The mistakes my clients are not necessarily aware they were doing.
I am talking to many very smart and capable people, on a daily basis. Some of them earning very decent incomes (at least higher than mine!). The issue is that sometimes, their behaviours and beliefs are playing against them, without even noticing it!
What can we learn from them? Here are 5 of the "mistakes" my clients are not necessarily aware they were doing. Let us see if you also victim of :
Set a budget and stick to it. We often hear that keeping your total annual housing costs to no more than 25% of your income is ideal. This helps ensure you keep a degree of flexibility in other areas.
I often hear clients thinking of their home as an investment (and sometimes the biggest investment of their lives). I am not saying that buying a house or an apartment is a bad idea, or that your house is not worth as much as you think it is. That being said, from my perspective an investment should provide a return.
A family home that is your primary residence (and therefore does not provide rental income) may be an excellent utility. It is not, however, what I would consider a good investment.
I agree that house prices do tend to rise over time, (and maybe yours is not tens of thousands more expensive than what you paid) but the cost of ownership, maintenance, and upkeep often erode most of the "capital gain" you made on paper.
A realistic return runs about 2%. There are more profitable property investments if you look around.
It is hard for most of my clients to strike a balance between enjoying their lives right now, while also building assets and future financial security. This would be much easier to do if we could predict what life would be like in 10 or 50 years.
That is obviously and unfortunately not how life works. So what is the solution? Save today more that you think you need to, because then you give yourself a margin of safety and you can handle emergencies better, take advantage of opportunities when they show up, or simply slow down your saving efforts if times become tough in the future.
Saving more that you think you need today also buys you more choice and freedom in the future. If you wonder how much you should aim for, the number most financial advisors will give you as a guideline is around 20% of your income. If it looks to big for you, let us talk I will show you a way to start from 0 and increase this percentage over time.
No one likes thinking about the worst case scenario, but when something actually goes wrong in your projections (and believe me ... it is impossible to be 100% right about the future!) you will be happy to have a couple of nets built in your strategy. You can do this in several ways, including one we have just talked about : saving more than you think you need to.
Other ways include maintaining an emergency fund representing 3 to 6 months of your expenses, using conservative assumptions around income, overestimating your expenses when you do any kind of long-term financial projection (inflation is you enemy, don't underestimate it), and not counting on any kind of windfall (such as a bonus or inheritance).
Buy low ... sell high : the golden rule of trading the market! It is very tempting to believe we can time the markets. It looks so easy when we look at graphs! I used technical analysis and made money with it but I will tell you : it was more luck than anything else!
Traders do not beat the market over a long period of time : so why would I, and more importantly, why would you? You may get lucky once, but repeating that performance over and over again for the next few decades is virtually impossible.
Instead build a strategic investing plan, and then stick to it, regardless of what happens in the markets. One of my favorite is called "dollar cost averaging". I use it in conjunction with other methods. Search for it and ask me how I use it if you want. It is not as sexy as showing off about 1000% returns from time to time, but it is simple, profitable so far and I am convinced that it will keep being that way.
I hope this article shades a light on some frequent issues that may not look obvious from the get go. The key is to find out why you do what you do before you can hope to permanently change a challenging behaviour. If you recognised yourself in one of the 5 points I mentioned, consider this issue as a symptom. Let us see what is the cause of this symptom!