Pitfalls to avoid in your finances

We can all manage our finances the way we see fit, but that doesn’t necessarily mean that all approaches are equally good. On the contrary! myLIFE takes a look at some of the errors frequently made and explains how these automatically undermine your financial situation. This should help you to avoid any future difficulties.

Don’t forget to set a budget

While most of us know how high our income is and where it comes from, far fewer of us know exactly how much of our disposable cash is spent and on what, with the exception of a few major items.

Whether driving or managing your finances, driving blind is likely to lead to a swift crash. Even if your income exceeds your expenditure, a certain degree of discipline is essential to managing your budget. This will help you identify areas for improvement and make better plans for the future, but will also allow you to deal with any personal financial crises more efficiently.

To find out more about this, visit our special “budget” section. This explains how to set a budget using the 50/30/20 rule and why it is important not to set a family budget that is too strict.

Don’t be a grasshopper, be an ant

As Aesop’s grasshopper discovered, it is exceedingly pleasant to sing all summer long, but it is painful to be without when winter comes along. Taking the approach of the grasshopper because “you only live once” is probably the worst philosophy possible in the eyes of your future self, who will have to deal with the choices you have made today. This is especially true if your economic situation deteriorates in the meantime.

Taking the approach of the grasshopper because “you only live once” is probably the worst philosophy possible in the eyes of your future self, who will have to deal with the choices you have made today.

If you want to be egotistical and live life to the full, that’s all well and good, but make sure you have the means to do so for a long time to come. If you always arrive at the end of the month having spent your last cent of your salary, your ability to enjoy life will be disrupted by the slightest unforeseen expense or any loss of income. If you want to gain financial freedom, you need to start preparing for the future. The first step is to establish some precautionary savings, which are easily accessible and will tide you over for at least 2-3 months if you hit a difficult patch – this will also reduce the risk of a downward spiral of over-indebtedness.

Don’t accumulate subscriptions

Subscriptions are easier to manage and cheaper if the service is really used, and are becoming increasingly widespread: gym, streaming platforms, online music services, apps, etc.

However, all of these subscriptions have a recurring cost, they generally tie you in for a certain period, and are often tacitly renewed if you don’t cancel them. Any money invested in these subscriptions brings you nothing on a financial level. Worse still, they can become very painful if you hit a difficult patch in your finances and it isn’t possible to cancel them without incurring charges.

Have a look at the total cost of all of these subscriptions today as a proportion of your monthly budget and decide whether they are all really necessary going forward.

Don’t go overboard with little treats

Don’t worry, we aren’t suggesting a ban on any purchases to treat yourself! However, it is important to recognise that it is often these little treats that contribute to major financial worries over the long term.

Do you really need that takeaway coffee and croissant from the service station on your way to work? Do you absolutely have to see the film that is only available on pay-per-view when there are dozens of others available to watch for free? Do you really need to order a pizza just because you fancy one, when your fridge is full of food?

None of these things is a big deal in itself, but it is important that they don’t become habits and that you realise that there is a heavy cost over the long term. For example, if all of these small items add up to EUR 40 per week, that means that over EUR 2,000 will have left your account by the end of the year when you may need this money to cover some major bill that you hadn’t expected. The decision is yours.

Don’t underestimate the fall in value of some purchases

Once you have got a grip on your small outgoings, it’s time to get started on the big-ticket items – starting with a new car. When weighing up your needs and desires, it’s often the desires that gain the upper hand, and this has a major financial impact.

If you can’t afford to pay in cash, maybe this indicates that you can’t afford the purchase without making yourself worse off.

Do you have enough money to buy the item you are considering, e.g. a car? If you can’t afford to pay in cash, maybe this indicates that you can’t afford the purchase without making yourself worse off. Is it really a good idea to pay interest on a loan to buy an asset whose value is going to fall dramatically over time? There is no problem with a car loan, providing it doesn’t mean that you are living above your means and, for example, buying a big SUV that will also weigh heavily on your budget in terms of maintenance and insurance costs.

If your means are limited, it is time to refocus on functionality for this type of purchase, for example, by choosing a vehicle with a lower real cost of ownership. Once again, think about your future self and ask yourself if they would be happy to assume the cost of your current choices.

Don’t spend too much on your property

This is easy to say, when property prices are still sky high in Luxembourg. But here again, the issue is making the right choices based on your situation and life goals. Many potential buyers look for the best possible property based on the maximum amount that they can borrow. This isn’t a good approach in financial terms.

It is much healthier to look for a property based solely on your present needs and life goals. This means you won’t be tempted to go for a three-bedroom home on the pretext that it’s within your budget, when a much less expensive two-bedroom place would suffice. Given the amounts at stake for this type of purchase, the difference can be enormous. The less expensive option will reduce your monthly repayments and will also be cheaper to maintain and run. The message is clear – stick to the size you need.

Don’t forget to plan for your retirement

It may still seem a long way off, but if you don’t make financial plans for your retirement, this could have major consequences for your quality of life when the time comes. If you want your money to work for you when you retire, you need to invest during your working life. The earlier you start, the more you benefit from the momentum of compound interest to build up a pretty sum of capital over time. We recommend discussing it with your banking adviser.

We are all subject to cognitive biases, which can influence our decisions without us realising it, unless we are on our guard.

Be aware of your cognitive biases

Nobody is fully objective when it comes to taking decisions, and this is particularly the case on financial matters. Worse still, we are all subject to cognitive biases, which can influence our decisions without us realising it, unless we are on our guard. It is key to understand how these work in order to guard against them. Interested in this topic? Take a look at the article, “Five behavioural tips on intelligent ways to save money” or our Special feature on behavioural finance.

Being aware of the errors likely to have a negative impact on our finances is already a step in the right direction. You can also seek expert help with tidying up your finances, which will earn you the recognition and gratitude of your future self, who will reap the benefits of the positive approaches you adopt today.