Financial literacy is lifelong learning. We’re always faced with new challenges on how to save, invest and manage our money. Mistakes can be made at any age, regardless of how savvy we are with our cash. Here are some of the most common ones we make at all stages of life.
20s: Not taking enough risks with investments and buying depreciating assets
Our twenties is usually when we land our first full-time job and start making our first regular salary. It can be a struggle to figure out how to manage all that money. Focussing on paying off debt and starting your long-term investments is smart.
But many young people make the mistake of not investing aggressively enough. When it comes to your retirement savings, you have more than 40 years until you will need that money. The saying “time is on your side,” has never been so true. Focus more on equities and index investing. For example, the average return for the S&P 500 over a 40 year period ending in 2016 was more than 11 per cent. Playing it safe with fixed income products in your 20s will not get you the same returns.
Your first full-time salary can also lead to a temptation to spend on things you may not have been able to afford before. You worked hard at university to land this job. But living above your means can set you up for lifelong financial obstacles. Stay away from buying depreciating assets, like a car or spending all your money on consumables like vacations and nights out with friends. Be aware of all your extra spending. Don’t start your career saddled in debt.
30s: Making education savings a priority over retirement and taking on too much debt
Your thirties are often considered crunch time with it comes to your finances. Many of us get married, buy our first home and have kids during this decade. You salary, which may have increased from your twenties, seems to be stretched to its limit with all these responsibilities.
It’s important not to lose sight of your savings goals. Retirement savings should remain your priority during this time, over saving for your kid’s education. Many parents feel guilty putting money away for themselves and not saving in their child’s education fund, but always remember, your children can take loans to fund their education, but you cannot borrow to fund your retirement.
With so many financial commitments it can be easy to get into debt. If you’re buying a house, make sure you stress-test your mortgage affordability. New mortgage rules mean banks will start doing this in January anyway. Make sure you can pay your mortgage as if it was 2 percentage points higher than the posted rate the bank has offered you. Take it a step further and pay your mortgage at that higher rate. This builds in insurance and helps you pay your mortgage faster.
40s: Failing to diversify investments to reflect your age and falling victim to lifestyle inflation
By the time you reach your forties, some of the financial pressures you felt in your thirties seems to be more manageable. Your mortgage is probably much lower and is closer to being paid off. You’ve probably been able to save some money in your children’s education fund.
If you have been socking away money in your retirement saving since your twenties you may be sitting on a substantial amount of money. Retirement is still twenty years away, but it’s important to make sure your investments reflect your risk tolerance and age. The last thing you want is to see your investments decrease in a market downturn leaving you worried if they will return enough by the time you retire. Talk to a financial advisor about building a smart safe investment portfolio.
At this stage, the temptation to upgrade to a bigger house or a better car can be strong. This phenomenon is called lifestyle inflation, where as soon as you are comfortable in the financial situation you are in you’re looking for ways to spend more. If your salary and family situation affords it, there is nothing wrong with moving into a bigger home or buying nice things. But make sure you can afford it, and that you’re doing it because you need it, not only because you want it.
50s: Not letting your kids be financially independent and forgetting to update your will
In your fifties, you’re most likely close to your top salary. You may also have paid off your mortgage and any other loans you accumulated over the last three decades. This newfound financial freedom can make it easier to want to spend money on others, especially your kids.
At this stage, it’s important to let your kids take on financial responsibility, and that can mean going into debt and making financial mistakes. Just because you can afford to fund their entire university education and help buy them their first home, doesn’t mean you necessarily should. Make sure you are doing it in a way that is not curbing their ability to be financially independent.
Having a will is an important part of a healthy financial plan. If you have not updated it in sometime this would be a good time to do so. Your assets have probably increased, you may have grandchildren you want to include. Taking time to update your will makes sure your assets are dealt with according to your wishes.
60s: Thinking the time to save is behind us and working until 65 when you could retire earlier
Getting closer to retirement can mean you start making some real plans with all that money you have saved in your retirement fund. At this stage, you may think saving is behind you. For the most part, this is true. But it’s still important to keep your short-term savings goals in check. Going on a holiday this summer? Makes sure you’re putting enough away now to spend later. Ahead of events like Christmas, start saving early to make sure you are not going into debt buying presents and holiday décor.
Most Canadians see 65 as retirement age. But for many who have been in their jobs longer than 30 years it may make sense to take retirement early. Talk to your HR department to see what early retirement would look like. In many cases, workers close to retirement are offered an incentive package to leave work a few years earlier. See if these options make financial sense for you.
70s+: Failing to stay up to date on financial literacy and letting your children handle the finances
Your seventies can a vulnerable time, especially if you’re recently widowed and handling finances on your own. In the years that you have been saving it’s important to know things have changed. There are new financial products, new ways to manage money and more efficient way to save. Take some time to keep your financial literacy skills up to date. A great resource to start with is ABC LifeLiteracy Canada.
For many older Canadians, it can be easy to let others take care of your finances. The federal government warns financial abuse of elders is on the rise, and the perpetrators are often a person’s children. Even if the people managing your finances do have your best interest in mind, it’s important to know how your money is being managed so you can make decisions for yourself. Before making any big financial decision, like selling a house, for example, gauge the opinion of those other than your own children.