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While it may be difficult to achieve perfection in our financial planning, there are things we can do to avoid making the big mistakes. Here are three examples of financial mistakes that people often spend decades trying to recover from:
  1. Thinking that you don’t need a budget (or it’s impossible to follow one for your situation)
“I know that budgeting is important, it just hasn’t worked for me.”
“It’s too hard to follow a budget.”
“I have a general idea of where my money is going but not a written plan.”
Similar statements are shared in financial planning meetings and during meaningful discussions between friends and family on a regular basis. We all have life goals and a vision for how we think our money should be aligned with those things that matter the most to us. The problem is that the lack of a budget is a major obstacle standing right there in the middle of our path.
Let’s call a budget by its proper name and purpose – it’s really a “personal spending plan.” These spending plans give us awareness of where our money is going and help us prioritize financial decisions.
Too many people think budgets are just for those who are struggling to make ends meet. In reality, we all need a personal spending plan and it needs to be more than just a brain cloud of good intentions. It needs to be in writing.

The good news is that it doesn’t have to be perfect. Your budget can be as simple or complicated as you want it to be. Try to make saving, paying the bills, and paying off debt automatic. Then check out automatic budget tracking tools like MintGoodBudgetor BillGuard to see if one might be worth adding to your budgeting toolchest.
  1. Relying on credit card debt to pay for lifestyle choices
If lack of a personal spending plan is a problem that can delays financial life goals, then debt issues may prove to be even bigger obstacles on the path to important goals like retirement. Last week, I sat down with Alicia and Tony, a couple in their 30’s trying to balance the competing goals of paying everyday living expenses, digging out of credit card and student loan debt, and raising 3 kids. They saw firsthand how seemingly small credit card balances can pile up in a hurry. If not addressed early enough, the financial stress will continue to increase along with that debt.
Initially, they said the combined balances owed on these cards usually never exceeded $2-3k. However, shortly after the birth of their twin daughters, Tony’s job was eliminated. Unfortunately, this major life event did not result in major changes to their lifestyle. Tony eventually decided to start his own home-based business funded in part with personal credit cards and their total balances ballooned to over $35,000 by the timewe met. While some of these credit card expenses were for necessary items, most were for lifestyle choices, or “wants” and not ‘needs,” that could have been avoided.

If you have revolving credit card balances, an innocent night of fun and revelry could end up costing hundreds if not thousands of dollars over time if it’s funded by plastic. (See the DebtBlaster Calculator.) We also tend to spend more when we swipe a card compared to simply paying with cash.

Credit cards are not necessarily a bad thing, especially if you have the discipline to pay them off in full each month. In fact, you can rack up some nice rewards and let the 34% percent of Americans that have revolving credit card debt help pay for your perks. After all, the average consumer spends $2,630 per year on credit card interest.
The best way to make sure that you’re not using credit cards the wrong way is to create a “24-hour rule” for all purchases with credit. If you can’t pay off your balance in full within 24 hours, then you shouldn’t buy that item. If you can’t manage that plan, it may be time to cut up those cards.
  1. Not paying attention to fees on financial products
The financial services industry hasn’t helped us out too much here in the past. The true costs of investment and insurance products aren’t always transparent and simple to identify. Most people don’t understand how financial professionals are compensated or whether the person they are working with is held to a fiduciary standard to operate in their best interests. Fees matter a lot more than most people realize. If you start to pay more attention to the fees you are paying for financial products, you can start pocketing more of your hard earned money.
My recent financial planning consultation with Sophia provides proof of why it helps to pay attention to the fees we pay for financial advice. At age 45 she had been consistently saving money in her 401(k) plan, Roth IRA, and taxable brokerage account. During an annual portfolio review of the mutual funds in her Roth IRA and brokerage accounts, she brought up a question that had been nagging her for a few months. When she reluctantly asked, “How much are the total fees that I am paying?” her financial advisor’s response got her attention.

The total fees according to her investment advisory agreement were 1.5% of assets under management. Since her portfolio was invested in a diversified mix of actively managed mutual funds, the expense ratios added another 0.75 to 1.25 percent of her total account value in management fees and other expenses. This may have made sense a decade ago when she lacked the financial savvy and confidence to be more hands on with her investments.
However, the recent market volatility led her to question the value she was receiving for the fees she was paying. By using a basic investment fee calculator, we estimated a difference of about $83,000 over 10 years using a 7% average annual growth rate (current balance $250,000). She reduced her total fees by 2 percentage points when she decided to transfer her investments to low-cost no-load index funds.

How we choose to manage our personal finances says so much about our life goals, values, and priorities. These financial decisions also demonstrate how we balance living in the moment with the need to plan for future goals. This balancing act can be a struggle and that is exactly why the simple act of creating a basic financial plan can help you stay focused on what matters the most to you. Just remember to avoid making the big mistakes when creating and following your financial plan.

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