6 Ways to Avoid the Financial Potholes of Life

If you've got your personal finances under control and in great shape, read 

no further. If you're confident and happy with the state of your finances, 

don't waste your time here. 

On the other hand, if you would like to improve your financial situation, avoid 

some of the more common money management mistakes, and achieve your financial 

dreams, take a few moments to consider the following tips for skirting the 

financial potholes of life.

1. Know thyself. How successfully we manage our money is as much about the 

mind as it is about the money. How often have you read about people who earned 

high incomes, won the lottery, or inherited large sums of money, yet ended up 

going broke? Or the reverse: people who earned modest incomes yet managed to 

build substantial wealth and live comfortably?

Most of us have a love-hate relationship with money, and understanding what 

makes that relationship tick can do as much for your finances as picking the 

next successful stock. What are your spending and investing habits, for example? 

Do you and your spouse have conflicting viewpoints regarding spending, 

saving, and investing? 

Whether you do self-analysis (there are numerous books on money psychology) 

or work with your financial planner or a therapist, exploring and gaining 

understanding about your relationship with money will provide invaluable

insights for making the right changes in your money management strategies.

2. Pay attention. Neglect is the stepfather of bad finances. Countless 

families have no household budgets and thus have no idea where their money goes.

The majority of people have never calculated how much money they need to 

accumulate for a comfortable retirement and hence have no idea if they're

saving enough. Workers mistakenly believe their employer covers them with long-term 

disability insurance. No wonder their finances look like a garden of weeds.

Just starting a budget and thoroughly reviewing your financial situation will 

be huge steps toward putting your financial house in order. 

3. Know your net worth. Your net worth is roughly the total value of your 

assets (home, retirement accounts, checking and savings, personal property, and 

so on) minus your liabilities (such as a mortgage or car loans). This is your 

benchmark by which you not only see how you're doing now, but how you're

doing in the future (recalculate your net worth annually).Regardless of the exact 

return on your investments, if you're building your net worth, you're 

building financial security. 

4. Increase your financial knowledge. Test question: if interest rates go up, 

do you know which way bond prices go? Seven in ten didn't get the right 

answer in a 2001 survey by American Century Investments. Yet anyone investing in 

bonds or bond mutual funds had better know the answer. Americans scored an

average of 67 percent on tests of knowledge of financial management principles 

conducted by Bankrate.com and the Federal Reserve. 

5. Take personal responsibility. Too often people simply hand over management 

of their finances to financial professionals, stockbrokers, accountants, 

insurance agents, attorneys, financial planners without staying involved. But

the more involved and knowledgeable you are about your own finances, the better 

they can help you meet your personal goals. And unfortunately, some hucksters 

take advantage of peoples ignorance and lack of involvement. 

Be involved,this is your money for your life.

6. Don't kid yourself. Financial overconfidence is another reason many 

families get into trouble. This became glaringly clear in the late 1990s when 

do-it-yourselfers overloaded on company stock or sank all their investment funds 

into high tech stocks, only to see their portfolios decimated from 2000 through 

2002. 

In another display of overconfidence, a third of the workers surveyed in 2004 

by the Employee Benefit Research Institute (EBRI) and the American Savings 

Council (ASEC) concede that they haven't saved anything for retirement, yet 

nearly half believe they'll have enough by retirement time. And only 8 percent

of current workers think they'll need about the same amount of post-retirement 

income as their pre-retirement income despite the fact that 39 percent of 

current retirees in the survey say they are spending as much as they did before

they retired and 13 percent say their income needs are higher.

Life is full of financial potholes. Those who avoid them are well-trained 

drivers who pay attention to the road to their financial success.

This column is produced by the Financial Planning Association, the membership organization for the financial planning 

 

 

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