How to avoid the 10 biggest financial mistakes people make and set yourself up for a successful 2022

You want to start the new year out right – but not sure where to start? It can feel a little bit overwhelming when you start to take those first steps in your financial planning. But we’re here to help make it a little bit easier for you by listing 10 helpful tips that help cover some of the things you should know!

1. Not having a financial plan

Starting things off with the obvious, and that’s making sure you actually have a plan in place. Your financial future depends on the decisions you make now, not later. Set aside enough time to allow you to plan everything out, ask yourself questions, figure out what you are wanting to do. Make planning your finances the priority. Your future self will thank you!

2. Not having a budget

It might not seem like a big deal at the time but picking up that regular morning coffee or having lunch out with friends – dollar by dollar it starts to add up.

A big part of your financial plan should be making sure you have a budget. The first thing you need to figure out is where you’re currently sitting between the two categories of in-flows (money in) and out-flows (money out). Figure out things like what you spent money on in the last 3 months by looking at things like your bank statements and old receipts - as well as looking at the costs of monthly expenses like your power, or insurance.

Once you’ve gathered all this information you can then neatly allocate things into “Monthly Income” and “Monthly Spending”. Make sure to factor in all the details, sometimes smaller expenses can sneak up on you.

Setting a budget can be a little bit scary as it can feel restrictive. But just remember to keep things with your budget realistic so you’re still able to enjoy some things. Don’t worry about overspending a little in one day as it's over the longer term that matters when it comes to keeping on track. Just make sure to keep yourself accountable by doing regular checkups to see if you’re sticking to things!

You can read our blog that covers how to build a budget here.

3. Living beyond your mean

If you’re in a position where you are only paying the minimum due on your credit card/afterpay balance each month or if you’re struggling to keep up with mortgage payments it probably means you are in over your head.

Ideally, you should only take out what you can pay off at the end of each month. If you can’t pay it back in full, then you should at least make some contribution toward the outstanding balance (principal). And if you’re really struggling it might be best to stop using things like credit cards until you’ve got things under control.

The bottom line is, if you’re spending more money than you can afford, it means you are living beyond your means. If you see it happening in your own situation, take it as an opportunity to reassess things.

4. Paying off the wrong debt first

Nobody likes debt, but unfortunately for most, it’s a part of life. The big mistake some people make, however, is not prioritising it.

Look at any debt you have and what needs to be paid first, starting with the highest interest rates. Prioritising paying off credit cards with higher interest rates first is beneficial in saving you some money.

A good idea is to put everything on a list and pay the ones with the most priority, first. Though generally, the order you should pay them off is likely to be similar to the list below:

1. Credit cards
2. Overdraft
3. Personal Loans
4. Mortgage
5. Student Loan

In the case of something like a student loan where it’s interest-free (as long as you’re working in New Zealand), because it’s interest free, you should pay it off as slowly as you can.

5. Not having an emergency fund

An emergency fund is a really important thing to have – think of it as your “rainy day” fund. We recommend having at least three month’s worth of expenses saved and accessible for emergencies.

It can be hard to pull together, but it can be a total lifesaver when the unexpected happens. And you can think outside the box with your emergency fund, it doesn’t necessarily need to be cash in a bank account or term deposit, it can also be an overdraft or excess capacity on your mortgage. It all achieves the same thing.

6. Not investing/saving for retirement early

Retirement might seem like a long way off, but life has a way of throwing things at you, like buying a car or a house, raising a young family or repaying student loans. This is why most people don’t get around to thinking about retirement until they are in their 40s.

But the more you can stash away for retirement early in life, the easier it will be to achieve your KiwiSaver retirement goals, leaving you with more to enjoy.

For example; you could either start your KiwiSaver journey earlier at 30 years old and contribute 3% of your income or, start late at 50 years old where you’ll need to contribute 20% of your income to get to the same level of savings by the time you are 65. And I don’t know about you but, saving 3% is much easier than saving 20%.

7. Not understanding your risk appetite

A big part of investing is understanding risk and deciding what level of risk you feel comfortable with (your risk appetite). It’s also a key factor in determining what types of investments you should have, and what percentage each investment makes up in your overall investment portfolio. Once you understand your risk tolerance and where you are willing to take on risk, investing becomes a little bit easier.

So - if you need your money soon, you should be taking fewer risks. This means not investing in things like equities/shares that can be more volatile (instead investing in more bonds, term deposits, and cash) - because if the markets dip, you might not have time to wait for them to recover.

At the same time, if you can take more risk, you should. If you have a long investment horizon, you will be much better off investing in a managed fund returning 5-10% per year rather than leaving your hard-earned savings in the bank earning 1%. But keep in mind you should only do this if you can afford to take the extra risk.

8. Not enough diversification

Another important part of financial success is making sure you have a well-diversified portfolio. Doing this will lower the risk of your investments because not all asset categories (e.g., equities and bonds), industries, or companies move together. By investing in lots of different companies, across lots of different markets and sectors, means if a few do badly, they'll be offset by the others that do well.

A general rule of thumb is to have at least 10 different investments, ideally across 2 or 3 global markets (Like the US S&P 500 or the MSCI emerging markets). You can easily achieve this by using a managed fund – as it's a single fund that can have hundreds of investments from around the world!

9. Buying into investing hype/FOMO investing (and not having an investing strategy)

FOMO stands for ‘fear of missing out’. It’s when your friend tells you about that stock he invested in a few months ago, and how they have made a sweet return on it. This makes it hard to not want a piece of the action. You then follow this emotion by buying in on the investment idea rather than through a more disciplined traditional approach. This is FOMO investing.

So how can someone avoid getting swept up into the hype? For us, it comes down to a few key rules:

• Slow and steady wins the race – if you haven’t read up on the argument of passive investing vs active investing, check it out here
• Don’t confuse luck for smarts – meaning don’t confuse your short-term wins for a good long-term investing strategy. You might win the first time, maybe the second, and even the third, but if your returns are based on luck, chances are they won’t last forever
• Do your own research – don’t just take your friend's word for it (or if you do, expect that they could be wrong) and if you don’t understand it then it's usually best to stay away
• If you do decide to invest in something higher risk (like crypto or an individual company), at the very least make sure to only allocate a small percentage of your entire balanced investment portfolio, and only invest an amount you’re comfortable losing.

Keep in mind also that investors can also be like gamblers. Quick to talk about their wins and quicker to hide their losses. Before you blindly follow someone into a quick win, make sure you understand the whole story (I.e., Do your own research).

10. Believing you can beat the market

One of the biggest mistakes you can make as an investor is continually changing strategy and trying to time the market. Most retail investors end up underperforming the market as a result of believing they can beat the market. Even if you are lucky enough to find a fund that outperforms, it is very rare that it will continue to do so over a long period of time.

A Strategy might perform well in one set of market conditions, but often these are rare glimpses of sunshine — like your mate that might have had a good run at the casino. It’s incredibly rare that someone will outperform the market over time.

Investing can be nerve-racking, so make sure you choose an investment strategy and stick with it through both the market upturns and downturns. Time in the market always beats trying to time the market.

We hope this list has been helpful, we understand that keeping on top of your money can be daunting, but by better understanding your financial goals, you’ll be in a better position to stay on track as well making you feel more confident with your financial decisions!