HOW DO YOU AVOID COMMON FINANCIAL MISTAKES?

Executive Summary:

Women have been programmed to think they aren’t good with money so we end up in a – I have to, but I can’t – destructive mental loop. This lack of confidence and resulting inaction can lead to a number of costly mistakes:

• Failure to do long-term planning
• Focusing on numbers rather than goals
• Not recognizing the power of a budget
• Underestimating other kinds of risk
• Investing too conservatively

Setting long-term goals, creating a spending and saving plan, and taking appropriate investment risk is a better recipe for success.

Common Money Mistakes That Cause Financial Insecurity

Ever notice it is hard to have a good day when you have a bad attitude? That’s one of the problems with women and money. Women have been programmed to think they aren’t good with money according to prominent psychotherapist, Olivia Mellon. Unfortunately, financial security is a top concern. So, we end up in a – I have to, but I can’t – destructive mental loop.

An extensive Australian study concluded that the Golden Triangle of Happiness consists of relationships, purpose, and financial control. So, in my view common mistakes women make center around not having a strong relationship with money. One way to change your mindset is to align your deeply held values with your money. After all, when you can separate the emotional baggage, money becomes a very useful means to a purposeful end.

What are some common financial mistakes?

• Lack of long-term planning

Women tend to focus on the short-term for a variety of reasons. Time constraints, caregiving responsibilities and a tendency to be risk adverse are some. But prudent financial planning is really about the future, and it usually takes a long-time horizon to prepare for retirement. Without a plan how can you set adequate savings targets today that will create financial security tomorrow?

• Focusing on the numbers

When people do plan, I have found the tendency to focus on the numbers rather than also considering important life goals and sense of purpose. It’s a little like dieting. Unless your plan is motivating and maintainable, it will sit in a desk drawer somewhere rather than becoming a new way of life. On the flip side, over planning is just as unfortunate. As a planner I had clients that were afraid to spend anything. They had to be encouraged to live their lives and reassured that their financial plan was strong enough to take special trips, renovate the house or help with their grandchildren’s college. That’s the art of financial planning. A good planner considers things that could go wrong so that a client can feels comfortable with reasonable spending when things go right. Setting an expectation of spending flexibility also helps people feel more in control of their financial situation which leads to a better quality of life.

• Not recognizing the power of a budget

If you don’t know what you are spending, it is difficult to be in financial control. Even if you aren’t going into debt it can lead to indiscriminate rather than thoughtful spending. And it is difficult to make good decisions on big ticket items. You may have the cash flow at the time but aren’t considering sporadic expenses or the monies you planned on contributing to a retirement plan. Another issue is that spending often meets underlying psychological needs. Sometimes it is a necessary expense but other times it is an unconscious way of dealing with feelings you aren’t totally aware of.  Like purchasing things online, you don’t really need because it makes you feel better. It’s fine if it fits into your budget but not if it prevents you from doing things that are more important to you. The key is to spend thoughtfully as part of a plan.

• Underestimating risk

Another issue with short-term planning is a failure to invest. Women’s natural aversion to risk doesn’t help either. But fear of a volatile stock market isn’t the only risk you should be concerned about. If you don’t invest or have other substantial income — inflation can lead to significant loss of purchasing power in retirement. And women typically live longer than men. So, if your nest egg isn’t growing over the years, you run the risk of being unable to maintain your lifestyle and at worst, running out of money.

• Investing too conservatively

Even if you do invest, portfolios need to take reasonable risk to be successful. You put money in a bank account for safety. You invest in the stock market for growth. Both have their place. When you have a short-term purpose for your money safety matters. But when you have a long-term goal, such as saving for retirement, it is essential that you get a reasonable return on your investments. Basically, you are taking on more risk for higher expected returns — or profit. Unfortunately, many women are reluctant to invest because they are fearful, lack knowledge and are short on time. I think fear is the main driver because the stock market must seem like a house of cards to many. But that isn’t true. While not every stock or mutual fund will be successful many will. And it helps to realize that a stock is based on tangible company assets such as real estate, equipment, and valuable employees. Having a well-diversified portfolio of stocks, paying reasonable fees, and staying in the market for the long-term has historically led to a successful investing experience.

The harsh reality is that once a woman reaches the point where she has to pay attention to her financial situation it can be too late. Sure – maybe you will be lucky and inherit something or have a partner that plans adequately for both of you. But do you want to bet on that? According to Social Security “the overall elderly poverty rate is almost two-thirds higher among women than men”. And sadly, even if you do have a robust retirement nest egg there are plenty of people out there that are willing to commit fraud or simply give you bad financial advice. You need to know enough to make, or at least partner in, making good decisions. And it’s not that hard! The goal of the Lady Money program is education and empowerment. Anyone can learn to take charge of their financial future with or without the help of an accredited professional.