Financial decisions add up – hopefully by providing you with a nice nest egg to retire on, but what if you make the wrong choices? That is what a financial advisory team is for, but if you go into that office blind, you let them make the mistakes for you. Lack of knowledge is the ultimate wrong choice.
A little research goes a long way to helping you make smart financial decisions on your own or with the help of a professional. A good place to start is figuring out what mistakes will cost you in the end. From the most likely problems to the little goofs everyone makes but no one talks about, learn what financial planning errors to avoid.
1) Putting Debt Ahead of Savings
It probably seems obscene to worry about saving when you have so much debt, but go ahead and put your retirement plan first. Chances are there will always be some kind of debt to pay:
- You buy a new car
- You have to move
- You run your credit card up during the holidays or on vacation
The point is debt tends to be a constant in most people’s lives, so they short change their retirement fund.
The best course of action is to manage them both, but with a little extra going to retirement. If you currently put 19 percent of your earnings towards debt and 10 percent to retirement, flip it around. When doing your financial planning, make sure retirement is getting the biggest piece.
2) Keep Your Emergency Fund and Retirement Separate
It is easy to draw on your retirement money in an emergency, but very hard to put it back. Instead, plan for the occasional car or house repair with an emergency fund.
Sit down and go through your monthly expenses. Now, think about losing your job. Figure out which of those monthly expenses have to be paid no matter what and add them up. Take that number and multiply it by three – that is the goal for your emergency fund.
Ideally, you have enough money in your emergency account to pay three months worth of bills. Put that money in an interest-bearing savings account and use it when necessary. If disaster never strikes, you can convert it to retirement cash and enjoy your good luck.
3) And Then There is Inflation
People tend to think in real time, forgetting the value of the dollar changes. In the next 20 or 30 years when you ready to retire, what is the cost of living going to look like?
When you are making investments, keep inflation in mind. Safe investments don’t take inflation into consideration. The interest they return falls well below the average annual inflation rate. It may mean you take a modest risk with your investment money just to stay current with the inflation rate. Play it safe with a certain percentage of your money, but take a little risk with the rest to compensate for the cost of living increases.
4) Thinking Medicare Covers Everything
Medicare is a very limited benefit; it covers only about 62 percent of your medical expenses, so keep healthcare in mind when planning for retirement. Factor in the cost of a supplemental health care coverage and long-term care into your financial strategy.
It takes a little extra planning like:
- Talking to your employer about post-retirement medical benefits – that’s a real thing, but not all companies offer it. Yours might need a little encouragement to get there.
- Think about a part-time, post-retirement career – Maybe you always wanted to get into real estate or own an art gallery. Consider taking some classes now that will help you pursue a post-retirement career and use that money to pay for healthcare.
- Integrate a medical saving plan into your retirement strategy – It’s that simple. You plan for housing, food and fun, so add another line to your budget for healthcare.
If you have assets to protect, then investigate a long-term care insurance plan, as well. If you start early enough, the cost is nominal and it can help pay for assisted living or even home care, so you don’t lose your retirement assets.
5) Refusing to Create a Personal Spending Plan
Maybe a budget is hard for you, so you don’t bother. You are not alone; it is hard for most people. Try thinking of it as a personal spending plan, instead, especially for lifestyle choices like a new car or a vacation.
Work on controlling what you spend, so you have the money to invest in your future. A personal spending plan helps you prioritize, so you make fewer impulse buys and keeps you from used credits cards for anything but an emergency.
6) Focusing on the Fees
They add up faster than you might think, especially if you don’t know what they cost you annually. When you set up financial assets like a taxable brokerage account, a Roth IRA or mutual funds, know going into it what the fees are and calculate what they add up to each year. What about in five or ten years? Is that money well spent?
7) Using Your Retirement Fund to Pay for Your Children’s College
It’s a noble gesture, but a mistake just the same. There are better options available to pay for your child’s education, such as
- If you are just getting started, plan ahead with an interest-bearing college fund.
- If your child is still in high school, start looking for scholarship opportunities and what it will take to win one.
- Don’t rule out student loans. They are a hassle and there is all that interest to worry about, but it is still a better choice than leaving yourself broke. If necessary, you can help your child pay off the loan with monthly contributions.
Financial planning is not for the weak at heart, but just understanding the pitfalls will help. There will always be something you didn’t expect, but if you strategize well, you can ease into retirement with few worries.