Avoiding the Most Common Financial Planning Mistakes

• We believe effective budgeting is one of the most important components of a financial plan, yet the task is often overlooked.
• We have seen that some individuals delay investing towards their financial future because they do not understand the power of compounding interest.
• In our experience, estate planning can be a tough and emotional conversation, so many individuals and couples never get the necessary documents in place.

In our experience preparing comprehensive financial plans, there are never two situations that are identical. We often get asked the question, What could I have done better? Or what can we do better moving forward? We think things could always be improved because no one is perfect, but we have noticed a common theme among the weaknesses of the financial plans we review and the recommendations we prepare.

1\. Overlooking Proper Budgeting Habits

One of the most common mistakes that we notice is individuals and families not following proper budgeting techniques. Reviewing spending can be very stressful, and this causes a sense of dread associated with the task. This causes people to delay and ignore their budgeting duties altogether. We believe that everyone should monitor their spending monthly to ensure they remain within their limits and not overspend.

This allows you to adjust your habits for the upcoming month to remain on track to meet your goals. _Lifestyle Creep_ is a term used to express how monthly expenses tend to rise as monthly income rises.

We have seen it plenty of times. Someone receives a $5,000 raise, but they do not increase retirement or investment contributions. They simply plan another trip, buy a nicer car, or allow themselves to spend more frivolously throughout the month. We feel Lifestyle Creep should be kept in check, and increases in income should be used to enhance your financial plan, not enhance your spending.

For more in-depth information on budgeting, we invite you to explore our previous post on Budgeting 101.

2\. Delaying Investment and Missing the Power of Compounding

Overspending leads us to the next common mistake – the lack of investing earlier on in the financial plan. We believe time is one of your greatest assets when investing in a future goal. The sooner you start, the more compounding interest you could potentially realize.

For example, if you start with $100 and earn 10%, then you earn $10. If you earn 10% the following year, then you earn $11. That initial $10 of growth will continue to grow, and the extra $1 in year 2 is the result of compounding interest.

We discussed this topic in one of our previous blog posts on the Time Value of Money.

We have seen many times where individuals or families delay investing because it can be an intimidating thought or because they prefer to spend their money rather than save it. By delaying investment in your financial future, you limit the amount of benefit you can obtain from potential compounding interest.

3\. Avoiding Estate Planning Conversations

The final mistake we would like to address in this blog post is the lack of concern regarding estate planning. We understand why this may be the case. The concept of passing away can be upsetting and difficult to discuss. Still, we believe your beneficiaries or heirs will be much better off if you address this aspect of your financial plan. Nobody likes to talk about death, but it is necessary.

Who do you want to receive your assets? Do you have any specific final wishes? If no plan is in place, then a probate judge will be the one making these decisions for you, and it is possible that your heirs may argue or fight over what they believe to be their share.

An effective estate plan makes the asset transfer process straightforward, tax-efficient, and equitable for all parties involved. To delve deeper into the various options and considerations surrounding estate planning, we invite you to explore our previous posts Making the Most of Estate Planning and Tips for Beneficiaries & Estate Planning.

Speak With a Trusted Advisor

If you have any questions about your investment portfolio, retirement planning, tax strategies, our 401(k) recommendation service, or other general questions, please give our office a call at (586) 226-2100. Please feel free to forward this commentary to a friend, family member, or co-worker. If you have had any changes to your income, job, family, health insurance, risk tolerance, or your overall financial situation, please give us a call so we can discuss it.

We hope you learned something today. If you have any feedback or suggestions, we would love to hear them.

Best Regards,

​Zachary A. Bachner, CFP®

with contributions from Robert Wink, Kenneth Wink, James Baldwin and James Wink.

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