Most financial failures are a result of certain habits or oversight. But you can actually cut losses by identifying what could lead you into a financial rut. Here's a list of worst things people do that sabotage their own wealth.
1. No financial and spending plans
It's an absolute no-brainer, but we all know a friend or family member who has 1) no personal financial plan and budget, 2) cannot stick to a spending plan, 3) have certain plans in mind, but fails to track and review these. These behaviors might seem harmless but in reality, having no plan and no budget results into either misspending or overspending.
Imagine you are renovating your home. You've devoted countless hours surfing through websites and Pinterest boards and now you are finally sitting down with your contractor. You give your design inspirations; then ask for a blueprint, quote and a timeline. But your contractor says he doesn't work that way and he wants to work out the details as he goes along.
Most of us would never hire a contractor like that, but that contractor's utterly careless behavior is exactly the same attitude by people who never plan or commit to one.
Set yourself up for success
Hence the first thing that you can do to ensure your financial well-being is to have a blueprint. It means having a financial plan which breaks down your life goals and your monetary resources over time. It also means having a spending plan – or a budget — which gives you a clear picture of how much you earn, how money should be spent vis-à-vis your goals, and if there is any extra cash.
How to make a financial plan
Now take a piece of paper and get started on drawing up a basic financial plan using this sample:
|INTERMEDIATE GOALS (1 to 10 years) |
|Priority||Goal||Total Cost||Duration||Monthly Cost||Target Date|
How to make a simple budget
Next, let us draw up a budget. A simple guide to use is the 50/20/30 rule. This is a formula for dividing your income into:
- 50% for living expenses and essentials (rent, utilities, transportation, groceries and food)
- 20% for financial goals (emergency fund, saving, investment, debt payments)
- 30% for flexible spending or things you want to buy but don't necessarily need.
This rule is a good starting point, but remember to keep track of your expenses and adjust the proportions to what works for you and your life goals.
Armed with these two tools, you can aim and be reminded of what truly matters to you. As you become more intentional, you are also making your money work for you and your future. And if sticking to your plan means buying one less venti cup of coffee in a week, it also means you are putting precious dollars into your very precious dreams.
Additional read: 5 Apps You Definitely Need to Get Your Finances Straight
2. Swiping your way to debt
Credit cards are part and parcel of modern-day living, but not everyone is smart about using their plastic. According to the Singaporean Credit Bureau, 1 out of 5 credit card users in Singapore only paid the minimum sum.
Outstanding balances incur interest daily, amount to around 2% interest fee per month or almost 25% per annum. It's a hefty sum.
To prove this point, let us say you have incurred S$1,000 in your credit card:
|Credit Card Outstanding Balance, June 2017||S$1,000|
|You paid the minimum, usually at 3% to 5%||S$1,000 X 0.05 = S$50|
|You incur no other charges for the current month, but additional interest daily will be charged, estimated at 2% in a month||S$1,000 X 0.02 = S$20|
|The minimum payment will be used to pay interest first||S$50 – S$ 20 = S$30|
|Your new outstanding balance||S$1,000 – S$30 = S$970|
The minimum amount due is actually too little to cover for additional charges that you will incur in the future. With this example it could take 2 years to finally pay off S$1,000, with about S$290 interest charges in the process.
Additional read: 6 Tips to Get out of Credit Card Debt Quickly
Make sure you check on the interest rates of your credit cards. Consider using a debit card for purchases. Last but not the least, follow the 24-hour rule. Ask yourself if you can pay for the item or service in full within the next 24 hours. If you can't, then don't.
3. Too trusting with your financial advisors
It pays to know who you are dealing with, especially with financial advisors, wealth managers and insurance agents who sell their products and services to you.
In most countries, financial and investment advisers (FAs) is governed by a fiduciary standard toward clients. They are bound to give the highest standard of duty, loyalty and care to their principal. If the FAs breaches their duty, he or she needs to be accountable for ill-gotten profit from a client.
In Singapore, unfortunately, FAs are not legally bound to a fiduciary standard. This implies that your FA might be giving you a suitable – but not necessarily the best – advice. He or she might be transacting with you purely for commission or to reach a quota.
The Monetary Authority of Singapore (MAS) has a usable guideline: "advisers need to meet key performance indicators that are not related to sales, such as providing suitable product recommendations and making proper disclosure of material information to customers."
Align with your FA
Next time you see an FA, ask about their commissions. They are making money off your investment, so it pays to know how they are earning from you and if you're willing to pay that price. Besides, tough questions bring out the person's level of sincerity.
This article first appeared on BankBazaar.sg.
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