Top five financial mistakes people make
Some of the biggest financial mistakes are also the most common and they can cause hardship in the long term. Here are the top five, with tips on how to avoid them.
1. Not having a budget
No matter how much a person is earning, without a budget they don't have control over their money and can't get a grip on their everyday spending and cash flow. Keeping up with the Joneses also puts unnecessary financial pressure on people and their families, so learning to differentiate between needs and wants is essential. Once a person knows what's coming in and what's going out they can see how much money is left over at the end of the week or month to save, invest or pay down debt - and where they need to cut back on spending.
2. Credit card trap
Anyone who continues to buy today with tomorrow's money is heading towards the big dipper of debt that can take a long time to climb back up from. Credit cards are convenient if paid off in full each month but if there is a large amount of debt sitting on a card it can cost people big time as interest rates on credit cards can be 20% or more. Pay off this debt as fast as possible by making more than the minimum repayment each month. If you have several cards maxed out, consider rolling all the debt onto one card.
3. Neglecting insurance
Figures show that at least one in five Australians aged between 21 and 64 will be incapable of working at some point because of an unforeseen accident, injury or illness, and yet almost 95% of the population is underinsured. Research also shows 60% of families don't have enough insurance to cover household expenses for a year if the family breadwinner were to pass away. Unfortunately, this is why many people seek advice to help them through this difficult situation and get back on the road to financial recovery. Personal insurance isn't just about life insurance but also total and permanent disability (TPD) insurance, income protection and trauma cover. Some people may not need all of these, but most need some of them. It's also not like car or home and contents insurance; it requires consideration of individual circumstances, needs and goals - so it's worthwhile getting professional financial advice.
4. Planning retirement too late
Retirement might seem light years away but as time goes by people get caught up with buying a home, raising a family, renovating, paying for kids' education. As a result, superannuation often gets pushed to the back burner. According to a recent survey, 36% of Australians aged over 50 regret not putting away more cash, with a further 35% saying they would increase their super contributions if they had the chance to plan for retirement again.
To avoid relying on an aged pension in retirement, it pays to start boosting super early through salary sacrifice, after-tax contributions or making the most of incentives such as co-contribution. Even if they can afford to salary sacrifice just $5000 of their annual wage into super, this is likely to grow faster than most other savings because of the tax concessions and compound interest.
5. Putting all your investment eggs in one basket
For people who have worked hard to save a lump sum to invest for their retirement, one of the financial disasters that could strike is if their investment is going nowhere but south. Diversification is the key to level out risk in an investment portfolio. By spreading investments across asset classes, investors can lower the overall risk of their portfolio and improve returns. Let's say a person has investments in property and shares; their shares are unlikely to be affected by a property market downturn and vice versa.
By being aware of the biggest financial mistakes and what they can do to avoid them, people can be on their way to financial success in no time.
Darren James, AMP financial adviser
Darren James, of MBA Financial Strategists, is an authorised representative of AMP Financial Planning Pty Ltd, ABN 89 051 208 327, AFS Licence No. 232706. Any advice given is general only and has not taken into account your objectives, financial situation or needs. Because of this, before acting on any advice, you should consult a financial planner to consider how appropriate the advice is to your objectives, financial situation and needs.