10 Mistakes Made by People Without a Financial Plan

10 mistakes made by people without a financial plan (Personal Money) - 01 Apr 2010

One of my favourite authors wrote: “Sometimes we can’t see the real value of a thing by just asking what its benefits are. We need to ask what problems we will face if we do without it in order to see the real and full value of something.” I believe the same applies to the value of a financial plan to our personal money management. In this article, I would like to share the common mistakes people make in managing personal money without referring to a financial plan?

Without a financial plan, you won’t know where you stand now in your journey to your financial freedom (it is like traveling without a road map). Are you there already, are you halfway through or are you hopelessly lost? You just won’t know. Without knowing how far away you are from your financial freedom, you won’t know what actions to take to move you closer to your goal. Even if you do take some action, without knowing the right direction you may be heading further away from your financial freedom. For example, you may invest in an investment product that promises high returns so you can achieve your financial freedom faster. However, this may turn out to be too risky an investment that loses you money instead and pulls you further away from your destination: financial freedom. When you have no big picture of the various alternatives or routes to help you reach your financial freedom, you don’t have a clear guide on what you should do to achieve your financial freedom. As a result, it is all too easy to make mistakes and waste your wealth unnecessarily. So, what are the 10 common mistakes people make without a financial plan?

1.   Under save

Without a financial plan, it is hard for one to imagine how much money one need to support his future financial goals and commitment. Without that idea, one tends to feel that they can afford to spend most if not all of their current income. As a result, there is either very little or no saving at all.

2.   Over save

On the other hand, some people tend to save a lot and spend very little. They believe that the more they safe, the better their financial position will be. However, this is only half correct. We save money to achieve financial goals and make our life better. We don’t just save for the sack of saving. By having a financial plan, you get to know the optimal saving amount and also optimal spending. As a result, it prevents you from over saving and become the true master of your money.

3.   Under or over insure

Since everyone has different needs of protection, it is hard for one to determine how much he should insure himself for his own circumstances without clear picture of his financial situation. As a result, one tend to over insure himself if he is risk averse. On the other hand, one tend to under insure himself if he is a risk taker. By having a tailor-made financial plan, you can tell how much insurance coverage necessary for own needs and avoid spending unnecessary money on insurance premiums.

4.   Commit too big a house

Without a financial plan, it is hard for one to know the right amount to spend on his own home. Therefore, most people will determine their affordability based on their ability to pay the down payment and service the monthly mortgage installments. However, this consideration fails to assess how this purchase will affect your ability to achieve other future financial goals. As a result, they end up buying too expensive a house and put a strain on the other financial goals. By having a financial plan, you will be able to know the real price (opportunity cost) you have to pay for that home purchase. You will be able to know how much you need to adjust your children’s tertiary education, your retirement age, your retirement income and other financial goals to accommodate that purchase.

5.   Over or under spend on children’s tertiary education

Without a financial plan, you can’t see the impact of your children’s tertiary education funding on other financial goals. Therefore, you may over or under spend on children’s tertiary education. In proper financial freedom planning, we would like to know the optimum amount for us to spend on children’s tertiary education. The idea is not to over spend one child and affect the funding of other financial goals or worse still affect the funding of other children’s tertiary education. On the other hand, you also don’t want to under-spend on children’s tertiary education and regret it later in life.

6.   Invest into unsuitable investment products

Without a financial plan, you don’t know the right investment return (ROI) that will help you achieve financial freedom and yet is not too risky. As a result, you may end up investing into too high risk investment products that may deplete your hard-earned money if you target too high a ROI, for example 20 or 25% per year. If you target for too low ROI, you may end up investing into too low return investment products that may not help you achieve your desired financial goals.

7.   Over invest into properties

Without taking into consideration of a diversified asset allocation in a financial plan, one may end up over investing into properties. Properties investment is not bad but over investing into properties is bad. It will expose you to too much risk into one asset class and badly affect your investment if property sector takes a dip. In addition, it may also affect your cash flow if you take a lot of loan to finance your property investment.

8.   Undersell your business

A good sale of your business can provide you enough funding for your financial freedom and complete retirement. On the other hand, a bad business sale will fail to give you sufficient fund for your financial freedom and complete retirement. Without a financial plan, it is difficult for one to know the complete impact of business sale to his financial freedom planning. Therefore, there is a risk of underselling your business.

9.   Retire too early or too late

In retirement planning, you don’t want to retire too early whereby you don’t have enough financial resources to support your retirement life style. You also don’t want to retire too late that you don’t have enough time to enjoy life. Without a financial plan, one seldom has enough information to make the optimum decision. As a result, you will either retire too early or too late.

10.   Start planning and taking action too late

Without financial plan, you don’t know the exact price you need to pay for procrastination, either procrastinate in saving, investing or insuring. Basically, you don’t feel the pain of not taking the actions now. As a result, you tend to take it easy until it is too late to enjoy the benefits of early planning and action.

Since our money is always limited, we should avoid every single mistake that will waste our money unnecessarily and stop us from achieving financial freedom. Therefore, arm yourself with the big picture and the best routes today by creating your own financial plan.

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