Avoid These 5 Financial Planning Pitfalls

I’m not a gambler*, but I’ll bet you’ve seen plenty of financial advice that tells you what you should be doing. What about the mistakes to avoid? 

Note: As a comprehensive services client, we’ll help you proactively avoid them along the way. So for you, there’s no need to read on — unless you want to learn more so you can share these avoidance techniques with friends, colleagues, or family members, of course! If you’re pondering a money move, I encourage you to call, email, text, or find a time to talk it through.

In this blog, I’ll point out five prime financial planning pitfalls — and point you toward resources to steer you in the right direction. Keep in mind as you read that these are general mistakes to avoid. They don’t apply to everyone, and individual motivations might actually direct some folks toward these choices for all the right reasons. This may mean that they’re not pitfalls at all but, rather, stepping stones on the way to reaching financial or non-financial goals.

Pitfall 1: Going against the “order of financial operations.”

Whether you call it your emergency/opportunity fund or your uh-oh fund, cash in your high-yield savings account is your financial foundation. Sure, that foundation can crack and need repairs from time to time. It’s always best to fix them as soon as possible before major structural issues set in. Your emergency/opportunity fund is there to support you. Make a point to give it an inspection here and there so you can keep it in good shape.

Next, get the “free money!” If this isn’t self-explanatory, check out our adventure guide to plan contributions.

Then come IRAs and health savings accounts (HSAs). Backdoor Roths seem to be all the hype this year since that door might be closing, and you can get the details here. And don’t overlook a high-deductible health plan HDHP just because of the high deductible part. Check out the max out-of-pocket, too, then weigh your options and usage to see if you could achieve savings.

Pitfall 2: Paying down “cheap” debt.

Often, the motivation to pay down debt is a non-financial one. But not all debt is bad debt. If you do have “bad” debt, choose a paydown approach that works for you. 

Like I said about auto financing in 5 Reasons Why You’re Going to Love Savings Creep, “Even if you could buy your next vehicle with cash, you could also look at interest rates. If you find a rate that’s markedly lower than what you could reasonably expect to earn in your investment account, you might take the financing and invest beyond your down payment for a better overall return.” 

That’s “cheap” debt: When it’s likely that you’d pay a couple to a few — or more — percentage points less in interest on the debt than you could expect to earn if you invested the funds instead. And don’t forget about how keeping accounts open and making those on-time payments can positively affect your credit score. 

Pitfall 3: Putting too many of your goals on hold.

Many of us learned in 2020 and 2021 that we need to put life on hold sometimes. But don’t forget the latter half of “Work hard, play hard”! So plan that vacation while you can. There’s a reason why so many retirees plan vacations for their early retirement years and why more folks are now reaching for financial independence earlier in life, after all.

And this doesn’t just apply to the “wants” on your list. If you’re dreaming of buying a home, for example, you could miss out on building equity if you put the purchase off. 

You do work hard, and you deserve to enjoy the fruits of your labor. If you need a nudge, here’s a way to get S.M.A.R.T.-er with your money goals.

Pitfall 4: Letting lifestyle creep set in.

Whether you’ve built up a cash surplus, you just got promoted, or your available spending has seen a boost for another reason, it doesn’t mean that your available spending has to increase to match. Fall in love with savings creep instead. Check out that last link for the how-to. 

Pitfall 5: Not planning for what you’ll do in FI or retirement years.

Whether you’re just getting started on the path to financial independence or you’ve been reaching for retirement for years, factor in what you’ll do once you reach it. Don’t let that hard work turn into boredom. Worse, think about how you would feel if you reached that finish line only to find out that you have to go back to work to maintain your preretirement standard of living or support your newfound hobbies. 

Have you succumbed to one or more of these financial planning perils? It’s likely not too late for you to turn it around, and the best way to start is by giving yourself some grace. As humans, we all make mistakes. And we — that’s the royal FPFoCo we — are here to help you overcome it and move forward.

*  In the before-covid-pandemic times, I was known to blow a $20 bill playing the nickel or penny slots — or play it safe and cash out when I was up by $5 — once or twice a year for fun.