In case you haven’t noticed, I’m kind of obsessed with smart financial planning. Over the years, I’ve given out a lot of money advice to a lot of friends and acquaintances. What’s surprising is how many people are both bright and successful, but also guilty of some huge mistakes in their personal finances. Although you may think that you’re completely in the clear, it’s important to be aware of some of the most common errors people make when managing their personal finances. Here are just a few.
First and foremost, not planning to retire. It’s great to have an occupation that you love. However, it can be an extremely costly mistake to go through life thinking that you’ll never, ever retire. It’s true that many people manage to hold down steady jobs, or run a business for their whole lives. However, there’s always room for unexpected hiccups getting in the way of your plans. Your health, the fluctuations of the economy, and various personal things can all force you to change your plans. For example, if you developed an illness that requires a treatment which is very taxing on your energy, your workload can become too much, and you may want to quit your job to spend more time on your hobbies and family life. No one’s saying you have to aim for retirement. However, it’s important to sit down with a financial planner and make sure that you have the option in later life.
Perhaps one of the most damaging mistakes that anyone can make with their personal finances is neglecting to build an emergency fund. Hopefully, you have a fairly positive attitude, and you’re not always thinking about the various financial and personal crises that could happen to you. It’s one thing to think that the future’s going to be bright. It’s another thing entirely to go through life without any plans at all for the various curveballs which chance can throw you. Sure, when an unexpected cost is suddenly dropped on you, you can usually get by relying on the cash you have in the bank, unused cards or loans until payday. However, this isn’t the ideal way to manage them, and you have no real way of telling how much you may have to fork out! If you’re currently living from paycheque to paycheque, then hitting a few surprise costs within the same month can quickly spiral into a full-blown disaster. This is why it’s important to carve off some of your earnings and keep them as an emergency fund. Most financial planners will tell you to aim for a rainy-day fund equal to about three months’ worth of expenses. Having this kind of buffer has saved people from being evicted on occasion!
Another massive mistake you need to be aware of is neglecting to plan for your end-of-year taxes. According to data from the IRS, millions of taxpayers ask for an extension to file their returns every year. If you were among those people, then you may have been guilty of this financial sin. Sure, you can put off filing your taxes to some extent. However, the one thing you shouldn’t put off is getting some tax strategies in place throughout the year. Once you get close to the end of a tax year, it’s often too late to strategize. To avoid being caught in a big panic, start now. Take steps to review your tax liability in the last quarter of the year, at the very latest. This will give you a little more time to save yourself. It’s not uncommon to hear about people who not only ask for extensions, but also go way over the deadlines and end up having to go back over taxes from previous years. If you don’t pay attention to your tax planning through the current year, you could end up cheating yourself out of a wide range of benefits. These can include bunching your itemized deductions up, harvesting your losses, and converting IRAs to Roth IRAs. Having the time to plan your charitable giving strategically is also something you could miss out on. Taxes are unavoidable, but if you approach them the right way you can certainly mitigate the monetary burden. Talk to your financial planner, or do your own research, in order to develop a solid tax strategy.
There you have just three of the biggest mistakes that people make when handling their personal finances. The list could go on and on, but avoiding these blunders should come before anything else!