Mistake
number one: Don’t have a plan
• Live for now
• Start on the “right track” too late
• Reduce your options
The financial services industry has done an
excellent job in sounding very clever. This job has been done so effectively
that your regular simply clever person has struggled to understand the
“gobbledygook” coming from the industry. Words like bonds, debentures and
securities, whilst quite simple concepts, tend to confuse people. To drive a car
you don’t have to understand everything that is going on under the bonnet.
Similarly, to have a financial plan you don’t have to be a financial guru.
As an industry we speak a language riddled with jargon. This makes it very
awkward for you to understand. This is actually very poor form as it gives you a
whole raft of (valid) reasons why you can simply ignore us.
If you don’t understand it you don’t have to do it – right? By ignoring the
whole money issue you can blissfully “live for today”. This approach, whilst
more palatable today, may well leave you “high and dry” in the future.
The reasons for action are simple, the outcome is simple – it is just the way
that you can achieve it that has abundant choice, and thereby becomes
complicated. Don’t let the choice stop you from acting.
Planning for your future should be fun! But, not spending = going without. Going
without = lack of fun, lack of status, lack of short-term satisfaction (you
choose). Most people struggle to save because they don’t have enough reason to
save.
Saving for a deposit on your house, saving for your children’s education, saving
for your retirement. These are all the reasons you should save. Without these
reasons being strong enough saving will never be anything other than a painful
exercise.
In a nutshell:
• Don’t ignore it
• Get a plan
• Set financial goals to allow your lifestyle goals to happen
• Put your plan into action
Mistake number two: People spend too long in “mortgage-debt”
• People borrow too much
• People take too long to pay off their mortgage
• People upgrade their houses all their lives
• People view their house as an investment
For most people financial security can be measured in terms of their net wealth,
that is their assets minus their debts. In order to increase net wealth they
need to reduce their debts and increase their assets.
Your house is your castle. Don’t let it also be your millstone.
You have to live somewhere. Of course you do and there are cases for and against
renting versus owning.
For some owning a house is enforced savings – you have to put money away every
month (or fortnight). The danger comes when you take 30 years to pay it off. You
never get around to the good stuff – your money working for you. You spend your
entire time paying interest. Not exactly rocket science but so many clever
people fall into the “Gotta have it now” trap.
If you want to keep up with the Jones’ then keep upgrading your house every time
you start to get on top of the mortgage.
If you want to go right past the Jones’ then as soon as you can, start investing
your money. Money makes money.
So what can you do? Either increase your principal repayments (enforce more
savings) or start up a separate savings plan.
Property is the darling investment for New Zealanders – we can understand it, we
can touch it, and we have to live somewhere. Don’t let it be the only investment
strategy you have.
In a nutshell:
• Save a big deposit
• Don’t always borrow the maximum
• Pay off your home as fast as you can
• Think about the financial impact of upgrading
• After you have paid off your home, save!
Mistake
number three: Buying when the market is up and selling when it is down
• Chasing after fad investments
• Off-loading an investment at the first sign of trouble
“I’m going the distance”. If only it was that simple. So many clever people
start off with a savings plan, or an investment in a certain market and then
when they have a negative period they panic and pull out of the investment. This
is the worst time they could do something. If you have invested in solid growth
assets in the first place then there is no reason why you should pull out.
If your investment game plan was right when you started, then a temporary fall
in value does not mean you should change the way you’re investing – stick with
it!
Certain markets have a high degree of volatility (that means they may go up a
lot and drop a lot), but the overall trend is up. When you look at the long-term
performance these markets will consistently beat a simple term deposit.
In a nutshell:
• Don’t “time” the market
• Even though there will be ups and downs along the way, get a plan and stick to
it.
Mistake number
four: People don’t take advice about their finances
Why do you think there are so many programmes on television that highlight the
plight of the DIY home do-up disaster? Because we love to have a crack! Why
should you pay somebody else to do a professional job? So many clever people
never make the effort to get professional advice when it comes to their
financial future.
In a nutshell:
• Find a professional financial adviser. Follow his advice.
Mistake
number five: People look for a quick win
Warning, warning. If an investment sounds too good
to be true, then it often is.
In a nutshell:
• Understand the risks
• Diversify your investments
• Be dull, be boring, look at the financial strength of the organization making
the offering – ask who is backing it and what reputation do they have?
• Ask a professional adviser to help you decide the best type of investment for
you and your lifestyle