financial planning 101: five mistakes you don’t want to make

financial mistakes

Now don’t go running for the hills just because this post is about money, a sensitive topic in most households. Take a big deep breath, and let’s dive into these common mistakes to uncover some helpful money tips.

  1. Operating without a budget.

I’m not going to lie. I’m a free spirit and this word makes my heart palpitate. But according to Kev, there’s no way around it. “First things first – you have to know what is coming in and going out before you can plan anything.” It’s one thing to make the budget, but it’s an entirely different thing to actually live by it.  Research says Americans are only spending 17 minutes per month telling their money where to go. His recommendation is to make a date with your headphones once a month and dig into your bank statement. Sound tedious? It is…but it helps you actually feel the pain. We spent HOW MUCH at Target last month? I can’t tell you how many times I have suspected fraud because I can’t believe I actually spent that much on groceries. To most of us ignorance is bliss – we would rather bury our heads in the sand than face the brutal facts.  The first step to a solid financial plan is telling your money where it needs to go. 

  1. Buying things on credit.

Don’t spend what you can’t buy straight up. There are two exceptions to this rule – your house and your education.  Many of us are not in a financial position to buy a house in cash or pay for our schooling.  That’s ok!  Mortgage rates are under 4% and tax deductible and an education is an investment to give you the opportunity to make a better income.  However, there are two sides to debt – financial and emotional.  The beautiful Von Maur sales girl says, “But it’s 0% interest!”  Or the finance manager tells you that you can get better than 2% in an investment rather than paying for that car in cash.  This is true – the “opportunity cost” is real.  If I can get 7% in an investment, why pay for a car in cash at 2%?  Because emotionally it is freeing to know that you are not strapped with payments all over the place.  Use the opportunity cost cop out and you could find yourself with 0% payments taking up all of your extra spending money!

  1. Buying a lil’ too much house.

The easiest area to overspend and strap the budget is on your mortgage. We know this all too well.  The banks will loan you 3X your income as a general rule, sometimes more.  If you want to REALLY get ahead financially and set yourself apart, cut that rule in half.  If the household income is $100,000, buy a home for $150,000.  If you go with the 3X rule, you are buying so much house compared to your income that your monthly cash flow will likely take a hit. The easier you can make your biggest monthly payment, the more at peace you will feel. (By the way, the Quad Cities has some adorable real estate at decent prices…yet another reason why downsizing is appealing to us!)

  1. Poor risk management.

What is your biggest asset right now?  Is it your house?  What about your 401k?  Most likely, it’s your PEP – Potential Earning Power.  Think about it…if you make $100,000 and you’re 35 years old, you are on track to make $3,000,000 more by the time you’re 65.  That’s not counting raises or inflation.  Your financial plan relies 100% upon your ability to bring that money in. Insuring your ability to do that is the foundation of the financial house you are building.  If the breadwinner or even the supplemental income earner in your house got sick or hurt and was unable to work, or worse yet passed away unexpectedly, would the rest of the family have to transition to a new home? A new lifestyle altogether? We’ve become passionate about making sure families have enough life and disability insurance to keep their households on track were a tragedy ever to strike.  If spending $100/month on car insurance to insure an asset worth $20,000 makes sense, then it makes 150X more sense to insure the $3,000,000 asset, wouldn’t you agree? When the storms of life come, you’ll want to have built your financial house on a solid foundation.

  1. Saving only 10%.

The 10% rule of thumb was relevant for our grandparents who could still rely heavily on social security, a company pension and a gold watch! But since most companies have moved to a 401(k) plan, that rule is not as true as it used to be.  The math simply doesn’t work –  saving 10% of your income for 35 years can’t afford even 80% of what you were making prior to retirement for a potential 30 more years. Yay for health and longevity in 2015!! But seriously, as life expectancy grows, so does your financial need in retirement. If you work for the government or a union, you probably do have a pension, but for the majority of us that’s no longer the case.  Even government pensions aren’t as secure as they used to be with the current debt situation.  Saving 20% of your household income is much more accurate if you want to retire at a reasonable age. The more you can establish these habits early and adopt the philosophy of biting the bullet and paying yourself first, the better position you will be in. Kevin advises clients to treat saving like a bill and automate the process. Don’t leave it up to your self control!  Take it away from yourself before you can spend it.

I’m telling you, you aren’t the only one who squirms when you read this stuff. The free spirit in me wants to say “yeah, yeah, well I’m busy raising toddlers over here, okay?! I’m buying diapers by the freaking van trunkload. It’ll all work out in the end. Haven’t you seen the quote on pinterest ‘It will all be okay in the end. If it’s not okay, it’s not the end.’ See ya, wouldn’t want to be ya, Mr. Financial Planning.”

If I weren’t married to Mr. I-Love-Planning, I would be tempted to live with that mindset! But I’ve learned that a little planning really can go a long way, and deep down I know that careful planning and discipline now gives our family the security and future we desire. Y’all, that’s so much better than instant gratification.

Don’t fall for the common myths about moolah, you can do this mama!

If you have in-depth questions or want to review your planning situation, Kevin would be happy to help. (You can find his digits over at his website.)

*This is not a sponsored post. All opinions in this post are completely and 100% my own. The ring on my finger was given to me wayyy before I wrote this. 🙂 *

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One Response to financial planning 101: five mistakes you don’t want to make

  1. Aubrey February 25, 2015 at 9:34 am #

    Yes! So true! I love how you explained this on both a financial and an emotional level. I too am lucky to have a planner husband who sometimes has to speak to my freer side :). I’ve given in to his love of budgeting, and it has ultimately been emotionally freeing to know that we are going to “make it” from month to month and year to year.

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