Four Common Financial Planning Mistakes

A financial advisor discussing retirement planning strategies with a client

Financial literacy is a critical life skill to possess, but a good portion of Americans seem to struggle with it. Only 36% of American households currently have a written financial plan[1] and around 30% of Americans are living from paycheck to paycheck.[2] Having a loose understanding of financial management can be detrimental to your wellbeing and have long-lasting consequences for your health and safety. It’s important to avoid mistakes in financial planning, and this article will outline common ones to aid you in the success of handling your finances.

Underestimating How Much Retirement Will Cost

Retirement in our golden years is the ultimate goal for most. We toil away at our jobs for decades with the expectation that one day, our hard work will pay off and we will be able to enjoy our retirement, financially secure and relaxed. That’s why it’s of paramount importance to have a solid understanding of just how much retirement will cost you. A common rule is to budget for at least 70% of your pre-retirement income after you retire.[3] It’s difficult to predict every possible scenario, but having a general idea of how long you will live (based on familial patterns) and what, if any can be predicted, medical conditions you may have, will also help. To know how far your money will go in retirement, consider meeting with a financial professional and asking for a scenario generator with the funds you have.

Not Investing

According to a recent Gallup poll, 39% of Americans don’t own stock.[4] These people may be missing out on higher rates of interest on their money. While it can be wise to keep cash you may need to be liquid in savings accounts instead of the stock market, the national average savings account yield is 0.55 APY.[5] If your stocks are returning more than that, you’re missing out on potential gains.

Failing to Save at All and Not Having an Emergency Fund

A Survey of Consumer Finances study found that almost half of American households had no savings in retirement accounts. [6]Saving can be hard, but it’s important to try to save anything, no matter how much. Building an emergency fund should be most people’s first steps when beginning to save. It’s generally recommended you try to save at least three to six months of monthly expenses in case of an emergency, but having anything in savings is a great start.

Excessive Spending

According to William Danko and Thomas Stanley, co-authors of The Millionaire Next Door, one key factor in the making of a millionaire is living below your means.[7] This might help you save as much as you can while you’re financially able.

Overspending and living above your means can negatively impact your life and leave you swimming in debt. Experienced financial professionals generally recommend the 50/30/20 rule, meaning you spend 50% of your income on necessities, 30% on wants, and 20% on saving or retirement.[8] Though these are just loose guidelines to live by, if your necessities like rent, insurance costs and groceries exceed 50% of your monthly income, you may be left with less money to spend on other things.

While there is no defined limit to how many credit cards you can have at one time, credit bureaus like Equifax generally recommend two to three credit cards at one time.[9] Having more than three credit cards often makes it difficult to keep up with monthly payments and overspending, if all of them are actively being used.

As a rule of thumb, you should always try to pay your credit card accounts on time each month and try to carry over a monthly balance as seldom as possible.

Financial planning and literacy are a major part of life, but it is one that people oftentimes get wrong. Knowing these common mistakes in financial planning may help you avoid them yourself. Ideally, this article provided insight into what to watch out for in your financial journey. Still struggling? Consider speaking with a professional.

The opinions contained in this material are those of the author and not a recommendation or solicitation to buy or sell investment products. This information is from sources believed to be reputable, but Cetera Advisor Networks LLC cannot guarantee or represent that it is accurate or complete. All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.

[1] “2024 Schwab Modern Wealth Survey Shows Increasing Financial Confidence from Generation to Generation and Younger Americans Investing at an Earlier Age.” Charles Schwab, 12 Jun 2024. https://pressroom.aboutschwab.com/press-releases/press-release/2024/2024-Schwab-Modern-Wealth-Survey-Shows-Increasing-Financial-Confidence-From-Generation-to-Generation-and-Younger-Americans-Investing-at-an-Earlier-Age/default.aspx. Accessed 15 Jan 2025.

[2] McNair, Kamaron. “Nearly half of Americans say they live paycheck to paycheck.” CNBC, 19 Nov 2024. https://www.cnbc.com/2024/11/19/bank-of-america-nearly-half-of-americans-live-paycheck-to-paycheck.html. Accessed 15 Jan 2025.

[3] Silva, Derek. “How to Make a Retirement Budget.” SmartAsset, 17 Dec 2024. https://smartasset.com/retirement/how-to-make-a-retirement-budget. Accessed 15 Jan 2025.

[4] “What Percentage of Americans Own Stock?” Gallup. 24 May 2023. https://news.gallup.com/poll/266807/percentage-americans-owns-stock.aspx. Accessed 15 Jan 2025.

[5] Goldberg, Matthew. “What is the average interest rate for savings accounts?” Bankrate, 16 Jan 2025. https://www.bankrate.com/banking/savings/average-savings-interest-rates/. Accessed 17 Jan 2025.

[6] “Nearly half of American households have no retirement savings.” USAFacts, 9 Nov 2023. https://usafacts.org/data-projects/retirement-savings. Accessed 15 Jan 2025.

[7] Stanley, Thomas, and Danko, William. “The Millionaire Next Door: The Surprising Secrets of America’s Wealthy.” 2016, Taylor Trade Publishing. Accessed 15 Jan 2025.

[8] “Budgeting basics: The 50-30-20 rule.” UNFCU, n.d. https://www.unfcu.org/financial-wellness/50-30-20-rule/. Accessed 15 Jan 2025.

[9] “How Many Credit Cards Should I Have?” Equifax, n.d. https://www.equifax.com/personal/education/credit-cards/articles/-/learn/how-many-credit-cards-should-i-have/. Accessed 15 Jan 2025.

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