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Monday 3 June 2024

5 Crucial Money Tips Your Financial Planner Wishes You'd Follow.

 When it comes to managing personal finances, sometimes the best advice is the hardest to hear. Financial planners often provide recommendations that might initially seem counterintuitive or unwelcome. However, these insights are rooted in long-term financial stability and success. 

Here are five critical pieces of money advice from financial planners, based on insights from Business Insider, that no one ever wants to hear but everyone needs to consider.

  1. Don't Buy So Much House.

The Emotional vs. Financial Decision

Buying a home is an exceedingly emotional decision. For many, it symbolizes stability, security, and a significant milestone in life. However, this emotional weight often leads to financial missteps. Instead of basing the purchase on data and financial capacity, people let emotions drive them to buy more house than they can afford.

Setting a Budget

It’s crucial to set a budget and stick to it to avoid this pitfall. Financial planners typically recommend that your total annual housing costs, as well as mortgage payments, should not exceed 20% of your gross annual household income. This guideline helps ensure you maintain flexibility in other areas of your finances, allowing you to meet other important goals and priorities without overextending yourself.

Read more about budgeting: Mastering Your 2024 Finances: Understanding the 50-30-20 Rule for Financial Success

Long-Term Flexibility

By limiting housing expenses, you can preserve cash flow for other needs. Whether investing in your retirement, saving for your children's education, or simply having a financial cushion, keeping housing costs in check is essential for long-term financial health.

2. And Don't Assume Your House Is a Good Investment.

Your Home is a Utility, not an investment.

Many people view their home as an investment, expecting it to appreciate significantly over time. While it's true that home values generally rise, this perspective can be misleading. A primary residence doesn’t generate rental income and involves ongoing costs that often erode potential gains.

The Real Return on your Home.

Financial planners point out that the average real return on single-family homes is about 2% per year. This rate barely keeps pace with inflation and doesn’t account for the various costs of homeownership, such as maintenance, property taxes, and insurance.

Reinvestment Considerations

Moreover, when you sell your home, you usually need to reinvest the proceeds into another property. This cycle continues to tie up your equity in your living arrangements rather than allowing it to grow as a liquid investment might. Hence, while your home provides utility and stability, it's not the golden ticket to wealth that many assume.

3. Save More Than You Think You Need To.

The Uncertainty of the Future

One of the biggest problems in financial planning is the uncertainty of the future. Without a crystal ball to predict emergencies, lifestyle changes, or economic shifts, it's hard to pinpoint precisely how much you need to save.

Building a Safety Margin

To combat this uncertainty, financial planners advocate for saving more than you think you need. This extra cushion can help you handle unexpected expenses, take advantage of unforeseen opportunities, and incorporate new goals into your financial planning.

Practical Savings Tips

A standard guideline is to save 25% of your annual gross income. This savings rate creates a buffer that can provide peace of mind and financial flexibility. A high-yield savings account is an outstanding place to store your emergency fund, ensuring that you have accessible cash for sudden needs while earning a bit of interest.

4. Have a Backup Plan.

The Importance of Contingencies

No one likes to think about worst-case scenarios, but having a backup plan is a cornerstone of sound financial planning. Life is unpredictable, and financial setbacks can occur at any time. Having multiple levels of safety nets can protect you from severe financial distress.

Ways to Build a Backup Plan

Building a solid backup plan involves several strategies. Besides saving more than you need, maintain an emergency fund that provides a shield for at least six months of living expenses. Use conservative assumptions for income projections and overestimate your expenses in long-term plans.

Avoid Counting on Windfalls.

It's also wise not to rely on windfalls like bonuses, commissions, or inheritances. While these can be pleasant surprises, they shouldn't be the foundation of your financial security. By planning for the worst, you can guarantee stability even when things don't go as expected.

5. Stop Trying to Time the Market.

The Temptation of Market Timing.

The stock market's volatility can make it tempting to try to time your investments. Hindsight makes it seem easy to predict market highs and lows, but in reality, it's incredibly difficult to do consistently.

The Data on Market Timing.

Even professional investors need help to time the market accurately. Studies show that attempting to buy low and sell high often leads to missed opportunities and lower overall returns. The average investor tends to be unsuccessful in the market precisely because of these mistimed moves.

A Strategic Investment Plan.

Instead of trying to time the market, focus on building a diversified, strategic investment plan and sticking to it regardless of market fluctuations. Regularly contribute to your investments and rebalance your portfolio as needed but avoid the temptation to make substantial changes based on short-term market movements.

Long-Term Success.

This disciplined approach might not provide the thrill of winning big on a single stock pick but leads to more reliable, long-term financial growth. Staying the course helps you capitalize on the market's overall upward trend without the stress and risk of trying to predict its every move.

Listening to financial advice that challenges our instincts or desires isn't easy, but it's often necessary for long-term financial health. You can build a stable and prosperous economic future by not overextending on housing, viewing homes realistically, saving more than expected, having robust backup plans, and avoiding market timing. Embrace these tough pieces of advice from financial planners, and you’ll be better prepared to navigate the complexities of personal finance and inflation.

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