“10 Financial Mistakes to Stop Making in 2020”, as featured in StarBiz, The Star, on 18th January 2020
We are now officially in 2020 – a new year, the beginning of a new decade – with fresh memories and success stories, new opportunities, new goals or a chance to make right with what went wrong.
Here’s an opportunity to redeem yourself if the in the last one year or 10 years, you did not feel like you achieved a lot. The infamy of New Year’s resolutions has resulted in many abandoning the practice of reviewing the year to come. When it comes to financial planning, however, goal-setting is a crucial step to achieving your financial milestones.
Without a well thought out financial plan, you will not be able to take inventory of where you stand, what your goals are and how far you are from reaching them.
Consider this situation: you opt for a large chunk of money to an investment plan with very high returns, but due to the high volatility you end up losing a portion of your capital within a short period of time.
This will ultimately bring you further away from your desire to achieve financial freedom, or in the worst-case scenario, lose all the capital that you worked so hard for.
If you had clear financial goals laid out, you would have had a clearer picture of your timeline, allowing you to grow your money slowly but steadily through a lower volatility fund. By drawing up a detailed financial plan for yourself in 2020, you can avoid these 10 pitfalls in your journey to financial freedom.
How is this a problem, you ask?
Without a clear target or plan, putting aside too much and skimping on your quality of life just for the sake of saving may lead to your own detriment in the long run. The whole point of saving is to ensure that you can attain financial freedom at the level of comfort that you desire in your future.
Being close-fisted does not only mean sacrificing the level of satisfaction that you and your loved ones can experience now, but it could also wear you out and have an adverse effect in the long run, as you find yourself going on a spending spree to make up for this dissatisfaction.
Without a vision of your future financial goals and timeline to achieve those goals, it is difficult to estimate how much of your salary you’ll need to put aside to achieve those goals.
You may end up under saving, or you may get tempted to dig into your savings to splurge the money that you’ve saved.
If something were to happen to you, how much would your family need in order to be comfortable? Many tend to purchase insurance(s) as a reaction to fear. As a result, you may spend too much insuring your family, money that could be better used to grow your assets instead. On the reverse side, without proper deliberation of your family’s needs, you may run the risk of leaving them in the lurch if something were to happen to you.
With a proper financial plan, you will know how much to spend insuring your assets, without spending too much or too little on premiums.> Splurging on too big a home
You may be earning enough to get a mortgage for that extravagant family home that you are eyeing. But is that really the best way to utilise your monthly income? When you have no clear projection of the financial outcomes you want to achieve, you will not be able to gauge how expensive a house you are able to afford.
As a result, you may put a strain on other financial goals and needs, such as your children’s education, retirement planning, or the capacity to grow your business.
By having a financial plan, you will be able to know the real price (opportunity cost) you have to pay for that home purchase.
Education is a necessary investment for your children, as it will equip them with the tools to grow their own life and in turn achieve their own financial freedom. Without a clear picture of all the financial goals that you wish to achieve and their respective timelines, you will not have a good idea how much room there is to spend on your kids’ education. You may end up overspending on one child and affecting other financial goals, or worse still, affecting your other children’s education funds.
When you don’t have a clearly outlined financial plan, you won’t know what ROI and risk appetite you should be aiming for when investing. Invest in too high an ROI, for example 20% or 25% per year, and you may run the risk of losing your hard earned money due to the high volatility. If you target too low an ROI, you may end up growing your wealth too slowly, and not achieving your desired financial outcomes> Under diversifying your investments
Without a plan on how to diversify your investment assets, you could easily end up over investing in one type of product, for example, property.
Without proper diversification of your funds, you run the risk of losing your money if the property sector crashes.
A good sale of your business can provide you enough funding for your financial freedom and complete retirement. On the other hand, a bad business sale will fail to give you sufficient funds for your financial freedom and complete retirement. Without a financial plan, it is difficult for one to know the complete impact of business sale to his financial freedom planning.
Therefore, there is a risk of underselling your business.
Everyone dreams of retiring early, but not many can actually fund that dream. You wouldn’t want to run out of money in the middle of retirement, would you? All the same, if you did have the means to enjoy retirement sooner rather than later, wouldn’t you want to know? Without a solid financial plan, you will not be able to make the right decision on when you should be retiring.
When you don’t take the time to benchmark your current financial situation against your financial goals, you will have little to no idea what the cost of procrastination is. Perhaps if you started taking action this year, your compounded interests will allow you to retire five years earlier as compared to taking action next year.
Without a clear picture, you will not feel the pain and resulting motivation to start achieving your financial goals.
As the saying goes, if you fail to plan, you plan to fail. Don’t let procrastination delay you from achieving the future life that you want.
As a commitment to the new year, put aside the time to take a pulse check of your financial health and map out your financial goals properly with a fee-paying professional or by using free tools/apps available such as iWealth.
Your future self will thank you.
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