There comes a time in everyone’s life where they must start planning for the future. Taking your finances into more serious consideration and creating a financial plan is an inevitable part of life. Unfortunately, many people make some crippling mistakes when first making their plans. Here are six major mistakes to avoid when writing out your financial plan.
Focusing On Debt While Saving Nothing For The Future
Many people would do just about anything to pay off all their debt. It can be tempting to throw all your additional income towards paying down your outstanding balances. While paying down debt is a great thing to work on, it shouldn’t come at the expense of your future self. You want to use some of your extra money to save at least a few months of living expenses. If you lose your primary source of income, you will have a safety net until you land back on your feet. Once you have enough saved up, you can start using that extra money to invest in assets. Your future self will thank you for thinking of the big picture instead of just your current debts.
Not Planning For Emergencies
Nobody likes to think about the worst-case scenario. However, it is a vital part of making any cohesive financial plan. Huge setbacks like having your house burn down or suffering from a critical illness can throw a wrench into your plans. You should always have emergency funds stashed away as a buffer for any surprises thrown your way. By building emergencies into your plan of attack, you will have many more solutions to any problem that may arise down the line.
Not Considering Mandatory Expenses
Everyone remembers to incorporate their utility bills and auto payments into their financial plan. However, people very commonly forget about other expenses that occur every year. Things like holiday shopping and getting your car registered are things you will always need to pay for at the same time each year. Instead of hoping for a large holiday bonus to fund your shopping spree, save up small chunks each month so the cost is far more reasonable. Saving 50 dollars each month is way easier than coming up with 600 bucks come December. Think about everything you have to pay for each year and plan accordingly.
Getting Caught Up In Taxes
Taxes come every year and many people still have trouble dealing with them. The most common mistake is either withholding too much or not enough from each paycheck. If you withhold too much, you can miss out on months of compound interest that you would’ve gained by investing those funds.
If you don’t withhold enough, you may get a heartbreaking bill at the end of the year. You can accurately gauge how much money you need to withhold by using the calculator provided by the IRS. This handy tool will show you how big your refund is or how much you will owe at tax season. With a few simple adjustments to your monthly withholding, you can either break even or get a larger refund at the end of each tax season.
Letting Emotions Get The Best Of You
If part of your financial plan involves investments, there will be inevitable periods where the market will shake. It can be extremely easy to let fear get the better of you and dump your investments. More often than not, this is a terrible idea that results in huge losses. A balanced portfolio will bounce back after periods of tumultuous market activity. Sticking to your guns is what investing is all about. Stay true to your financial plan and watch as your wealth builds over time.
Upgrading Your Lifestyle When You Get A Raise
Making large purchases is the first thing many people do when they get a raise. However, there is a crucial flaw in their logic. Increasing your spending each month cancels out the raise completely. Most people still live paycheck to paycheck because of this error in judgment. You want to use this extra income to invest in something that helps you reach your goals.
Paying down some debt, saving for something special, or investing are the three best things you can do with raise money. The easiest way to prevent excess spending is to plan what you will use upcoming raises on. Promise yourself that you will use your raise wisely instead of wasting it on frivolous things. When that first paycheck comes, you will know what to do and not feel tempted by silly purchases.
With these mistakes in mind, you should be able to craft a financial plan to meet all of your goals with relative ease.