When it comes to financial planning, mistakes can have a costly impact on your finances.
Introduction
Regardless of age or your current financial position, a well-prepared financial plan can help you achieve your life goals and put you on the path to financial independence. Even with the best intentions, knowing where to start can be a challenge. If this sounds like you, keep reading so you can avoid these common financial planning mistakes.
Mistakes to avoid
1. Failing to make a financial plan
Most people would prefer to spend more time planning their next holiday than they would their personal finances. They only consider vague goals and are unsure as to whether they are on track to achieve them. Financial planning is a rewarding exercise which can provide clarity and a real sense of direction. Without a financial plan, it is hard to know where you are going or how you are going to get there.
2. Not communicating
Decisions about money are rarely made logically. Emotions and human behaviour usually dominate decision making and this leads to differing styles of managing and investing money. Without discussing these differences, this can lead to conflicts between couples. This communication should extend beyond partners, particularly where there are adult children who may inherit family wealth. Often it is the adult children who end up dealing with things in the event of later life care and settling an estate.
3. No or little emergency fund
It is normal to think bad things will not happen to you. Without this, our ancestors would never have left the safety of their campfires in search of more. This way of thinking remains deep rooted in our brain, which frequently leaves many people short of funds when boilers break, and jobs are lost. A good rule of thumb is to have the equivalent of at least three to six months’ living expenses readily available in cash deposits.
4. Insufficient protection
As the average life expectancy continues to increase, many people are now finding themselves financially responsible for not only young children but older family members too. This increased responsibility makes it all the more important to consider how loved ones would cope if you were to suffer an incapacitating illness or even death.
5. Not saving enough
It is easy to put off saving when you are young, and budgets are tight. However, the later you start, the more you miss out on the power of compounding and the harder it becomes to make up lost ground. It can be difficult to get the balance right between saving for the future and paying off bad debt. Getting into good habits early makes it much easier to commit to saving and automating these savings increases the chance of you actually saving something.
6. Not reviewing their financial plan regularly
Life is unpredictable. You may plan today for a future goal and yet, the only certainty is the assumptions you have made now will not become reality. Your priorities change throughout your life, tax legislation gets reformed and you may need to reconsider your objectives. Regularly reviewing your plan gives you the chance to check in and see where you are at, provide peace of mind and makes you more likely to stick with it.
7. Picking a retirement date out of ‘thin air’
Deciding when to retire is one of the biggest decisions you will make in your lifetime and most people settle on an age at which they want to cease working with little thought as to whether they are financially ‘ready’. Retirement planning provides you with confidence knowing how much you can spend in retirement, how long the money will last and what can be done to alleviate any shortfalls.
8. Not updating Wills and beneficiaries
If you have experienced a life changing event such as marriage, divorce or having children, you should review the terms of your Will. A properly written Will ensures that your assets end up where you want them when you die. Most pensions do not form part of your estate on your death, which means they will not be covered by your Will. Who gets your pension savings when you die is at the discretion of the pension provider in question, they will make the decision based on the information available once you have died. To aid with this decision making, you can complete an ‘expression of wishes’, sometimes referred to as a ‘nomination form’, which allows you to tell them exactly what you want to happen in the event of your death.
9. Putting off estate planning
The saying goes “two things are certain in life – death and taxes”. While this may be true, the amount of tax you pay on death can be minimised with prudent planning. There is no ‘perfect’ solution and you must consider the balance between control, access to capital and income, and how soon the strategy will be effective, to name just a few.
10. Doing it yourself
Building your own financial plan requires a lot of researching and learning. For most, it is not worth the time and ongoing effort. As you get older, busier and (potentially) wealthier, your financial goals get more complicated. A financial planner can help you save time and from making costly mistakes, also motivating you into taking action, to help you remain disciplined about your financial strategies.
While this is by no means a comprehensive list of all the mistakes you can make when preparing a financial plan, it does highlight some of the key points to consider. Financial planning is a rewarding process that can ease financial anxiety and provide you with the steps needed to get the most out of life. The DIY approach is not for everyone – for those who lack the time, skills and/or discipline to create and follow a financial plan, then it is worth considering professional help.
If you have spotted any of these mistakes when doing your own financial planning or want to avoid making them in the future, then please do get in touch.
How can we help you?
If you would like to discuss your financial planning requirements, or if you wish to arrange an initial no cost, no obligation, consultation, then please fill out the contact form below. Alternatively, you can call 01603 706 820 or email info@lffp.co.uk.
Important information
This article is solely for informational purposes and nothing in it is intended to constitute advice or a recommendation.
The impact of taxation (and any tax relief) depends on individual circumstances. This has been prepared based on our current understanding of UK Law, Taxation and HMRC practice, all of which could be subject to change in future. The value of investments can fall as well as rise and it may not always be possible to receive back the sum initially invested. Past performance is not necessarily a guide to future investment returns.
The personal insurance protection products discussed in this article (with the exception of some Whole of Life policies) are not savings or investment products and have no cash value unless a valid claim is made. The tax treatment of any policy may depend on your individual circumstances and may be subject to future change.
While considerable care has been taken to ensure this information is accurate and up-to-date, no warranty is given as to its accuracy. This article constitutes a financial promotion.
