Seven financial planning mistakes to avoid

Financial security means different things to different people. But there’s one thing that’s the same—achieving this security requires healthy financial habits. The following tips can help you build these habits and avoid common financial planning mistakes.

Financial mistake #1: excessive spending

It’s fun to treat yourself to a new car, outfit, or vacation. But too many treats can affect your ability to make progress on your long-term financial goals. Consider creating a budget to help you fight the urge to splurge. A budget will show you how much money you have coming in, how much you need to meet your expenses, and how much is left over for discretionary spending.  

To get started, track your expenses for one month to see where your money’s going. There are numerous smartphone apps you can use, or you can simply write your expenses in a notebook.

If it turns out you have more money going out than coming in, it’s time to find ways to cut back. Could you switch to a comparable, but less expensive, cell phone service? Eat out three times per month instead of five? Every change you’re able to make, no matter how small, can help free up money for savings and other financial needs.

Financial mistake #2: relying heavily on credit

This financial mistake is often tied to the first. “The buy now, pay later” nature of credit cards have made them an appealing way to pay for purchases, but this convenience can lead to overspending, credit card debt, and finance charges. The average credit card debt per household for the second quarter of 2021 was $7,854.1

Taking the following actions can help you manage your credit card usage:  

  • Wait a few days before making a large purchase to make sure it’s something you really want
  • Research different credit cards to find one that offers low or no annual fees, a reasonable annual interest rate, and, possibly, a rewards program
  • Pay your bill in full each month or at least more than the required minimum amount to reduce or eliminate finance charges

Additionally, you should monitor the information in your credit report, which can affect your ability to buy a car, rent an apartment, or purchase a home—and, in some cases, even get a job. Many employers, property managers, and financing companies review credit reports as part of their hiring or lending process, so you want to make sure the information is accurate. You’re entitled to one free report annually from each of the credit reporting agencies such as TransUnion, Equifax, and Experian. Best practice is to request a report from one agency every four months; that way, you can actually check your credit three times per year.

Financial mistake #3: lack of emergency savings

Life is full of unexpected events—car repairs, illnesses, and broken appliances. Unfortunately, many people lack the savings to cover these events, forcing them to look at less desirable payment options, such as borrowing money from family. Thirty-five percent of adults have reported they’d have difficulty paying an unexpected $400 expense.2

Building an emergency savings fund, also known as a rainy day fund, can help you navigate life’s surprises while keeping your financial goals on track. Not sure how to build a fund?

  • First, review your budget to identify where you can carve out $25, $50, or $100 per month for emergency savings.
  • Next, add your rainy day fund as a line item in your budget to help you reach your savings goal. Best practice is to save enough money to cover three to six months of living expenses.
  • Finally, consider having the money automatically deducted from your paycheck and deposited into your bank savings account; that way, you won’t be tempted to spend the money instead of saving it. 

Financial mistake #4: inadequate protection of financial accounts and personal property

You’ve worked hard to build the life you enjoy, so make sure you have the proper safeguards in place to help protect yourself, your family, and your assets.

  • Insurance: The type of insurance you may need depends on your circumstances. If you provide financial support for loved ones, life insurance can help ensure their future well-being in the event of your death. Renters and homeowner insurance can help you replace personal items lost due to theft, fire, or natural disaster. A financial professional can help you evaluate the type and amount of coverage that’s right for you.
  • Cybersecurity: Computer breaches are becoming more sophisticated, which means you need to be more vigilant in protecting your online presence. Be sure to use complex passwords—a combination of letters, numbers, and symbols—and two-factor authentication to access your accounts. It’s more unlikely that a cybercriminal will possess both your passwords and your cell phone. Also, be cautious with email. Don’t open emails or click on links from people you don’t know. Phishing emails are one of the most popular ways hackers gain access to personal information and accounts.

Financial mistake #5: outdated beneficiary information

When you enrolled in your employer’s retirement plan, you had to name a beneficiary for your account—the person or people who will receive your money in the event of your death. The same is true if you have life insurance or an individual retirement account (IRA). When’s the last time you checked your beneficiaries? If you’re like most people, it’s probably been a while, which means your beneficiary information could be out of sync with your intentions.

Here’s an all too common scenario. John enrolls in his company’s 401(k) plan and names his wife Mary as his beneficiary. John and Mary divorce several years later. John remarries, but never changes his beneficiary to his new wife Beth. Imagine Beth’s surprise when she tries to claim the 401(k) account upon John’s death only to find out she’s not the lawful beneficiary—Mary is.

To avoid this scenario and similar ones, you should review your beneficiary information at least once per year and whenever you experience a major life event such as the birth or adoption of a child, marriage, divorce, or the death of a loved one. 

Financial mistake #6: not building financial know-how

Part of being financially fit involves increasing your knowledge about personal finances, so you can make more informed and confident decisions. Check with your bank and other financial institutions, as many offer their customers free webinars and seminars on a host of financial topics such as investment basics, managing debt, and retirement planning. If you work with a financial professional, don’t be afraid to ask questions. Part of their job is making sure you understand what they’re recommending and why.     

Financial mistake #7: no written financial plan

Many people think financial plans are only for the wealthy, but everyone can benefit from having a written plan. A formal plan can help you keep your financial life on track, as you’re more likely to follow through if you have written goals and steps for achieving them. You can create your plan yourself using budgeting and other online financial planning tools, smartphone apps, or Excel spreadsheets, or you may want to work with a financial professional.

In any case, creating your plan isn’t a one-and-done event. Your plan needs to evolve with your life, so you’ll want to review it at least annually and after any major life event. Having a written plan won’t help you if it doesn’t reflect your current financial needs and goals.    

Make it a habit to avoid financial planning mistakes

Managing your personal finances can feel overwhelming at times, with multiple financial priorities competing for your attention. Creating healthy financial habits can help ease your anxiety and put you on the path toward your definition of financial security. 

1 “Credit Card Debt Study,” WalletHub, 9/9/21. “Report on the Economic Well-Being of U.S. Households in 2020 – May 2021,” Board of Governors of the Federal Reserve System, May 2021. 

John Hancock is not affiliated with TransUnion, Equifax, or Experian, and none are responsible for the liabilities of the others.

The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made herein.