The path to financial security can be a perilous one. One or two missteps can lead to financial ruin. To avoid wrecking your finances, you should be aware of the steps to avoid. To help you, we have listed them below.
An inability to consistently pay off your credit card balances alerts a financial planner that you are likely violating one of the first rules of sound financial planning: live within your means. Carrying forward credit card balances month-over-month may be a subtle inconvenience but it has harmful effects. Not only is this type of borrowing expensive (17-19% for conventional credit cards; up to 32% for department store cards), but the continuous carrying of balances signals that you may be too comfortable with debt. It’s too easy to slide into a pattern of behaviour of constantly spending more than your take-home pay.
If you don’t care where you end up, it doesn’t matter what road you take. “Financial drift” (the absence of sustained effort to get rid of debt) is a sign of no plan or financial vision. A financial planner wants clients who are uncomfortable with debt. To be too comfortable with debt means you’re always being bound by your creditor’s chains.
If financial surprises arise, the absence of back-up savings or assets is a profound handicap. While you can apply for a line of credit with your banking institution, they will generally expect assets to back up the loan and they will definitely expect to be repaid if you borrow against the line of credit. Having an emergency fund of your own savings is a good signal that you are serious about your finances. It will help avoid debt in the event of a major expense or income interruption. To be most tax-effective, consider building your emergency fund in a Tax-Free Savings Account (TFSA).
Vehicles are an inescapable necessity for many of us, yet most don’t plan for the replacement of the current vehicle. A tell-tale sign of questionable management of your finances is a continuous inability to save for even a portion of the cost of your next car.
It’s fine for a twenty-year-old student to not have an RRSP account. Tax-deferred saving can be delayed until income and tax rates are higher. Still, you should get in the habit of making regular contributions early—as soon as you get your first serious job, for instance. Even if you didn’t start early, now is much better than later. Taking action today, to save for retirement, benefits you by saving tax today and enhancing retirement income tomorrow.
Employers spend richly on employee benefit programs. Unfortunately, many employees don’t know about their benefits and their responsibilities under those programs. This is particularly alarming when it comes to retirement plans and the benefits/limitations of life and disability insurance.
If your employer provides a savings program offering a company match, you should make contributions to take advantage of it!
The absence of a will is not necessarily a problem: if you die without a will, the government gives you one…but you probably won’t like it. You’ll have no say in important matters, such as the appointment of appropriate guardians for your minor children or which family members will receive your life savings. And extra court and legal costs will erode the value of your estate.
Many investors believe variety is diversification. You may be holding a large number of mutual funds (or individual securities) in the belief that you’re achieving a sound balance, when in fact the mix is uncoordinated, excessively risky and likely working against itself. The result is overall underperformance. Having a modest number of funds (ten or less, or even two or three balanced funds) selected to provide an appropriate asset mix would better serve the average investor.
Your portfolio is like a bar of soap: the more you touch it, the less there is! If you’re the average investor, you lack the time, expertise and discipline to effectively select and monitor your investments. You’ll be overconfident when things are going well and overly nervous when they’re not. You’ll buy when you should be selling and vice-versa. You’ll hold onto your winners too long because they’ve done so well for you and you’ll hold onto your losers in the hope that someday they’ll recover. Transaction costs will erode your accounts.
The result? Your portfolio suffers. If your actively traded portfolio grows, it will either be because:
Studies show that attempts to outperform the markets and the pros usually result in disappointment, causing you to delay or miss your great financial goals in life.
Playing the lottery can be fun (it’s only a couple of bucks and your odds are slightly better if you actually buy a ticket). But if you’re planning on it, in the belief that one of those lottery tickets will finally pay off and solve your financial worries, you need to do a reality check and take a closer look at your odds. (Lotteries have been described as a tax on people who are bad at math!) Building your wealth is about strategy, discipline and patience, not waiting for a windfall.
You may have already used the Savings Goals calculator in the Four Rules of Financial Planning section. If you have not, then use it now to find out what it will take to reach your savings goal.