Financial Adviser: 5 Money Mistakes to Avoid if You Want to Become Wealthy
There is a saying that it is not how much money you make, but how much money you keep.
If you know how to make your money work hard for you, you will probably be able to keep and grow your money for many generations to come.
One of the most common reasons why many people fail to save enough money is because of the lifestyle that they choose. When their income increases, the tendency to spend more also rises.
Somehow, there is this psychological comfort that makes you feel financially secured when you are earning money—until you realize that you have nothing in the end.
If you are wondering why you are not saving enough money, this may be the best time to take a closer look at how you are handling your personal finances.
Here are the five money mistakes that may be keeping you from becoming financially independent:
1| Failing to plan and control expenses
Your journey to financial independence starts with having the right financial mindset. When you are determined to achieve certain financial goals in life, your mindset will dictate your spending behavior.
One way to control spending is through budgeting.
When you budget your expenses, you will be able to plan how much you want to save first and how much you plan to allocate for your expenses.
Make a budget by projecting your expenses in a spreadsheet. Monitor this by tracking your actual expenses and comparing them with your budget.
When you see how you are doing against your budget, you will have a better appreciation of what you spend. A budget is a useful tool for decision-making and evaluating your spending decisions.
Although you may need to spend more than your budget on some items at times when it is necessary, the purpose of having a budget is to guide you and help you spend according to your priorities.
2| Failing to pay credit card debts in full
Credit cards are a great source of free credit when used properly. It offers a convenient substitute for carrying large amounts of cash when you go shopping.
The key is to avoid tolerating how credit card companies make money from you from their interest charges.
When you pay the suggested minimum payment, you already agree to pay interest to them at an unreasonably high rate.
For example, there is a credit card company that charges an interest rate of 3.25 percent per month. Do you know that this translates to 39 percent a year?
If you follow this by paying the minimum, the difference will be simply added to your balance. The longer it takes, the bigger your debt balance will become as your unpaid interest accumulates over the months.
In fact, for as long as the minimum payment is lower than your interest, it will take you forever to settle your debt fully.
3| Failing to create a personal financial roadmap
A goal without a plan is just a dream.
When you have financial goals in life, you need to write it down and put it in a plan. If your goal is to go into business someday, you need to put a financial value to your goal.
How much do you need to save in order to achieve your goal? How long will it take you to achieve the goal at the rate you are saving? If it is not enough, what will be your alternatives to achieve it? Should you lower your financial goal or find other additional sources of income?
When you have a personal financial plan, it helps you monitor your progress. You will find ways on how to grow your savings to achieve your goal.
Your plan to go into business may just be one of your financial goals that will be part of your plan.
You may need to incorporate other goals such as helping with the future education needs of your loved ones, paying your personal debts if there are any, and having a retirement plan.
Creating a personal financial plan may be challenging in the beginning especially if you have not done any plans before. It may be helpful to consult a professionally trained advisor such as a Registered Financial Planner (RFP) to assist you.
4| Failing to manage risks and returns
There is always a risk that you will lose money in every investment.
If you are a risk-averse type of person, you can simply invest your money in government-guaranteed investment instruments. But such investment vehicles can give you only the minimal return and may not be ideal if you are looking for ways to grow your money at a faster pace.
If you want to earn higher returns from your investment, you may need to take bigger risks.
Some people who tend to be more aggressive in investment and take more risks in their ventures may also lose their money in the end.
Managing your risks means diversifying your investments. You can allocate your investments according to your risk preference up to the point where you have achieved the right return you are most comfortable with.
5| Failing to invest to improve your financial knowledge and skills
Becoming financially literate helps you make smarter decisions about money.
For example, should you invest your money in interest-bearing bonds or preferred shares? Is it good to borrow money to invest in real estate? How long should you hold your investments?
These are some of the things that you need to learn in order to answer these investment questions.
If you feel that you don’t have enough knowledge and understanding about making financial decisions, you need to educate yourself.
Read books on investment and personal finance. Do not hesitate to invest in training and seminars on financial planning.
The returns on continuous investment in personal finance education will more than compensate for the cost of your money mistakes.
Henry Ong, RFP, is president of Business Sense Financial Advisors. Email Henry for business advice firstname.lastname@example.org or follow him on Twitter @henryong888