We are just into the second month of the new year, and the brand new start of the Lunar Chinese New Year. How is your financial health looking? If you did not have time to make some new year resolutions to make better financial decisions this year, you may want to look at this article to avoid some of the worst financial decisions you can make!
Your financial situation is a combination of every financial decision you've made up to this point. If you're like most other people, you have had very little or no coaching, so you're just learning as you go. This means while many of your choices may spring from good intentions, they fall flat as a result of poor planning or lack of knowledge. Let’s hope the following list helps you to stay aware before you make any of these mistakes!
1. Paying off debt with savings
Withdrawing money is easy, but it's very hard to pay back those retirement funds. With the right mindset, borrowing from your retirement/savings account can be a viable option, but even the most disciplined planners have a tough time placing money aside to rebuild these accounts. When the debt gets paid off, the urgency to put back what you took out usually goes away. Keep that need-to-pay mentality you had with your credit cards, and create a plan to pay yourself back.
2. Not building an emergency fund
Most people live paycheck to paycheck even though some of the debt they are paying might be to service a mortgage loan; a house which when fully owned can be an asset in the future. However, an unforeseen problem can easily become a disaster if you are not prepared. Many financial planners will tell you to keep six months' worth of expenses in an account where you can access quickly. Retrenchment or medical bills can drain your savings and place you in a cycle of debt paying for debt.
3. Not buying insurance
Illnesses and deaths are never expected. The point of insurance is taking care of the people who depend on the income earner. If you live alone with no dependents, then you may not need insurance. If you have a family who depend on your income, then you should consider it so that you do not place unnecessary monetary burdens on them.
4. Not investing
If you do not get your money working for you in the markets or through other income-producing investments, you will never be able to stop working. Making monthly contributions to designated retirement accounts is essential for a comfortable retirement. Understand the time your investments will have to grow and how much risk you can tolerate, then consult a qualified financial advisor to match this with your goals.
5. Putting all your money in one investment
So yes, you spoke to your financial advisor and found something you would like to invest in. But learn the next step – diversification. When it comes to securing your money and to grow it for future use, remember to diversify so that you do not lose all your hard-earned money in one investment if it goes wrong.
6. Taking on Debt for Things Other Than a Car Loan, Student Loan or Mortgage
If you ever borrow money, it should be for a big purchase that represents an investment in your future. In contrast, amassing “bad debt,” funds borrowed for purchases that decrease in value, can jeopardize your financial security.
The bottom line is to not borrow to live a lifestyle that’s out of your reach. Never fall into credit card debt or take out a loan to fund everyday expenses like groceries or holidays. Car loans are technically “bad debt” since cars depreciate in value as soon as you buy them, they are a necessity in some places. If you have to take out a car loan, make it as small as possible by paying as much as you can in cash or buying second-hand.
It takes many people a lifetime to build significant wealth, but it is so much easier to lose it. It probably wouldn’t be just one bad decision but to avoid major pitfalls, start tracking where your money is, plan for problems, making more money and spending less. The bottom line is that you actually have to get down to doing it, not just think about it.
Lek Sin Yan
TRS Contributor