The ability to manage money wisely is a particularly valuable skill in the midst of a financial crisis. Here are the most common mistakes people make when it comes to money. We’ll also offer some financial planning advice to help you manage your own finances properly at a time when people’s purchasing power is falling, inflation is rising, and exchange rates are completely unpredictable.
A budget is the cornerstone of financial planning. It is therefore particularly important to be careful when drawing up a budget. To begin with, you should draw up your own budget for the coming month, and only then should you draw up an annual budget.
Keep at least $1,000 in your account to cover unexpected expenses. And gradually build up your ‘financial cushion’ to an amount equivalent to three to six months’ income.
What to do?
Take your monthly income as a starting point, deduct regular expenses such as housing and transport costs, and then set aside 20–30 per cent for savings or to make mortgage repayments.
The remaining funds can be spent on everyday living: restaurants, entertainment, etc. If you’re worried about spending too much, limit your weekly spending by carrying a set amount of cash with you.
“When people take out a loan, they think they have to pay it back as soon as possible,” said Sofia Bera, a certified financial planner and founder of Gen Y Planning. “And they spend everything they earn on repaying it. But that’s not entirely rational.”
If you don’t have any savings set aside for a rainy day, should an emergency arise (such as an urgent car repair), you’ll have to pay by credit card or end up in further debt.
“Usually, when people plan to invest, they think only of the profits and fail to take into account the possibility of losses,” says Harold Evensky, president of the financial management firm Evensky & Katz. He said that sometimes people fail to do the basic maths.
For example, they forget that if they lose 50 per cent in one year and make a 50 per cent profit the following year, they haven’t returned to where they started and have lost 25 per cent of their savings. It is therefore better to think about the consequences. Be prepared for any eventuality. And, of course, it would be wiser to invest in a variety of different investment vehicles.