- Effective budgeting is one of the most critical components of a financial plan, yet the task is often overlooked.
- Many individuals delay investing towards their financial future because they do not understand the power of compounding interest.
- Estate planning can be a challenging 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? Things could constantly 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.
Common Lifestyle Spending Mistakes
One of the most common mistakes 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 everyone should monitor their monthly spending to ensure they remain within their limits and do not overspend. This allows you to adjust your habits for the upcoming month to stay 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 plan another trip, buy a nicer car, or allow themselves to spend more frivolously throughout the month. 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.
Common Investing Mistakes
Overspending leads us to the next common mistake – the lack of investing earlier on in the financial plan. Time is one of your greatest assets when investing toward 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%, 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 results from compounding interest. We’ve delved into this topic in Understanding the Time Value of Money. We have often seen individuals or families delay investing because it can be an intimidating thought or because they prefer to spend rather than save. By delaying the investment in your financial future, you are limiting the benefit you can obtain from the potential compounding interest.
Common Estate Planning Mistakes
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 tough to discuss, but your beneficiaries or heirs will be much better off if you address this part of the 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 simple, tax-efficient, and fair for everyone. 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 debt repayment strategies, your investment portfolio, taxes, retirement planning, or anything else in general, 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, and James Wink.
If you found this article helpful, consider reading:
- Debt Repayment Strategies
- How to Negotiate a Raise
- Qualified vs. Non-Qualified Dividends
- Recommended Books on Personal Finance
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