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» June 2009: My Net Worth Update and Personal Finance Report

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» May 2009 – Current Net Worth and Personal Finance Report

Different people have different reasons for their financial actions — whether to save, invest, or to spend it all. But among the people I’ve talked to and given advice to, the following ten mistakes are the most common:

1. Indecision about money goals.

The key to having an effective and efficient financial plan is to have objectives and goals. This is where it all begins. Everyone has dreams. And our dreams prompt us to go a certain way and produce certain results. Through your dreams, your mind pictures what you want for your future. The first step is to write down your dreams na dput a deadline. Dreams with a deadline are goals. Let them be your financial goals.  If you give yourself one year to produce $1 million, your whole physiology will be looking at different ways to achieve your goal. If the goal is unreasonable, you may have to scale it down. So start with a dream. What is your dream? What do you want your money to do? Not knowing what you want your money to do will cause you to make unnecessary mistakes.

2. Not knowing how you spend

Where did all my money go? That’s a very common question because we tend to spend to our heart’s desire without considering where our money goes. A simple list of expenses with their categories, such as food, clothing, or shelter, will give you an idea of where your money goes. This is important because once you decide where you spend your money, you will know what percentage of your income goes to a particular expenditure. By knowing this, you can start juggling funds so that you can set aside more savings, and spend more on necessities, and less on luxuries.

3. Not knowing how much you’re worth

Knowing your net worth amounts to a simple a-b=c. Take your assets (what you own) and deduct your liabilities (what you owe) and you get your net worth. Your net worth is your mathematical starting point in calculating where your money should go based on your money goals and dreams. For example, your money goal is to make a net worth of $1 million after three years. Your starting point is your present net worth. For example, if it is $200,000, this means you have to increase your net worth by 400% to achieve your money goal.

4. Too many debts

This is self-explanatory. I’ve mentioned in my previous articles that along with debts, come interest rates. Aside from inflation and taxes, interest is one of the things up there on the list of money enemies. So keeping a lot of debts, especially with high interest rates, slows down, if not stops, your journey to financial independence.

5. Not enough life insurance

One of the worst things that can happen to an earning individual who has dependents is to be underinsured. In the event that you pass away, you leave a financial burden to your survivors. Without proper insurance coverage, their lives may end up a financial mess, without the dreams and goals you set for them. How much insurance will you need? Your personal situation will determine that. Your would need to consider how many people are depending on you, their ages, the length of time before they finish college, the debts you have to repay, and the taxes you have to pay. Remember, there are only two things sure in life. Death and taxes.

6. No financial records

Your financial records are like doctor’s file on you, or your child’s baby book, dentist’s records, or wills for lawyers. Without this vital information about you, it would be difficult to estimate and forecast what your finances will be in coming years. Setting aside your financial records is as easy as stamp collecting. There’s nothing to it. So get those records, such as, statements, receipts, invoices, bank books, credit cards, etc., and file each category. This will also help your accountant at the end of the year to complete your tax returns. Who knows? you may even unlock some important tax deductions and tax credits later on.

7. Sloppy investing

Investing should be your ally in fighting inflation. You invest your money, in order to outplace the rate of inflation that erodes your money’s buying power. However, not fully understanding the relation of risk and return may result on one’s depletion of investible funds. A lot of people have made many mistakes in investing as a result of going for high-risk, high-return investments, and get-rich-quick schemes. To learn more about the different kinds of investments and their risk/reward characteristics, we will be discussing the “investment pyramid” next time.

8. Accepting advice without questioning its wisdom

Finding the right financial adviser, or someone who could help you in formulating and implementing a plan to achieve your financial goals, involves the same process in finding your doctor, dentist, psychiatrist, etc. You have to shop around for one who thinks the same way as you do, but who can be objective enough to make recommendations which may not totally match yours, but would work towards your financial goals. You must be comfortable with this person, since financial planning and implementation is a long term activity and your adviser should be with you to guide you. In other words, it will require a long-term client-adviser relationship. Some people prefer their relatives as financial advisers, while others choose professionals. Whatever the case, be choosy. And don’t take anyone’s advice 100% of the time. In the end, it’s your future, your money, so it is your decision.

9. Wrong feelings about money

Money is not the root of all evil. The lack of money is the root of all evil.  Money in itself is just an object that will satisfy one’s wants and needs. Enough money to do this gives a person a sense of satisfaction. Making enough money and having a comfortable lifestyle is everybody’s goal and can be achieved through proper financial planning. The trouble is, some people don’t want to be rich because they feel guilty about it. They feel money is separating them from a spiritual life. But it’s not. Being wealthy actually gives you the chance to contribute more to your family, your community, society, your spiritual family, and more. So money helps you help others. If you think in these terms, you will not sabotage your own personal financial goals with feelings of guilt or other negative emotions.

10. Procastination

Procastination is basically postponing pain. But when you postpone the pain of devising and implementing your financial plan, you hurt your future because time does not stop. Be it any growth or development in any facet of your life, such as your relationships, career, or finances, not acting on your goals is the worst thing you can do because you will lose all of the above, if you don’t act on it. All this would be just information on paper. You have to act on your plan and act now.