When it comes to personal financial planning, you can make mistakes without even realizing it. Let’s take a look at seven of the most common ones and how you can avoid them for a better financial future.
1. Playing victim to your debt
If you tell yourself, “I’m never going to get out of debt,” you paralyze yourself from ever reaching that goal. Getting out of debt is possible. You just have to take one small step at a time. One recommended approach is to tackle your smallest debt first, putting as much money as possible toward it each month until it's paid off. Then take the money you were putting toward that previous debt and apply it to the next biggest debt until it's paid off, and so on.
2. Lack of forward thinking
When you’re young, retirement seems blurry and far away so most people put off saving. The fact is, the earlier you start saving, the less money is required overall to build a healthy retirement nest egg than if you wait. This is due to the power of compound interest. For example, someone who begins saving at 45 will need to save much more in order to have enough in retirement than someone who begins saving at 25, simply because the interest won’t have as many years to compound.
Watch how compound interest can impact your future.
3. Outdated beneficiaries
One of the most important aspects of good personal finance is keeping your beneficiaries up to date. This is something that must be done throughout life. If you've recently experienced a major event such as a marriage, birth, death of a spouse or child, or have entered retirement, take time to review your beneficiaries and make any needed changes.
4. Underestimating cash reserves
It’s hard to overstate the importance of a healthy cash reserve to cushion against unexpected expenses, yet according to a recent survey by Bankrate measuring how secure Americans feel about their finances, only 45% of people had saved enough to cover at least three months of expenses. Most had saved either nothing at all or less than recommended. Aim to put aside at least three to six months' worth of household expenses in an easy-access vehicle like an AGFinancial Investment Certificate or money market account. The primary purpose of these cash reserves should be to handle unexpected emergencies rather than to earn high rates of return.
5. No distribution strategy
You spend a lot of time developing a savings strategy for retirement, but it’s just as important to have a strategy for how your funds will be distributed to you once you actually retire. Distributions need to be planned carefully both for maximum tax benefit and to avoid the possibility of outliving your funds.
6. Lack of Social Security understanding
Beginning this year (2015), the IRS will again be mailing printed Social Security statements directly to you. It's crucial to review this statement and understand what it means so you can maximize this benefit as you age. Remember, each financial situation is different. Make sure you fully understand the possibility for penalties, taxation of your benefits, the benefits for your spouse, and the best time at which to begin receiving payments. A tax professional can help answer your questions.
7. Jumbled priorities
Many families have limited discretionary income, and one of the biggest mistakes is not properly prioritizing how that money will be used for maximum benefit. For example, it’s common to see parents save aggressively for their child’s college education at the expense of their own retirement. Make sure your discretionary income is serving your most important financial goals first, whether that is paying off debt, building cash reserves, or saving for retirement. These things have the greatest potential to negatively or positively affect your future well-being.
With a little planning and intentionality, you can avoid these common mistakes and build a solid financial foundation to carry you into the future. For information on retirement planning options, call 866.621.1787 or email retirement@agfinancial.org.
