Financial planning is crucial for your future. Without proper financial planning, you may find yourself without enough funds to retire when you want. You could also lose a significant amount of money due to avoidable taxes.
There are many common problems that people run into when personal financial planning, but the good news is they are often preventable. Below are just a few issues you may encounter and what you can do to fix or avoid them.
Problem #1: Aggressive Assumptions
Planning your financial future does require a fair number of assumptions to be made. You will have to make these assumptions based on future income, expenses, and returns. Sometimes these assumptions can be overly aggressive or optimistic.
While you may plan to make more in the future, that is not guaranteed. Even if there are good projections that your retirement savings will increase, these are simply projections. Counting on them could have dire consequences in the future.
Solution: Make More Conservative Assumptions
Hoping for the best but planning for the worst is an excellent model to follow when it comes to retirement planning. Take into account the possibility of decreased income, significant expenses, or any kind of change to cash flow.
Adding contingencies to your plan for job loss, emergencies, and a downturn in investments will keep you better protected. For example, if you don't have an emergency fund you'll want to create one sooner rather than later.
Problem #2: Not Diversifying Your Portfolio
When planning for your financial future, you may stick with the same investments, expecting them to perform. Unfortunately, a lack of diversity in your portfolio can lead to problems in the future and lower your overall wealth management.
Well-rounded portfolios can help secure the income you need in the future to meet your retirement goals. Gone are the days your typical stock option or mutual fund will suffice.
Solutions: Consider Alternative Investments
Diversifying your portfolio is not as hard as it used to be. With new regulations, there are now many alternative investments opened up to all investors.
These alternative investments can provide passive income during retirement and help your wealth grow faster. There are additional asset classes many have yet to dive into. With a little bit of strategic planning, your future will be more secure.
Problem #3: Not Accounting for Inflation
One of the most common financial planning issues is failing to account for inflation. No matter what the world's financial situation is, money loses its value over time.
This makes it an essential consideration during financial planning. The golden number for retirement used to be a million, but that has quickly grown to two million in the last decade.
Solution: Build Inflation Into Your Plan
When doing your comprehensive financial planning, you will need to factor in an increase in expenses and a decrease in the value of your money. You also may not want to be too dependent on safe investments, which may result in returns lower than rising inflation.
Problem #4: Not Saving Early Enough
People tend to push off financial planning until they are older. Unfortunately, this is a financial planning issue that can cost you. If you wait too long to start saving, you may be significantly behind in your financial goals.
Solutions: Start Saving and Investing Now
If you haven't started saving in an IRA or investing, do it now. If you have had a slow start, now is the time to pick up the pace. The earlier you start investing, the greater your wealth can grow, and you will avoid playing catchup in the end.
If you aren't a planner, you need to become one so that your retirement fund has time to grow.
Problem #5: Not Accounting for Change
Change is inevitable, but many people fail to account for it during their financial planning. While you may have mapped out a five, ten, or twenty-year plan, they are likely to change before they are achieved.
For example, you may decide you want a large house but fail to plan for the additional expenses that come with it. You could eat into savings that you had planned to use for another goal.
Solution: Be Adaptable
While goals like owning a larger home may not be in the plan now, it is prudent to consider the possibility. Have some extra funds set aside to provide some flexibility if you need to adapt to what life throws at you. You can be a planner all day every day, but you need to be flexible as new expenses come your way.
Problem #6: Failing to Account for Long-Term Expenses
Long-term expenses that are not part of your retirement goals are easily side-lined during financial planning. The most common one being the costs that come with aging.
Healthcare costs and long-term care costs grow each year exponentially. Failing to account for these expenses can lead to a depletion of savings and difficulty sustaining yourself.
Solution: Factor In Long-Term Expenses
Do your best to determine what possible long-term health care expenses may be and consider your options. Look at insurance and health savings accounts to see what you have for long-term coverage.
If it seems you may fall short, account for the expense in your overall savings goal. Many forget to factor this in during their investment planning.
Problem #7: Being Aggressive or Conservative When Investing
Being too aggressive or too conservative when investing can lead to problems. You should never expose yourself to more risk than your goals will allow. Yet, you should also not play it too safe or fall short when it comes time to retire. This is a financial decision that everyone needs to make for their own retirement.
Aggressive investing can lead to the possible loss of a significant amount of your savings. On the flip side, being too conservative can lead to a loss of value with your money. Either case could leave you short of what you need to meet your financial planning goals.
Solutions: Find the Right Mix
Ideally, your portfolio should be a good mix of high-risk and low-risk investments. Most portfolios start with more risk and then move to be more conservative as you approach your retirement. While this is perfectly fine, there should still be a mix so that your investments can grow at a consistent rate.
Don't Let Financial Planning Issues Get You Down
Don't be discouraged if you have run into any of the financial planning issues above. These problems can be fixed with a few simple adjustments during the planning process.
At the end of the day, any kind of financial plan is key for your future. Make sure you have some kind of written financial plan to help ensure you'll stick to it to meet your goals.
If you have problems diversifying your account, alternative investments may be the answer for you. Contact Rocket Dollar today to learn more about alternative investments and how they can help your wealth strategy.