“I have been working for 20 years, yet I have very little cash in my savings. Sometimes I wonder where all of my money has gone” - Mrs Chong, Executive
If you are thinking of improving your financial health, first, you need to be aware of how you spend your money and be able to recognise your financial mistakes. This will allow you to manage your finances properly. At the end of this article, you will be able to identify the common money mistakes and what you can do to avoid them.
Mistake #1:
Failing to Plan
Failing to plan is planning to fail. While most of us are fully aware that we need to set proper financial goals, not many of us actually plan our finances properly. It could be because we are too busy with work, family matters or other activities that we see as a higher priority. The idea of spending some time to analyse our finances may not be of utmost importance. To some, it could be a stressful event as the conclusion of planning your finances may require you to be more conservative and disciplined in your spending.
Failing to plan may result in us having to pay higher taxes, leaving our savings sitting silently in underperforming investments for years or overpaying for financial products. Since there are always deadlines to be met at work, we tend to let our finances be, thinking that it is of lower priority as there are no deadlines to meet nor is there anyone to force us to look into our financial plans. This may go on until we realise that we have encountered a serious deficit. By that time, it may be too late for us as we would require more in order to recover from our financial crisis.
It is important to note here that PLANNING is an act typically found among people who are successful in accumulating wealth, even with just a modest income.
Mistake #2:
Spending Beyond Your Means
Previously, most people shop with cash. A quick look into one’s wallet or purse would allow them to roughly gauge the balance available to spend for that day, week or month. Nowadays, most people have credit cards with credit limit more than one’s income. With just a swipe of the card, you can spend way beyond the balance available in your bank account. Apart from that, we constantly overspend due to peer pressure and consumer temptation that surround us on a daily basis. Since purchasing is made so easy, we tend to fall into the trap of impulse spending, grabbing whatever we desire without thinking through whether it is a need or a want. We are, to a certain extent, exposed to mild brainwashing with TV commercials, newspaper ads, sale circulars, and flashy shopping malls promoting the lifestyles adopted by the rich and famous, which of course involve having the latest gadgets and gizmos.
The ability to flaunt our gadgets and personal wealth not only extinguishes humility within ourselves but also makes us fall into the mistake of spending exorbitantly and unnecessarily. If we do not jump on the bandwagon, we will be considered left out of today’s scene. If we find that at the end of each month, after servicing our car loans, housing loans, credit card bills and other utility bills, the net salary that goes into our bank account is usually insufficient or in a deficit, we must realise that we have been spending beyond our means.
Mistake #3:
Spending Future Money
“Buy now and pay later!” This trend has become a norm nowadays and is even more apparent when we are anticipating a windfall such as the year end bonus or increment. The practice of paying for something with future money is very dangerous as we would not be able to manage our finances properly. Spending future money may result in us paying even more than the original price of the product and incurring unnecessary high interest fees or financial costs.
There are many risks that we have to bear by spending future money. For example, we may not have enough funds for emergencies such as medical bills or car mechanical problems. These emergency expenditures may affect our ability to pay for our previous commitment which we have made leveraging our future money. As such, it is important for us to have an emergency fund to aid us in times of need. This fund must be at least three times our monthly expenditure so that it leaves us with more than enough cash to spare.
Credit cards are also a common problem. Credit cards have become a must-have item in our wallet. No doubt it is a convenient item to have around; however, some of us misuse it and treat it like a passport to spending our future money at will. It has become a common phenomenon where, by just settling the minimum payment at the end of the month, you will be able to spend more now. As a result, the credit card bad debt snow-balls to an extent beyond our control.
According to a study by the Department of Statistics Malaysia on bankruptcy caused by credit card debt, the number of people declared bankrupt has increased in the last few years especially in the younger age group. There are cases where using credit card is a wise way to spend your money, for instance when buying flight tickets or making online purchases, but when you depend on your credit card to make even the most minor purchase of necessities, then you need to check your financial health.
Mistake #4:
Delaying Saving for Retirement
After working for about 30 to 50 years, retirement would certainly be welcome. Some of us even aim to take up early retirement. In order to achieve this, we need to plan our finances to make sure that we have enough savings to sustain our ideal post-retirement lifestyle. Unfortunately, if we have been delaying saving for retirement in our younger years, the profit generated from our retirement savings may be insufficient to allow us to sustain the retirement lifestyle that we want.
The idea to delay allocating some portion of our current salary as our retirement savings until we are more financially stable is very risky. As our income grows, our expenditure will grow as well. At the same time, we need to ensure that our savings grow proportionately with our income from a very early stage.
One of the best ways to ascertain that we save monthly is by practicing the “pay yourself first” concept. Instead of spending the moment you receive an income, put a portion of the money aside into a savings or investment account. This would ensure that we are able to live comfortably when we finally embrace our retirement.
Mistake # 5:
Investing in the Wrong Products
There are various kinds of investment products in the market. Some generate low profit and are of low risk and some would allow us to have hefty profits but with high risk. However, in order for us to identify the right product that suits our investment appetite, we must take some time to understand the market that we are going into, the risk and returns, and the procedure of trading and investing. One simple way is to log on to the Malaysian Investor website (www.min.com.my) and read the many articles about financial literacy that the SIDC has prepared.
There is also the challenge of spotting illegal investment products. Scammers are constantly looking for gullible investors and if we do not do proper research on where we are about to put our money, we might end up losing our investment. Aside from the Malaysian Investor website, there are various sources that provide information about investing. For example, you can go to the Bursa Malaysia website (www.bursamalaysia.com) to learn more about investing or visit the Securities Commission Malaysia website (www.sc.com.my) to check on the legality of an investment scheme.
Mistake #6:
Failing to Pay Off Debt
The next best step to take after paying yourself first is to pay off your credit card debt. Although the option to pay a minimum of the debt is available, you should always try your very best to pay the full amount owed. This way you will be able to avoid the late interest charges on the owed balance. Imagine if you paid off a credit card debt that charges 18% interest per annum, you indirectly stand to gain 18% in savings annually. Not many investment products can offer a return rate that high! By paying off your credit card debts, you then can devote other portions of your cash to investments.
Mistake #7:
Focusing Too Much on Money Matters
All the above tells us to focus on our finances. However, on the other extreme, we must also not be too absorbed in accumulating our wealth to the extent that we lose sight of other priorities in our lives. While we plan our financial health, we must not neglect our spiritual satisfaction, health, family and friends, career satisfaction and fulfilling interests. Without other contentment and pleasure, even the richest man on Earth would not be happy.
At the end of the day, we must remind ourselves to find the balance between accumulating wealth and enjoying that wealth according to our means. We must be committed in our efforts to improve our financial health. Unless we are truly committed to creating wealth, chances are wealth will remain estranged to us.
7 Common Money Mistakes and What You Can Do To Avoid Them
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