Blog

Common financial pitfalls

6th Aug, 2018

By Robert Little

When was the last time you reviewed your average spending or put some real thought into how much money you are putting aside?

We all lead busy lives and many of us leave our finances on autopilot, including the use of direct debits and contactless payments. As a result you might experience the following financial pitfalls (and derail your financial plans) without realising.

Working with a financial adviser encourages you to slow down and take a breather, so you can analyse your budget and your bank account.

You might find yourself overspending on frivolous items and underspending on setting money aside to achieve your financial goals (whether this is early retirement, buying your dream home or any number of other things).

We can help you create a plan and stick to it. We do this by encouraging you to spend money wisely and acting as a sounding board when you want to splash out.

If you want to take the first step towards planning for your future please call 01642 477758 or visit our Contact page to arrange a free initial meeting.

Keeping up with the Joneses

This has been an issue for generations but, thanks to social media, it is easier than ever to see what people spend their money on. Seeing endless photos and descriptions of meals out, extravagant holidays and designer clothes can lead to a desire to want the same.

It is important to remember that social media only shows the highlights from someone’s life, not all the ups and the downs. A fancy meal out one night will probably mean a cheap night in at other times.

Unless you have a good idea of someone’s financial background (including their monthly income, outgoings, savings and debts) you should never feel the need to keep up with the spending habits of friends and family. If you do you could quickly find yourself short on savings and retiring far later than planned.

Overspending on cars

Many personal finance articles will tell people to pack their own lunch or avoid their daily coffee if they want to cut back on their spending. While these are good tips, it is vitally important to consider large monthly commitments before looking at smaller amounts.

After a mortgage or rent, the biggest monthly expense for many people goes on financing a car through a lease, a loan or a Personal Contract Purchase (PCP). In fact, in 2016, 30% of all consumer finance was made up of car finance. Replacing your car too often, getting a more expensive car over a cheaper (but less flashy) option and buying new rather than previously owned can all knock thousands of pounds off your savings over the course of a lifetime.

It is also vitally important to compare Annual Percentage Rates (APRs) when considering car finance rather than looking purely at the monthly cost. Some dealerships might point out that buying new is cheaper than buying second hand, but this is only because they apply a far higher interest rate to previously owned vehicles. I have personally seen several examples where a new car had an APR of around 6% but a used car had an APR of around 12%.

In summary make sure you shop around, consider all of the available options, watch the APR figure and don’t overindulge (and then consider what you can do with the money you save).

Losing employer contributions

All employers in the UK are required to automatically enrol qualifying members of staff into a workplace pension and make contributions on their behalf. These employer contributions can add up over the course of your working life yet some people leave their pension scheme (and forgo the employer contributions) because they do not want to face a reduced pay packet.

For some people this is out of necessity rather than want, and it is very important to ensure you can afford to make contributions and tie this money up until your retirement (because pension savings are not accessible until at least age 55). However, if you can afford to make these contributions, you should ensure you make the most of them.

Some generous employers will offer even greater contributions beyond the minimum amount prescribed by the regulations, so be sure to ask if your company falls into this category.

Lifestyle inflation

If you get a pay rise, does your spending tend to increase? If so you have succumbed to the effects of lifestyle inflation, where any extra earnings are spent rather than saved. It is one of the easiest traps to fall into yet it  can have a very detrimental effect on your financial plans over the years.

The best way to avoid this scenario is to find out how much your take home pay will increase and set up a standing order or direct debit to remove this amount from your current account as soon as possible after pay day. This money could go into short term savings or longer term investments (whichever suits your financial plan).

Doing this ensures you pay yourself first so you can’t accidentally lose this benefit through wasteful spending.

Summary

The key take-away from this article is to invest a bit more time into the way you look at your finances. To cut your spending, look at your car payments (and other big bills) as well as looking at smaller, more regular items such as a daily coffee habit and eating out). In terms of savings, make sure you make the most of employer pension contributions (as long as you can afford to) and don’t let a pay rise go to waste by spending more.

If you would like to put a financial plan in place you can book a free initial meeting with myself or one of our advisers. Please call 01642 477758 or visit our Contact page.

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