When it comes to finances, everyone makes mistakes from time to time. Hopefully, you can learn from your mistakes and get financial help. If not, those missteps can sabotage your finances.
To avoid financial crisis, start by recognizing where you might be failing when it comes to managing your money. Here are seven common financial failures and the steps you can take to overcome them.
1. Failure to Plan
A recent survey by GOBankingRates found that one of the biggest money challenges for Americans is planning for retirement. But it’s not just retirement planning that people struggle with — it’s financial planning across the board. “A lot of people fail to plan or don’t understand the importance of why they need to plan,” said Shelly-Ann Eweka, a financial planner with financial services company TIAA-CREF.
Two-thirds of Americans don’t have a long-term financial plan, according to a Northwestern Mutual survey. However, the study showed that those who were disciplined about saving felt more secure about their financial future and were more likely to be happy in retirement.
To create a plan, you need goals. That means taking the time to figure out and understand what you want to achieve financially, Eweka said. You must decide when you want to retire, if you want to retire early and if you want to save for your kids’ college education. If you need help pinpointing what you want, consider working with a financial planner who will “create a blueprint for you,” she said.
2. Failure to Act
When people realize they need a plan, they might get overwhelmed and end up not doing anything, Eweka said. This is especially common when it comes to saving for retirement because people don’t know which investments to choose, said Jason Gordo, managing director at United Capital. As a result, they fail to take action.
It’s not only a fear of making the wrong choice that leads to inaction, it can also be a lack of urgency. “Getting around to working on their financial life never happens because there’s something better to do,” Gordo said. Until there’s a need, people won’t feel the need to take action, he said. At that point, it can be too late.
Start by taking small steps to put a financial plan into action, Eweka said. For example, if your company offers a workplace retirement plan, make sure you sign up to have contributions automatically deducted from your paycheck. This will automate your savings. If you’re not sure which investments to start with, pick up a single balanced mutual fund with a mix of stocks and bonds or a target-date fund that automatically shifts to more conservative investments over the years.
3. Failure to Stick to a Budget
You learn at an early age that you can’t buy something if you don’t have enough money to pay for it, Gordo said. “Along the way, the average American has forgotten that if they only have a dollar, they can’t spend more than a dollar,” he said. Unfortunately, many are spending more than they earn — and relying on credit to do so.
People fail at managing their cash flow because they don’t track how much they earn and spend, Eweka said. You don’t have to call it a budget, but you do need to analyze where your money is going each month. That awareness will help you make better decisions about how you spend your money, she said.
4. Failure to Prepare for Emergencies
GOBankingRates found in a recent survey that 62 percent of Americans have under $1,000 in their savings accounts. This likely means that they don’t have the cash to cover an emergency and will have to rely on credit, friends and family, or their retirement accounts to cover unexpected expenses.
“People will tell you they’ve heard of emergency planning, but how many people put it into place,” Eweka said. “When the emergency occurs, they’re scrambling.”
Financial experts typically recommend saving enough to cover six months’ worth of expenses in case of a job loss, maternity leave, medical issues or other emergency. To find spare cash to fund your savings, look for leaks in your budget that add up quickly and can be easily eliminated.
Also make sure you have enough insurance to cover catastrophic events. “You don’t want to experience being under-insured,” Eweka said. In addition to auto, homeowners and health insurance, you should have disability and life insurance to provide for your family if an injury leaves you unable to work, or if you die. Also consider long-term care insurance to cover the cost of assisted living or nursing home care because health insurance typically doesn’t cover these expenses.
5. Failure to Create an Estate Plan
People often don’t take the time to prepare for the unexpected, such as a medical condition that leaves them unable to make financial decisions or even death. “You don’t really think about it,” Eweka said. But if you don’t have the necessary legal documents in place before something happens, it won’t be easy for your loved ones to deal with it when it does.
For starters, make sure that you have beneficiaries listed on your financial accounts and that you update those beneficiaries if you get married, divorced, have children or experience any other life event, said Mike Piershale, a chartered financial consultant and president of Piershale Financial Group.
You need to designate a medical and financial power of attorney who will make health care and financial decisions for you if you are unable to do so yourself. You also should have a will to specify who gets your assets when you die and who will care for your children; otherwise, a court will decide.
Consider creating a trust, too, which allows you to transfer assets without going through the probate process, Piershale said. If you just have a will, any property that’s only in your name at your time of death will go through probate court to be distributed. The process can be lengthy and expensive, as the average probate fee is 6 percent of the gross estate, he added.
6. Failure to Get Financial Help
Many companies now offer employees financial-planning resources — including access to advisors who provide one-on-one counseling — but employees don’t always take advantage of the opportunity to get low- or no-cost advice, Eweka said. Sometimes it’s because there’s a lack of awareness about these services, so you should ask your employer if they offer access to financial advice.
However, sometimes there’s just a lack of interest. Gordo said that United Capital provides counseling for about 70 company retirement plans. However, only about 10 percent of participants in plans United Capital manages take the opportunity to sit down with a planner, he said. “They want to retire but assume they just need to keep coming to work and putting money away,” Gordo said. “That’s like getting in a boat and hoping to get where you want to go without navigating.”
TIAA-CREF found in its Advice Matters Survey that respondents who did get professional advice increased the amount they set aside in savings, decreased spending and established a plan for managing debt, among other things. If your employer doesn’t offer financial planning services, you can find a financial planner on your own through NAPFA.org or GuideVine.com, a site that matches planners with consumers.
7. Failure to Discuss Finances With Your Spouse or Loved Ones
It’s common among married couples for one spouse to handle the family finances, Eweka said. If that spouse dies, then the surviving spouse suddenly has to handle money matters he or she might have never dealt with before. “That’s not a situation you want to get yourself in,” she added.
To prevent this, both spouses need to be aware of each other’s accounts and assets — even if only one of them handles the daily financial tasks. Consider using a joint bank account to make it easier to track cash flow, unite your finances and allow a surviving spouse to easily access money without going through the probate process. With separate accounts, the probate process would be required.
If you have adult children, you should share information about your financial situation with them. Let them know what accounts, insurance policies and sources of income you have so they can assist you if you can no longer handle your own finances. Without this information, they’ll have to put the pieces of your financial puzzle together on their own if something happens to you.
Although all of these failures have the potential to sabotage your finances, none are insurmountable. You can overcome these financial problems by taking the right steps, but the key is not to wait to get financial help.