As a financial counselor, I’ve had thousands of talks about money with young professionals.
Many of these discussions center on how to deal with their problems and optimize their financial prospects, which also include leveraging high earnings to accumulate substantial assets.
However, some of the discussions I have with individuals are about how they may correct some of the significant mistakes they made before seeking advice from a financial planner.
While it’s vital to discuss what to do correctly, it’s also important that we identify some of the most prevalent financial planning errors.
You might be able to learn from someone else’s mistakes and prevent some missteps on your own road if you do so!
In this article, we’re going to discuss some of the most frequent ways we see young people get in their own way on their journey to financial success. We’ll also look at how you can prevent making the same mistakes or solving similar issues in your own life.
3 Solutions for the Most Common Financial Mistakes Young Professionals Make
1. Being too optimistic.
Because of the nature of financial planning, you must make some educated guesses about what will happen in the future.
In order to craft out various scenarios, you must make a number of assumptions about factors like your:
- cash flow
- income
- investment returns
- spending
One of the most common financial mistakes I see individuals make with their financial planning is making these assumptions way too aggressively. “Aggressive” might be a synonym for “optimistic” in this situation.
Many people are inclined to believe that they will earn considerably more money in the future than they are earning now. That they will receive big bonuses or incentives, despite having no prior experience with such figures.
Others feel that equity pay will only increase in value and that investing in their company shares is a guaranteed investment. People may also come across certain investing possibilities and believe they can’t lose (But no investments are risk-free in reality).
Too many assumptions can also manifest themselves in rejecting the need for flexibility or an emergency fund since a person cannot imagine a terrible catastrophe affecting their own life.
It’s also possible you’re thinking that you’ll retain the same employment and that the position will always give the perks you’re used to.
If your assumptions leave no room for mistakes, they’re just too aggressive to employ for planning. You can’t just expect everything to always go as planned, or that you’ll never have to cope with a financial setback.
A smart plan includes multiple plans in the form of:
- alternatives
- financial buffers
- cautious assumptions
One example would be expecting you’ll make a bit less than you think you’ll earn or spend more than you think you’ll spend.
2. Failure to take change into account.
Although this error is intangible, it can nonetheless be fatal to a financial strategy.
You haven’t taken into consideration the fact that life is changing if you make judgments today requiring you to behave in a specific manner for an extended length of time.
You may not be the same person in five years as you are today (let alone ten or twenty).
Your objectives alter, your hobbies fluctuate, and your priorities shift. This isn’t always a negative thing. It’s just the way people are.
The issue arises when you make a strict strategy based on your current tastes. While getting what you want now may feel good, you may be leaving your future self high and dry with a lifestyle they don’t want to live. This is a common financial mistake.
This may be seen in financial planning in the following way:
A customer may choose to purchase a much larger (and very costly) property. It’s easy to make the plan work on paper. But while committing to the larger, more expensive house may leave them with very little money to spend on some other things they might desire now or later in the future.
This may include:
- the ability to travel
- take a sabbatical
- or accomplish other objectives
A customer may say that purchasing a bigger property is by far the most important thing to them right now. It is their top priority, and they are ready to go to great lengths to achieve it.
That might be true… at the time. What this strategy fails to consider is that once they purchase the bigger property and lock that fixed expenditure into their cash inflows, they may have a slim choice or financial freedom to pursue other objectives for many years.
Tomorrow is not promised and neither is who you will become in the future 100% predictable. A smart financial plan takes this into consideration and seeks to save you from making a decision today that you’ll have to live with for years.
3. Believing that you can Google search your way to any solution.
The internet’s power is incredible. Never before has such a large number of individuals had access to such important information.
However, with such a large store of information comes a lot of noise. And, because so much information is subjective, there will be a lot of noise in the world of financial advising.
Noise can occur in the aspect of financial planning and investment management. When you decide to ask just one question, you end up receiving ten different responses, ranging from factually true but not appropriate to your unique circumstances to flat-out incorrect and misleading.
You may do a lot of research on your own. To a degree, you can educate yourself, develop your skills, and accomplish things on your own…but here lies another common financial mistake.
You just can’t expect someone to become a physicist by providing him/her membership to Oxford University’s Physics library and telling them to read through it. That won’t help them at all. The internet is exactly the same thing, but multiplied tenfold.
The argument is that having access to knowledge, which everybody with an internet connection now has owing to Google, isn’t enough. You’ll need to complement that accessibility with the insight and knowledge to know what to seek and what to disregard.
That’s why it’s an error to assume that you can handle everything in your financial life on your own, from budgeting to investing. You’ll eventually get to a point of complexity where you’ll profit from expert help. Because only pros can tell what’s important and what’s simply noise.
Editor’s note: This article was originally published Aug 31, 2021 and has been updated to improve reader experience.
Photo by Christin Hume on Unsplash