Key financial planning mistakes to avoid for a secure future

Dr Biz • January 25, 2021

Financial planning is often forgotten in the hubbub of daily life, with most us glad simply to have a little money left in our bank accounts. However, the savvy among us go a little further than that, taking time to think about their immediate and longer-term financial futures. Doing so is not only a good way to manage money and prepare for any emergencies that might arise, but also to achieve financial goals well into the future. Below we set out a few mistakes to avoid for those thinking about financial planning.

1. Not knowing your priorities

The starting point of any financial plan is understanding and establishing your financial priorities. Typically, these will depend on where you are in your life. If you are 25, for example, your financial planning focus might be on saving to get on the housing ladder, or perhaps paying down any debt accumulated during your education. New parents, however, will likely be thinking about how they can start saving for their own children’s future, while business owners might need to prioritise business activities over the short term. Think about what matters most now, then work forward from there.

2. Under-estimating risks

No-one likes to think about the worst happening, however as 2020 showed us, the worst can and does happen. Insurance products are typically the best way to prepare for unforeseen events, yet they are frequently neglected. According to Aviva, on average people are short on their life insurance of around two times salary and three times for life protection. Moreover, the firm’s long term care study showed that while 95% were aware of severe disability, 50% said they believed they could stay healthy and would be unlikely to need long-term care cover. None of us can predict the future, so make sure you are prepared!

3. Not having an emergency fund

Along with an adequate insurance policy, a healthy savings pot is a financial planning necessity. After paying down expensive debt (typically anything that isn’t a mortgage), saving for an emergency should be the next big priority - or indeed if you have lots of debt it may be worthwhile considering doing the two things concurrently. It is usually best to have at least three months of expenses saved. This should include housing and utility payments as well as discretionary expenses and any other regular financial obligations such as school fees or medical expenses not covered by your medical insurance.

4. Under-considering dependents

As part of your emergency fund, or perhaps separately, you might like to consider any eventualities that could crop-up with your dependents. This will be especially pertinent if you have older children at university or otherwise not yet established in a career that might need financial help, or if you have ageing parents that might soon need long-term care. An unforeseen event with a dependent can scupper even the best laid financial plan so be sure to fully and regularly assess their situations and, if you can, work with them to shore-up their finances. This might include ensuring they have adequate savings and investment plans in place, which you can work with a qualified financial adviser to put together.

5. Thinking too short-term

While getting priorities in place and saving for emergencies are the most important first steps when it comes to financial planning, don’t let that stop you from dreaming. Once you have all of the essentials in place, think about what you would like to ultimately achieve financially. Would you like to build a certain amount of wealth by a certain age, perhaps so you can quit work or change career, or make a big purchase you have long dreamed about? Perhaps you would like to give a large sum to your children, or even a charity. Whatever your financial goal, think about how you might go about achieving it and set out a plan. Often, writing down our desires is the most powerful way to realise them.

6. Forgetting about your retirement

The final piece in the financial planning puzzle is to think about what your own old age might look like, or what you would like it to look like. While many of us will rely on our children to take care of us in our old age, again, things don’t always work-out the way we plan them, and so it is likely wise to start paying into a retirement plan as early as possible. This is not least because the power of compound interest means that the longer you save and invest, the more your interest builds on itself and the more growth you will see on your capital. You can work with a financial adviser or planner to start a plan, go directly to an insurer or start your own investment pension portfolio.

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