We’ve all been there – a few forgotten charges on your credit card and you end up paying way too much in interest. Now, you’re cutting back next month’s plans to pay for last month’s splurges.
While it’s frustrating to occasionally pay more than you expect, small financial snags like these aren’t typically a cause for concern.
However, some financial mistakes have the power to derail your financial plans and affect your wealth for years to come.
To help you protect your wealth, you’ll see the 3 most common financially destabilizing mistakes, and what you can do to protect yourself from their effects.
#1 Over-prioritizing the present
Living in the moment may feel good, but this type of attitude can wreak havoc on your financial future – think the grasshopper and the ant. Instead of the grasshopper’s prudent storing up of wealth, you risk ending up like the ant, left in the cold and living paycheck to paycheck.
Symptoms of over-prioritizing the present
Foregoing monthly savings
One of the most obvious signs of putting today’s desires first is ignoring savings entirely. This leaves you in a precarious position, without any funds to weather temporary storms, never mind achieving your long-term financial goals.
The good news is, saving doesn’t have to be expensive. Even putting away just 10% of your monthly income into a savings vehicle (like a TFSA) will help you start to grow your savings and protect your future.
Overlooking the need for a safety net
No matter your income, you need a contingency plan. Without one, even small bumps (new appliances or a new water heater) along the road can derail your financial plans.
To insulate your financial plan, create an emergency fund that will cover 3 to 6 months of your basic living expenses. These provisions can be your lifeline in the face of sudden expenditures and will help to protect your financial future.
Misusing retirement savings
A sound financial plan includes various savings vehicles like RRSPs, TFSAs, emergency funds – even vacation savings. However, just because they’re all considered ‘savings’ does not mean they are interchangeable.
Pulling from your retirement savings to get through an emergency, or purchasing a vehicle may seem alright – after all, you’ve socked this money away for the “just in case” moments, right?
The problem is, withdrawing funds – especially retirement funds – earlier than you intended can mean higher taxes and increased penalties. Plus, by borrowing from these long-term savings vehicles, you risk missing out on the compounding interest that makes these investments so lucrative. Remember, the true strength of retirement savings is the potential for exponential growth over time.
#2 Allowing lifestyle inflation to outpace your finances
No matter how many raises you get, or how well your business does, your lifestyle will eat up every extra dollar if you let it. From new houses and vehicles to new ‘toys’ and sending the kids to private school, there is always more you can reach for.
As long as you are aware of your finances, increased spending is fine. However, when it begins to outpace your income, lifestyle inflation can derail your financial plans in a hurry.
Symptoms of lifestyle inflation outpacing your finances
Overcommitting on a vehicle purchase
Spread out over monthly payments, that new vehicle you’ve had your eye on seems very affordable. However, when you fast-forward a few years, those vehicle payments are joined by higher grocery prices, expensive family vacations – perhaps a private tutor for the kids. This is when those monthly payments for a vehicle – an asset that’s depreciating every day – hit so much harder.
Buying a home beyond your budget
When house-hunting, that extra bathroom or big backyard might seem worth the higher mortgage payment. However, if interest rates increase, or your lifestyle changes, those added monthly costs can knock you – and your budget – off balance and leave you scrambling.
Financing over saving for large purchases
Today, financing is available on everything from boats to designer purses. With all that debt so easily available, financing to get what you want now (instead of waiting 6 months so you can save up) seems to make sense. But while saving for purchases can flex with you (and any emergencies in your life) debt is set in stone, limiting your ability to respond to today’s needs. Saving for a purchase also gives you space between seeing it and buying it. This gives you time to think about whether you really use it, or if it will just end up gathering dust.
#3 Mismanaging debt
Whether you’re buying a home or taking out a business loan, debt can be a powerful tool you can use to pursue – and achieve – your financial plan. However, if used poorly, debt can quickly trap you in its jaws.
Symptoms of mismanaging debt
Amassing credit card debt
Credit card balances may seem harmless initially, but their high-interest rates accumulate debt at an alarming rate. So, instead of using credit cards as a way to purchase something you can’t afford right now, leverage them as a security and rewards device.
If your financial position allows for it, use your card to buy what you can easily pay off within the month, then pay off the balance before the month is over.
Disregarding unpaid debts
Ignoring your debt doesn't make it vanish, it just makes things worse. When your debt inevitably gets handed over to collection agencies, it will significantly impact your credit score for up to seven years. So never disregard your debt – it will follow you around and cause undue stress.
Becoming a cosigner
Although cosigning might seem altruistic, it can destabilize your financial footing even if you’re doing everything by the book. Becoming a cosigner means you're not just risking your credit score, but you’re also potentially taking on liability if the primary borrower fails to repay.
Protect your wealth with insurance
No one plans to have an accident or have their life interrupted by a burglar – but these things happen every day. With appropriate insurance, you can minimize the effects these unplanned issues can have on your life.
Without insurance, you may find yourself dealing with the after-effects for months or even years to come. That’s why we always recommend maintaining the right amount of insurance, so you can live the life you want, not the one unforeseen disasters push on you.