Financial planning is one of the most critical things anyone can do for their current and long-term financial goals. As with any aspect of life, financial planning can either be intelligently implemented or approached in the wrong way.
But what are some of the major financial planning traps and errors you should be wary of making?
1. Not working to a plan
Surprisingly, not having a clear financial plan is more common than you might expect. A plan forces you to think about your financial goals and what you want in life. It should take into account your current and projected financial states, changing life stages, and fundamentals like income, assets, debt, and cash flow. It should encompass supporting tools like budgets and include measurable, quantified goals so you can check your progress. With a detailed financial plan, you can ensure your financial resources are put to the most productive uses and understand the precise steps you need to take to reach your goals.
2. No plan B for contingencies
An effective financial planning process should assess potential risks, contingencies, emergencies, and other unexpected outcomes. It should incorporate a thorough risk management strategy for addressing risks. For example, you might see your personal top risks as losing your income and not being able to provide for your dependents. In this case, setting up an emergency fund, obtaining income protection insurance, and updating your estate plan could mitigate these risks.
3. Postponing saving
Every financial planning strategy should incorporate savings targets. Delaying gratification and saving now rather than later “when you can afford to” will ensure your money starts working harder for you earlier. Saving early, no matter your income level, lets you leverage the power of compounding.
4. Not seeking expert advice
Take a proactive approach to your finances and work with an adviser for expert guidance. The value of a qualified financial planner goes beyond giving you an objective opinion. Your financial planner can offer invaluable insights into complex, technical issues like the right investment vehicles and products, along with ever-changing tax laws. They can give you a tailored plan with strategies designed for your unique situation while motivating you to achieve each financial milestone.
5. Underestimating the importance of estate planning
Estate planning is easy to put off and delay until later, but it could be an essential element in your financial planning. It allows you to distribute assets to loved ones and minimise tax when wealth is inherited, so it’s an important consideration not to be overlooked as you review your long-term financial plans.
6. Looking for quick fixes
A financial plan is successful if it allows you to build wealth steadily over the longer term, but some people are looking for quick fixes. High return investments, however, typically attract higher risk. Rather than choosing investment options with bigger possible gains and higher volatility to make some quick returns, it could be better to ride out short-term ups and downs. In addition, work with a trusted adviser for an investment strategy that matches your goals and risk profile.
7. Not communicating with family
Your partner and other loved ones might have different approaches to managing money, so maintain open communication, especially about shared wealth, goals, and assets. Keep loved ones up to date about estate plans and inherited wealth. By doing so, you can reconcile diverging goals and strategies and avoid potential family conflicts over money in the future.
8. Omitting regular reviews
You’ll be reaching new milestones and different life stages, so make sure you review – ideally with the assistance of an adviser – your requirements, goals, and investments on a regular basis. This allows you to stay up to date with how your investments are performing and adjust your strategy as necessary. When tax laws, superannuation regulations, and other legislation change, you can be confident you’re still fully compliant and optimising your financial plan for these changes.
9. Chasing the market
Financial planning encompasses investing, and successful investing isn’t about chasing the market, but rather achieving your financial goals so that you can accomplish your life goals. Rather than trying to profit off the latest market trends (which could expose you to excessive risk), invest regularly and consistently according to your risk profile.
10. Working with the wrong adviser
If your current adviser isn’t working out for you, consider working with another one. A great financial planner can turbocharge your financial planning by supporting you with expert insights into things like tax laws, business and investment structures, as well as sound investment strategies. Take the time to find a qualified, experienced adviser who communicates effectively and helps you with setting realistic goals and developing workable strategies. You should also be asking them questions to determine if they are the right adviser for you, such as what their accreditation is, their strategies, etc.
Avoiding common errors and mistakes in financial planning
Some of the most common errors and traps in financial planning are easy to avoid, but can end up costing you significantly. An effective financial planning process involves a clear plan that integrates supporting elements like risk management, ongoing savings, and estate planning. In addition, it involves working with a qualified financial planner who can guide you on avoiding traps and errors, allowing you to be supported by the best expert advice.
Prime offers expert integrated wealth management & protection advice, helping clients protect their assets and build wealth. If you’re looking for simple, honest advice to help secure your financial future, contact our team today for more information on how we can work with you to achieve your goals and aspirations.