In today’s evolving financial climate, navigating your financial future can feel like walking through a maze. Times are tough … our economy is on the rocks, interest rates are high, and things feel uncertain. This affects everything from job security to investment returns. Given this landscape, it’s important to be aware of the top 8 financial mistakes to avoid to safeguard your future. Here are some of the biggest financial mistakes and money mistakes to be wary of.
Insufficient Emergency Fund
In a world where the Rand’s value fluctuates and economic policy can change overnight, having an inadequate emergency fund is a mistake you can’t afford to make. Besides which, the concept of job security no longer exists, as companies are always aiming to do more with less (even more true in the new era of AI). Aim to set aside at least six months’ worth of living expenses. Two years is ideal. An emergency fund is your financial safety net and can provide peace of mind in these unpredictable times. That’s why setting financial goals can make such a difference to helping you keep your finances on track.
Neglecting Retirement Savings
One of the most pervasive ‘financial mistakes’ South Africans make is inadequate preparation for retirement. With the cost of living steadily rising, relying solely on a pension fund or government support is risky. The biggest risk we face at retirement is not having enough, which is now being compounded by longevity risk, (thanks to advances in medical technology). Consider options like Retirement Annuities, Tax-Free Savings Accounts and other forms of discretionary investment to build a robust retirement nest egg. Even better, develop side hustles and passive income streams that allow you to not only supplement your income, but also allow you to contribute more to your financial freedom pot.
Unmanaged Debt
Unstainable debt levels are the fastest wat to financial ruin, whether you’re a blue-chip corporation, small business, household, or individual. High-interest debt is the biggest ‘money mistake’ that can undermine your financial health. According to the 2022 National Credit Regulator (NCR) Annual Report, 70.2% of South Africans were living in debt. The report also found that the average South African debt was R69,000. Unsecured debt (credit cards and personal loans etc.) is the most common type of debt in South Africa, accounting for 62.7% of all debt. Secured debt (like home loans) accounts for 37.3% of debt levels. Focus on paying off high-interest debts as quickly as possible and consider consolidating loans if you can. And when taking out a home loan, give yourself ‘breathing space’ – never lend at your affordability limits, and always imagine what will happen if interest rates go up by 5% (as they have done) to make sure you can still afford paying the loan.
Investment Missteps
The financial market’s volatility in 2023 makes it tempting to play it safe. However, keeping all your money in savings accounts or under your mattress are ‘financial mistakes to avoid’. Take calculated investment risk customised to your goals, dreams and aims – by understanding the role different asset classes play in growing your wealth over time. From equities to crypto, bonds, and gold … depending on where you are in life and what you want to achieve – all could form building blocks in a diversified and balanced portfolio. Understand what a ‘real return’ is (investment return above inflation) and unless you are achieving compounded investment returns of at least Inflation Plus 5 over many decades, achieving financial security will be incredibly difficult. And when it comes to deciding on the underlying investment options, there isn’t a shortage of instruments to choose from – ETFs, index funds, unit trusts, share portfolios. That’s why professional investment guidance can be useful to help tailor a portfolio to your needs.
Suggested Read: Why Offshore Investing is So Important to Achieving Financial Security
Overlooking Insurance
Skimping on insurance can be a costly mistake. Insurance tends to be a grudge buy but you only appreciate its value when you need it. A badly timed accident or medical emergency without the necessary coverage can set you back hundreds of thousands (sometimes more) and lead to immediate financial ruin. Whether it’s medical, car, or home insurance, not having adequate cover can leave you financially vulnerable. Not forgetting insuring your income, life etc. Make it a point to review and update your insurance policies annually to ensure they meet your current needs.
Lack of Financial Planning
Whether it’s tax planning or asset allocation, failure to plan is planning to fail. Financial planning looks at your situation holistically and covers all the key pillars of your financial life, i.e., retirement, risk, investment, estate planning and taxation. The complexities of financial planning in South Africa have grown, especially with new regulations. Neglecting this aspect of your finances can result in a myriad of money mistakes down the line.
Forgoing Professional Advice
As your life becomes more complex and ‘busy’, managing all the pillars of financial planning mentioned above becomes increasingly time consuming and difficult. And it might simply be something you’re just not that interested in doing. You have a life to live and other stuff you’d rather be spending your precious free time on. One of the most under-recognized ‘financial mistakes to avoid’ is neglecting the expertise of financial advisors. With ever-changing economic conditions, having a professional guide to help navigate your finances can be invaluable. Even better, finding one that is genuinely fee-based and that can provide impartial and unbiased advice should be your goal.
Living Beyond Your Means
The cold, hard truth is that unless you are able to live within your means and have more money coming in that going out, you will never get ahead financially. And that is the biggest money mistake we see made consistently, across all income demographics – from those earning millions a year to those earning very little. A big house and nice cars don’t equate to financial health if most of your income goes to making interest payments. You should aim to consistently save and invest more than 20% of your income. If you can do that, you’re on the road to financial independence.
Read Next: Master these 11 Steps to Achieving Financial Freedom.
Conclusion
By being mindful of these common financial mistakes, anyone can position themselves for greater financial security and success. Remember, financial wisdom isn’t just about making money; it’s also about knowing how to keep it. Progress and change is often just about doing the little things well cosnsistently over a period of time.
Carl-Peter Lehmann
Carl-Peter is a Director and Partner at Henceforward. He is a CERTIFIED FINANCIAL PLANNER with over 20 years experience, helping his clients navigate various financial pitfalls.
