We all have financial blindspots that threaten our retirement planning and what you can’t see can hurt you.
Two days ago, I tripped on a step and fell — hard. I’m a bit banged up, but I’m lucky that the damage is not worse.
Walking from dinner with friends to catch an Uber, I didn’t notice the half-step in front of me. When I tripped, I launched forward and solidly landed on brick stairs.
I was dazed. I sat on the ground for a bit, and my friends helped me stand up. Their eyes were as large as saucers. By the looks on their faces, I realized this could have been a “Million Dollar Baby” fall. (If you haven’t seen the movie, be sure to put it on your list.)
This “mini step” was in my blind spot. Since I was focusing on the larger staircase ahead of me, I didn’t see the smaller step.
We all have these blind spots in our lives, too — areas we are either completely unaware of or we simply ignore. When blind spots are financial, they can work against us, unintentionally sabotaging our good efforts to make progress with our money.
What can we do about them? Go looking for them! Be proactive.
In my work as a financial planner, I’m keenly aware of my clients’ possible blind spots in their attitudes about money. I recommend exploring each of these to see if they pertain to you.
Here are five common money blind spots that could be tripping you up and sabotaging your retirement:
Focusing on the small things while ignoring the big ones.
A client of mine used to scrimp and save, clipping coupons and shopping at discount grocery stores to save money. At the same time, her husband was trading their joint brokerage account buying stocks on margin and investing in high-flying penny stocks (essentially gambling rather than investing).
Even though she was on the account, she wasn’t monitoring it. When the stock market turned, they lost hundreds of thousands of dollars. Though being thrifty at the grocery store is helpful, she needed to keep her eye on her investments — the big money — also.
Financial Planner Tip: Know where your money is and how it’s invested. Review your overall finances once a year, at a minimum. Use an expert to give you a second opinion on your financial plan. If you don’t have a financial planner, find one!
Some resources are Let’s Make a Plan.org (where you can find a Certified Financial Planner™ professional) and NAPFA.org (for fee-only planners).
Assuming your future finances will get easier.
Many people assume setting aside funds to save will become magically easier in the future. “I’ll start saving and investing when I get a raise/when my bonus comes through/when my credit cards are paid off” is a common refrain. But the future comes with its own set of challenges.
We don’t actually know what the future holds — it could be even more challenging than today. Your expenses could be higher, or you may not get a promotion or the raise you were counting on. Even if you can only save a small amount right now, do it.
Start saving in your 401(k) or retirement plan now and set up auto-escalation so your contribution increases by 1% each year. Schedule an automatic transfer from checking to savings with an amount you know works, and then increase it when you can.
Financial Planner Tip: Prioritize savings and investing today — no matter the amount and no matter the circumstances. What matters most is working toward your goals today and not assuming that it will somehow be easier in the future.
Not preparing for regular expenses that come at irregular times.
Depending on your state, property taxes are due in the fall and spring, and every April, income taxes are due. A bill for tuition for private school or college arrives every semester. Every summer, you will probably want to take a vacation.
We know these expenses are coming, but since they don’t come out of our budgets monthly, they can throw us off.
Instead of stressing about expenses that come in a lump sum at irregular intervals, add them up and divide by 12 months. Then, put that monthly amount in savings, earmarked for the specific expense. Instantly you have a regular monthly expense instead of a surprise down the road.
Financial Planner Tip: Set up a separate savings account just for these items. Call it your “off limits” account and only tap into it when the expenses hit. Your emergency fund is still for actual emergencies.
Trying to fix everything at once.
When you feel like you are behind, you want to get on track right away. But sometimes, “all in” doesn’t work. For example, one of my clients who was committed to paying off her credit cards every month was always borrowing from her 401(k).
She had the right idea but took it to the extreme. She had an automatic transfer from her paycheck to a savings account, and she saved the maximum in her 401(k) up to the company match. Since her company matched Employee Stock Purchase Plan purchases, she contributed the max there, too.
Because she was doing them all at once, she didn’t realize that she wasn’t leaving herself enough money to live on. She thought she was doing everything right! As a result, she was frequently raiding her savings and borrowing from her 401(k).
A simple fix for her was to pare the contribution amounts down to something reasonable, but keeping the automatic transfers going. Then she set reminders at 6-month intervals to increase them gradually.
Financial Planner Tip: Develop savings habits that stick for the long term by starting with amounts you know you can afford. Then set up an automatic investing schedule. Gradually increase your contributions rather than attempting to get to the maximum immediately.
The gap between perceived spending and actual spending.
In order to get ahead financially, you need to live below your means and invest for your future. Yet, often we aren’t aware of how much we are actually spending.
When I first started tracking my spending, I was stunned at the amount I spent going to lunch with colleagues and friends. I switched it up and invited my friends to go for a walk around the park at the end of the day or hit the Second Saturday Art Walk instead.
These free events saved me over $1,000 a year, which I was able to invest instead. The time spent doing activities with friends actually deepened the friendships instead of taking away from them.
Financial Planner Tip: Track your spending so you know where your money goes. Use one of the many budgeting software programs out there such as Mint.com or something your bank provides.
Trim spending in areas that aren’t important to you, or come up with alternative ideas that are less expensive.
Do any of these hit a nerve? If so, take a good hard look at what used to be your blind spot, and you may really turn your finances around.