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8 Common Financial Planning Mistakes

1. Failure to plan.
Many people earn, spend, save, and invest their money without a great deal of thought or planning. They have only vague goals and don't analyze whether their limited financial resources are being put to the most productive uses to achieve those goals and provide financial stability. Without a financial plan and accompanying tools such as a budget, you're going to have a tough time knowing where you're going or how best to get there.

2. Failure to communicate.
Spouses or partners frequently have different styles of investing and managing money. These differences need to be discussed up front, then either reconciled or accommodated. Otherwise, conflicts over money can damage overall household finances and even lead to relationship problems. Leaving a spouse out of the "financial loop" can also be devastating if the other spouse dies first. But financial communication should extend beyond spouses. You should discuss finances with your children, particularly adult children who may inherit family wealth. Talking with children about finances is also critical in the event that they ultimately have to care for you or settle your estate.

3. Procrastination on the savings front.
People, particularly young people, often say, "I'll start saving later, when I can afford to." This overlooks the tremendous power of compounding. Catching up takes a lot more money than most people realize. Think about the following example: If you invest $100 a month for 30 years at an average annual return of 8% for 30 years, you will have accumulated almost $150,000. If you wait 10 years before staring, you'll have to sock away $260 a month for the next 20 years to reach roughly the same amount. If you wait until the last 10 years, you'll have to sock away $800 a month to achieve the same results.

4. Failure to diversify personal finances.
The bear market of 2000-2003 painfully illustrated the benefits of diversifying among a variety of investment categories. But diversification might well involve more than just investments. One situation we run into frequently is that of a couple who both work in the same industry—perhaps even for the same company—and who invest heavily in stock options and employer or industry stock in their retirement plans. If your employer or industry suffers hard times, you could lose your jobs and much of your savings in one fell swoop. Furthermore, if your employer dominates the region where you live, the value of your home could suffer at the same time.

5. Chasing the market.
In the 1990s, many investors chased higher-risk stocks right over a cliff. Now some observers worry that investors are over-concentrating on bonds or international stocks, with the potential for bad results when interest rates rise. The goal of investing is not necessarily to beat the markets—it's to achieve your life's goals. This is usually accomplished by investing regularly, early, and with modest risk. Trying to outwit the market year after year frequently causes investors to take excessive risk that, in the long run, leave you well short of their goals.

6. Assuming bad things won't happen.
Newspaper headlines should convince most people that personal catastrophe or life-changing events with negative financial consequences can occur unexpectedly at any time. Yet families routinely fail to prepare financially for such events. For example, not having sufficient emergency cash funds in the event of job loss or not carrying disability or long-term care insurance. Don’t assume these events won't occur.

7. Putting off estate planning.
Families may have good intentions to get wills, develop an estate plan, rebalance their portfolio, update their insurance, or take an inventory of their financial health, yet never quite get around to doing it—until it's too late. This is especially common in estate planning, with its overtones of mortality.

8. Doing it themselves.
Yes, you should always be involved in the details of your finances. However, the benefits of working with an outside financial planner, someone who can look at your situation objectively, usually far outweigh the associated costs. Often the additional returns and tax savings, or mistakes avoided, or consolidation of paperwork/accounts, or reduction of hassles or a combination of these factors can make hiring a financial advisor a smart decision. A qualified planner who takes into account your entire financial picture can provide impartial, technical advice and, often most importantly, motivate you to put your financial house in order.

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