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Wednesday, July 27, 2022

Top 5 Most Common Financial Mistakes To Avoid

Throughout the years in personal finance industry, here are some of the most common financial mistakes that I have seen. This is especially true for those that just started to work and finally get a taste of having money of their own. These financial mistakes often lead them into endless loop of living paycheck to paycheck, and an unforeseen circumstance can easily turn into disaster without any emergency fund. 

1. Overspending on Unnecessary Expenses

Overspending is the most typical scenario that I found when my clients filled in the Income and Expenses tracking sheet. They got to realized that even though it may not seems like a big amount when they order that bubble milk tea, or dinning out, or even those monthly subscription to movie streaming or audio streaming, eventually every little items add up. 

"Sedikit-sedikit lama-lama jadi bukit," this phrase is commonly used to encourage money saving. But like a double-edged sword, it works the same as to expenses too! So if you are living paycheck to paycheck or can barely save up any money, the first thing to do is to look into your expenses! 

Tips: Avoid or using lesser on physical cash. This is the best way to track on expenses. Then take a look at your bank account statement frequently, look at where are all those money go. Cut out those unnecessary expenses, especially those on subscription basis, such as gym membership (that you rarely go anyway), music services or video streaming (just wait for the ads), and some other subscriptions that you forgotten.

2. Paying the Minimum Amount for Credit Card

Should you use credit card or not is a highly debated topic. But let's face it honestly, the only reason for one to be paying the minimum amount every month is simply because he/she cannot afford to pay back in full and is living on borrowed money. 

"Bank lend you money" with 15% to 18% annual interest rate (some banks offer 8.88%) on your credit card bill. But when it is on the opposite side, where "you lend your money to bank", you are only getting less than 1% annual interest on saving account and 2-3% on fixed deposit. Isn't that crazy?

This is why banks always entice you with all the sign up offers and some even guarantee RM600 into your e-wallet or shopping vouchers. This could be also why you always hear bank staffs getting 6 months bonus! 🙊

So yes, if only you can afford and discipline to PAY IN FULL every month, use by all means to help track expenses and to earn all the cashbacks and points. Otherwise, stay away, no point using credit card as you ended up spending a lot more. Having said that, it doesn't mean you should not own a credit card as it can still be helpful for emergency use. 

3. Buying a New (Expensive) Car

This is especially true by borrowing money to buy a car and pay interest on a depreciating asset. Do you know, according to Malaysian Automotive Association (MAA), total passenger vehicles sold in 2020 was 480,971 and in 2021 was 452,663. For the first half of the year, total passenger vehicles sold up to June 2022 was 293,540, compared to first half of 2021 was 223,805. Despite MCO and all the complaints on increasing in prices, people are still buying new cars! 

Generally as a rule of thumb to gauge, if one unable to pay cash for a new car then it could also mean he/she cannot afford the car. After all, being able to get a car loan is not the same as being able to afford the car as there are other expenses incurred such as maintenance, petrol, toll, car insurance and road tax.

Regardless if you are buying a new car or used car, be sure to do all your homework. Cars are expensive and depreciating, so if you are buying more of a car than you need, the opportunity cost is missing out on saving or investing for other financial goals or even simply just paying off other debts.

4. Buying Too Expensive House  

Similarly to car, just because you can afford to get a house loan does not mean that you are able to afford with all the hidden costs! So when it comes to buying a house, bigger is not necessarily better. Unless you have a large family, buying a 4,000 sqft house will only mean more expensive maintenance and utilities. Oh, and also gotta clean a lot more spaces that you probably rarely use. 

Buying a house is like buying an appreciating asset. But unlike a car loan with tenure up to 9 years, housing loan can be a very very long commitment. Do you really want to commit to such a big and long dent in your monthly budget? 

5. Not Having a Financial Plan

All the 4 common financial mistake above are a result of not having a financial plan. When my client engaged me for comprehensive financial plan, the first step is always to gather all their information which include income, expenses, assets, liabilities and most importantly, their financial goals. 

Guess what? The most frequent scenario that I came across is that most people do not know their financial goals and they do not track their income and expenses (they do not know their current financial situation!). Surely you know how important it is to do goal setting and follow it thru!

Your financial future pretty much depends on what you do right now. Most people spend countless hours on binge-watching or scrolling through their social media feeds, but rarely anyone would spend a bit of time going through their personal finances. The reason behind that is that you do not know you need to do so or probably you know but you do not know where and how to start right? 

Start your comprehensive financial planning NOW!

The Bottom Line...

To avoid all these financial mistakes, start by monitoring all the little expenses that can add up rapidly and quietly, then move on to the big expenses. Having a budget would be the best solution so that it helps you to decide better before adding new debts to your long list of payments. 

One key takeaway from this article is to keep in mind that being able to make a payment isn't the same as being able to afford the purchase. Finally, developing a sound financial plan can better determine the success of your financial future! 

Any other financial mistake that you find it common but crucial to avoid? Let me know down below!

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