself and your future rather.