It’s easy to commit money mistakes. In fact, I would argue that it can be easier to make poor financial decisions than it is to make consistently brilliant choices with your cash.
This is rarely the fault of the person making a mistake. Unless you have made an effort to acquire a financial education, or you have been fortunate enough to have a great teacher, there is a reasonably good chance that the education system has failed you in this regard.
The absence of formal financial education to a high standard at school simply positions millions of people to fall into the same old traps with their money.
There are (at least) ten money mistakes that people seem to make regularly. Knowing what they are should help you avoid them in the future and improve your chances of making brilliant decisions instead.
1. You don’t know what you spend each month.
Failing to budget is one of the most common money mistakes to make. Getting your household budget together and then sticking to it consistently is one of the most positive financial steps you can take.
A budget does not have to be complex; keeping it simple means you are more likely to use it.
2. You know more about your house than you know about your pension.
Ask a typical person about their house, and chances are they will be able to give you chapter and verse in response. Ask about their pension fund, and you are more likely to be met with a blank expression.
For most people, their pension fund is their second-largest asset. Start taking an interest. After all, your pension fund will enable you to maintain your current lifestyle in retirement.
Investing some time now to understand and then take control of your pension fund will pay dividends in later life – a time when you might wish you had bothered to make more of an effort when you were younger.
3. You follow the herd.
You can always spot a ‘golf course’ investor. Their portfolio contains every flavor of the month investment fund from the last decade, usually purchased just as the fund finished delivering stellar returns for the final time before crashing. It might not have been the golf course where they picked up their latest hot investment tip, but they have been getting the ideas from somewhere.
It rarely makes sense to follow the herd when investing money. Just because a fund was suitable for someone else does not necessarily make it right for you. In fact, it is often the contrary position that gets the best results in investing.
4.You avoid facing up to the unpleasant stuff.
Nobody enjoys thinking about their death or the death of a family member. Yet, this is a crucial subject to consider when it comes to smart financial planning.
Avoiding the topic of death (or illness, disability, etc.) can leave you or your family dangerously exposed should the worst happen. Put any irrational fears to one side—you do not die because you have made a will or set up some life assurance cover. You might even find that thinking about death and dealing with the associated financial planning issues will enable you to sleep more soundly at night.
5.You fail to shop around.
There is a massive gap between the best deal and the worst deal in the world of financial services. It is also the case that a single product provider is rarely the most competitive for every product type.
When you fail to shop around for the best (which is not always the cheapest) deal, you expose yourself to uncompetitive and potentially wasteful financial products.
The Internet makes this form of whole of market comparison quick and easy. If in doubt, engage the services of a professional independent financial adviser. In addition to finding you the best deal, they will also ensure that you are taking the most appropriate action course.
6.You do things once and never review them.
Things change, and because things change, you need to review and then make changes to your personal finances at regular intervals. The policy you set up today is unlikely to remain on track or invested in suitable funds when you retire in the future.
A regular review of your finances is a necessary discipline to adopt. At a minimum, you should be sitting down to review everything at least once a year. If you are following a complicated investment strategy, quarterly or even monthly might be more appropriate.
Decide on your review strategy, put a date in your diary and then stick with it.
7. You follow financial advice blindly.
Financial advice is precisely that – advice. Whilst you should trust the advice from a professional independent financial adviser (assuming they are well qualified and impartial), it is essential to understand the direction you are receiving and relate it to your personal circumstances, goals and objectives.
When in doubt, ask more questions. A good financial adviser will never end a meeting until they are satisfied that you understand the recommendation and all of your options, along with the advantages and disadvantages associated with each of these. Always keep in mind that financial advice is advice, not instruction.
8.You don’t have clear goals.
Unless you have specific life goals, it is difficult to make consistently brilliant financial decisions. The choices you make about your money should always relate to broader life goals. When you make financial decisions that are not linked to goals, it is difficult to measure success.
When people know what they want out of life, the associated decisions about their finances come naturally.
9.You never read the small print.
Consumer protection in retail financial services is streets ahead of where it has been at any time during the last twenty years. The Financial Services Authority (FSA) takes a tough stance with any adviser or financial institution not treating their customers fairly. This is an essential regulatory principle that should ensure a favourable outcome for most consumers.
This is not to say that you can sign-up for financial products or services without reading the small print and always expect to have a smooth ride. The small print is often dull and sometimes filled with legal jargon, but it is always worth reading.
Regulated financial firms have to produce a Key Facts document that describes the most critical issues to consider. Always read this document and, if possible, read the more detailed terms and conditions as well. If in doubt, ask questions about the terms and ensure you get a satisfactory answer (preferably in writing) before you sign on the dotted line.
10.You make impulsive financial decisions.
Making impulsive financial decisions is one of the common money mistakes everyone does. It probably means that you have not taken the time to weigh up all of the options or shop around to get the best deal. Worse, it might land you in pits of debt. In short, it usually makes sense to step back from an impulsive financial decision, take a few deep breaths and revisit it later.
Another good reason for never rushing when it comes to money decisions is the risk of fraud or other scams. Fraudsters like to place their victims under pressure to make a fast decision. Any pressure like this should set alarm bells ringing and cause you to walk away from a deal.