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Leaking money: What are the common financial mistakes and how do you avoid them?
Experts share more on common pitfalls, including prioritising convenience over cost, and offer advice
While the amount may seem small at first, consistently choosing convenience over cost can impact your savings.
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Kareyst Lin, Content STudio
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Are you saving more as your earnings grow?
If your answer is no, it could be a sign of “lifestyle creep”, where your spending rises in proportion to your income.
This often involves choosing convenience over cost. For example, taking a taxi to work to get more sleep in the morning, or opting for food delivery instead of having lunch at a more affordable hawker centre nearby, says Ms Isabelle Tan, director of sales, financial services, Summit Planners Dunn & Partners.
Summit Planners Dunn & Partners is an authorised representative of Manulife Financial Advisers.
Many people fall into this trap thinking that they are “saving a bit of time”, she adds, but expenses can add up quickly.
“When you prioritise convenience over having a good budget, you will find that at the end of the month, you actually ‘lose’ quite a lot of money,” Ms Tan, 40, says.
“Avoiding ‘lifestyle creep’ takes conscious effort, and being more mindful of your spending habits is a great start,” she adds.
Ms Tan and her colleague, Ms Tiffany Kang, who is also a director of sales, financial services, at Summit Planners Dunn & Partners, share more on common financial mistakes that people make, and offer tips to avoid them.
Mistake #1: Not paying credit card bills in full and on time
Paying credit card interest is a common money leak, which can add up to big bucks over time. “Make it a rule for yourself to always pay your credit card loans on time,” says Ms Kang, 35.
Delaying credit card payments or making only the minimum payment can quickly snowball into a larger debt and make it harder to pay off.
On the other hand, making timely payments in full helps you avoid incurring high-interest charges while improving your credit score, says Ms Kang. A good credit score is crucial for future loans and credit applications.
Another pitfall to avoid is instalment plans. “It may seem convenient to pay for big-ticket items in instalments, but paying for purchases in full – with funds you already own – is a good financial habit to cultivate.” Ms Kang says.
Mistake #2: Not saving for rainy days
We can never anticipate what life will bring, but Ms Tan believes that a core principle in financial planning is to be prepared for the unexpected.
Before embarking on any investment ventures, Ms Tan ensures that her clients have at least six months worth of income set aside as emergency funds.
“Should there be retrenchment or a sudden job change, this rainy day fund acts as a buffer to help them tide through the tough times.
“Knowing that they have this amount of money set aside will also provide them with a peace of mind and help reduce their stress.”
Mistake #3: Delaying investments
When it comes to investing, time is your best friend. Ms Tan advises: “Once you have your emergency funds sorted out, it’s ideal to start investing as soon as you can.”
The most significant benefit of investing early is the power of compound interest, where the interest earned from your investments is reinvested, resulting in even more interest earned. “This way, you can achieve your financial goals using the least amount of money over a more extended period of time,” Ms Tan says.
She also shares a simple technique for managing monthly cash flow. When you receive your salary, Ms Tan suggests “paying yourself first” by setting aside 20 per cent of your income for long-term financial goals such as retirement.
“You can then use the remaining income to pay bills, expenses, and luxuries like travel,” she adds.
Mistake #4: Not having adequate insurance
Growing your money through investments is an attractive prospect, and many may be tempted to jump right into it and neglect insurance.
But Ms Kang stresses that having adequate insurance coverage is just as important when it comes to financial planning. She shares the basic policies that everyone should have:
- Life insurance, which covers death, terminal illness and permanent disability
- Hospitalisation plan, which reimburses your medical expenses, treatment bills, and hospitalisation costs
- Personal accident plan, which covers your medical expenses and loss of income that arise from an accident
- Critical illness plans, which typically provide a lump sum payout if you are diagnosed with a critical illness, such as major cancer, stroke, and heart attack
According to the latest Manulife Asia Care Survey 2023 published in March, nearly half (49 per cent) of Singapore residents are concerned about the cost of treatment for serious illnesses.
About 42 per cent worry about losing their income or job if they fall seriously ill.
Conducted between late December 2022 and early January 2023, the Manulife study polled 1,037 Singapore residents. It covered a total of 7,224 respondents aged between 25 and 60 in seven markets across Asia.
How can we ensure that our insurance coverage is enough to tide us through health scares? Ms Kang shares a simple rule of thumb for critical illness coverage: “Be insured for at least five times your annual income.”
For patients who are diagnosed with late-stage critical illness such as cancer, they will probably not be able to work for a long time, she explains.
Mistake #5: Not reviewing your plans regularly
Having holistic financial planning is the basis of financial success.
But how do we know our financial framework is well-rounded? Ms Tan says: “It should ensure that even if you are sick, injured, or retired, you can live the way you want to – without having to burden another person financially.
“You want to ensure that you don’t have to live beneath your means, or worry about money running out.”
Ms Kang emphasises that a financial review should be done at least once a year.
Our priorities evolve as we go through life, and it’s important to adjust our financial plans regularly to meet these changing needs. “At every stage, you want to make sure there is enough emergency cash and insurance coverage as your net worth increases,” she says.
For instance, a young adult earning $5,000 a month may require critical illness coverage of approximately $240,000, which is equivalent to four years of their annual income.
“But a few years down the road, when you are earning up to $10,000 a month, your insurance coverage should also increase in proportion,” Ms Kang says.
This is the third of a nine-part series titled “Your wealth and well-being”, in partnership with Manulife Singapore.
