Basically, they consist of the same old mistakes: underestimating expenses, overestimating income and failing to plan for unexpected costs.
But today I want to focus on long-term errors investors can make in their existing financial plan. It’s easy to do; after all, you’re juggling enough in your budget now, without having to think about what you’ll need in 15 years!
The fact is, every investor who is genuinely devoted to building a wealthy future needs to consider their entire lifetime when preparing a budget.
Here are 4 ways investors often fail to budget for their future – and how to avoid making these same mistakes yourself:
1. Preparing a budget with no goals
There’s no two ways about it: your future plans are what drives your budget now. If you haven’t worked out your two, five, 10 and 20 year plan yet… now’s the time to get cracking.
Without a clear road map to guide you, you won’t know the best way to allocate your money. You won’t know whether to save for a deposit, throw extra money into your mortgage, or spend some money improving a current property to increase its value.
Your goals drive your budget, so don’t make the mistake of drifting along aimlessly!
2. Being unaware of every expense when purchasing a property
This is a little bit different to ‘underestimating expenses’. This mistake is caused by failing to do your homework. Buying a property is a costly affair that involves legal fees, inspections, agent costs, bank charges, stamp duty, settlement fees, mortgage protection insurance… need I go on!
On top of those expenses, each property is unique and might need some money poured into it to bring it up to scratch. Estimating the costs of repairs or assuming you won’t need to make any changes to the home is a naive way to purchase a property. We’re talking about big dollars here, so you’ll need to know about every cent that asset is going to cost you.
3. Failing to factor in some help from the experts
The richest, wisest and smartest among us still go to experts for a little advice. A mistake often made by green investors, or old hats who get a little lazy, is to forego seeing a financial expert or mentor regularly, year after year. These professionals are an investment – a little bit of time and money spent on them could save you from a big fall later on. A mentorship program like ours at Real Wealth Australia pays absolute dividends in ensuring your investment strategy is successful.
Forgetting to increase the buffer as your portfolio grows
A buffer is an amount of money set aside to combat unexpected events. You’ll want enough in your buffer account to be able to support your property’s expenses for a length of time that you decide on, such as one year. The importance of this safety net can’t be stressed enough: it’s a financial lifeline if things turn sour and will help you avoid becoming financially vulnerable.
But what many investors fail to factor in is an increase to their buffer account. When you’re on property 3 and 4, a $10,000 buffer may not enough to support a portfolio of several assets. A big mistake is becoming complacent with your safety net, which could see you landing hard if circumstances take a sudden nosedive.
Remember that a budget is flexible and adaptive. Even if you already have a great budget in place but you have made some of these mistakes, don’t sweat it too much. Plan it out and make some changes, even if they’re only small at first.
Reconfigure your budget each time you hit your next financial goal, and don’t forget to factor in a few dollars to celebrate!