On your path to financial freedom there are several pitfalls to avoid. The following are the top 5 danger zones to watch out for on your way to achieving your goals and dreams.
1. Burdening yourself with debt. In its proper place, debt can be leveraged to help you achieve your dreams, such as when you’re buying a house, paying for education, or seeking to build credit. All too often, however, debt can also be a set of handcuffs keeping you from experiencing financial freedom. Constantly owing someone else money compounds the problem by keeping you from saving and building wealth for yourself. Do whatever you can to rid yourself of unnecessary debt.
2. Failing to save. Failing to save is a good way to ensure that you’ll never achieve your financial goals. However, getting on a budget and allocating 10-15% of your income for the future is a great way to protect yourself from future crises and help you succeed in your goals. If you can’t do that, then set aside whatever you can, even if it’s only $50 a month. Every bit helps, especially when you consider the compounding interest on your savings (when invested). Most companies offer a retirement plan that will match your contributions by 3-6%. This is an excellent opportunity to receive free money and you should contribute to your retirement plan at least the amount that your employer is willing to match.
3. Making financial decisions in the wrong state of mind. You can seldom expect a decision made in haste or out of an emotional state of mind to come out favorably, and yet people attempt this all the time in financial decisions. Consumers are emotional beings and often make huge financial decisions on a whim. Before making any substantial decision such as buying a house, changing jobs, or retiring, etc. you should carefully consider all of the financial implications and then plan accordingly. Failing to do so could be disastrous for your financial health.
4. Making uninformed investment decisions. Successful investing is a skill that is learned and cannot be replicated by just anyone. While there are resources out there to help the lay investor know how to invest (a great resource is A Random Walk Down Wall Street by Burton Malkiel), most investors would be better served by working with a professional who knows the markets, tax strategies, portfolio theory, and investment strategy. In a world full of financial product salesman, brokers, and financial planners it can be difficult to know who really has your best interests in mind. In an article by the New York Times, consumers are encouraged to work with advisers who hold themselves to the fiduciary standard, meaning they put their clients’ interests above their own. While this seems like a no-brainer, most advisers are actually not fiduciaries and simply sell their sponsoring company’s products, regardless of how well the these products actually perform. To ensure you have an advisor who is working for your best interests, simply ask them, “Are you held to a fiduciary standard in all dealings with me and my financial affairs?” If they say no, walk away and find someone who can always be on your side without these apparent conflicts of interest.
5. Failing to plan strategically for your financial future. Without charting a course for where you want to be in the future, you’ll never know how to get there. Sitting down and writing down all your dreams and goals can help you determine your end-game and strategies to get there. Often this process is best tackled with the help of a financial planner in the form of a comprehensive financial plan.
In avoiding these pitfalls, you will set yourself up for financial freedom and success in achieving your life goals and dreams. For more information on planning for your financial success contact us at American Financial Planning.
I’d love to hear from you. What are some other financial pitfalls you’ve observed that bar access to financial freedom?