Six award-nominated advisers explain to Alan Hartstein how people hurt their financial security.
What are the biggest money mistakes financial advisers see clients making?
Much of it comes down to over-committing yourself, not setting realistic goals, getting into credit card debts and failing to plan for the future.
Mistake 1: Lack of long-term planning
Remedy: Get a handle on budgeting, saving and debt reduction and pay attention to super.
The biggest mistake Gregory Bloom of Yellow Brick Road Bondi Junction sees people consistently making is having “short-term vision”.
“I often have to remind my clients that the decisions they make today will have a huge impact on their standard of living in 10, 20 and 30 years’ time,” he says.
Bloom believes the most important things to get right don’t involve complex investment structures or investment vehicles. They are instead simple things such as budgeting, saving, and debt reduction.
He suggests people repaying debts learn to do with less.
“If they have to exist on $1000 a month while they’re repaying loans and/or saving for a deposit for a house they have to survive on it, it’s as simple as that,” he says.
Maritza Kriel, founder of MK Wealth Solutions, Brisbane also considers neglecting super to be one of the biggest money mistakes people can make.
“Unfortunately, clients in their 50s that haven’t put much money into their super plans have a very limited time frame to work with," she says. "In these cases we look at every individual situation and work with what we have over whatever time frame we have left, to structure and plan for the best possible outcome.”
Mistake 2: Over-leveraging with property
Remedy: Don’t over extend yourself by buying properties you can’t afford or assume they’ll always go up in value.
Brent Story, co-founder of Cornerstone Advice Brisbane, nominates over-leveraging with property as one the biggest money mistakes people are making consistently.
This, he says, is based on the assumption that if you buy one property and its value rises you can then use the equity in that property to buy your next one, repeat the process as often as you like and it will automatically have a positive financial result.
“I’ve seen clients that have bought three properties yet none of them have risen in value sufficiently to move them forwards,” he says. “And from a cash flow perspective, that’s really draining. They end up in a holding pattern where they don’t want to sell a single property because of the costs involved but they are not building wealth.”
Story believes in simple, common-sense strategies to building wealth, such as saving 10 per cent of your income for this purpose. He also suggests protecting yourself against income loss with insurance and building an emergency cash fund.
Mistake 3: Not controlling your cash flow
Remedy: Live within your means and consider the opportunity costs of large purchases.
For Peter Hodgson, a Brisbane-based financial planner at ANZ, good money management comes down to managing your cash flow. Fundamental to this is budgeting and getting on top of debts, especially credit cards. He says budgets should be divided between fixed costs and discretionary spending.
“Once people know what they have left after rent, food, clothing and bills like electricity they have a much better idea of where they stand and how much they are spending on entertainment and non-essential things,” he says.
Hodgson recommends putting away the credit cards. “When people pay cash for everything it profoundly changes the way they look at money,” says Hodgson.
People, he says, are usually startled when you show them what they can achieve with better saving habits.
“When I tell a 25-year-old that if they start with $5000 and save $50 a week at a 7 per cent average interest rate they could have $1 millon by 65, this really brings home the opportunity cost of wasting $200 or $300 a month on things they can live without.”
The same principles apply to 45-year-olds who have poor financial habits. “Like it or not, you’re going to get to a certain age and you need to do whatever you can to reduce debts and save as much as possible if you want to maintain a particular standing of living when you retire,” Hodgson says.
Mistake 4: Setting unrealistic goals
Remedy: Don’t be so overwhelmed that you do nothing. Instead, start small.
Cathryn Gross, who founded boutique agency Twelve Wealth in Sydney, sees people setting goals that are so unrealistic that many people invariably end up doing nothing. Once you convey that their goal really doesn’t have to be that far down the track or so lofty, they tend to take some action, she says.
“If, for example, someone is in their 30s or 40s and doesn’t have a house yet they’ll say, ‘I’ll just never be able to afford it; I’ll never be able to repay my mortgage’. However, if you can show them how, by saving $10,000 or $20,000 a year, they can get a deposit together within three or four years, they are much more encouraged,” Gross says. “So the first thing I do is work with them to set a realistic budget and then start tracking their spending.”
Starting with small goals that are relatively easy to accomplish helps people gain more belief in their ability to achieve the larger ones. “I put them in the headspace where they can do things then give them the framework to do them,” she says. “Put simply, little things lead to bigger and better things."
Mistake 5: Not challenging bad habits
Remedy: The earlier you start saving the more compound interest can work to your advantage.
Erin Truscott from GCA Financial in Brisbane devotes much of her time to providing financial advice to Millennials, who she says often don’t prioritise saving or have any appreciation of the importance of time and compound growth.
This leads to bad cash flow management and spending beyond their means, another common mistake people make that is not the sole domain of any particular age group, she adds.
“If people get into bad financial habits early they can carry them through their entire lives. This can cause lots of financial stress, especially if you’re trying to sustain an unrealistic lifestyle,” Truscott says. “It’s vital that you make a decision to take control of your finances as early as possible.”