Here Are My Top 5 Biggest Financial Planning Mistakes People Make
By David W. Hoffmann, CFP®, AIF®
In my nearly 20 years in the financial services industry, I have seen even the most experienced investors and savers make some critical mistakes. On the investment side of our business, no one can be right all the time due to outside factors that are out of your control.
That is why I make sure to focus with clients on areas that are within in their control. For this reason, our firm makes financial planning a key component of our client service model. The following are five of the more common mistakes we uncover with prospective clients.
Lack of planning - Most people should invest based on their financial goals and not to try to beat the stock market. A comprehensive financial plan can help you to come up with a target rate of return and appropriate risk level to help you meet your goals. Planning allows you to create specific goals for what you want to achieve and when you want to achieve it.
Failure to review your plan - You should review your plan at least once a year and/or when major life changes occur. These major changes may include an inheritance, house purchase, new job, marriage, divorce, or other event that may change your financial goals. Planning should not be a one-time exercise but rather an ongoing one that is updated regularly.
Failure to manage debt properly - Don't let debt control your life. To avoid lingering debt and credit problems, plan to pay it off as quickly as you can, focusing on high interest rate debt first in most cases. The benefits to paying off debt are extensive. You will free up more income, improve your credit score, allow for earlier retirement and most of all, relieve the stress associated with carrying large amounts of debt.
Failure to manage risk and your estate - If you do not put in place the proper property & casualty, life, disability, and/or long-term care insurance, all of the saving you have done could be wiped out very quickly. Furthermore, if you do not have up-to-date wills, POAs and living wills, all of your hard work and worthy intentions could be subjected to the negative effects of probate, inheritance and/or estate taxes, or even unforeseen family conflicts.
Starting too late - Albert Einstein said, "Compound interest is the eighth wonder of the world. He who understands it, earns it...he who doesn't...pays it." Let compounding work for you over time. Compounding can create a snowball effect, as the original investments plus the income earned from those investments grow together.
For example: If you saved $500 a month for 10 years and never invested it or earned any interest on it, you'd have $60,000 after 10 years. But if you invested $500 a month for 10 years and earned 8% each year on your investment, you would end up with about $91,500. In other words, you'd have 50% more money! The earlier you start the better when it comes to compounding. Compounding really works hardest for you in the later years.
Paying attention to some basic financial planning principles such as those I have outlined here could allow you to retire more comfortably.
To summarize, taking care of financial issues that you can control helps you see the big picture and set long and short-term life goals. Some basic financial planning techniques can make it easier to stay on track to meet your life goals. In addition, you may want to consider working with a CERTIFIED FINANCIAL PLANNER™ (CFP®) who is educated in these areas to provide further guidance and peace of mind. Many financial advisors call themselves financial planners, but they may not be looking at the whole picture for you
Thanks for reading!
David Hoffmann is a Senior Financial Advisor at DBR & Co. Wealth Partners, a Pittsburgh-based wealth management firm.
If you would like to contact the author, David Hoffmann, please e-mail him at firstname.lastname@example.org or call 412-227-2800.
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