As human beings, we are all inherently emotional creatures. It’s one of the most beautiful parts of life that we feel so intensely in response to all kinds of different stimuli, but it also means we can find it hard to make rational decisions all the time.

This is especially the case when you’re managing your wealth. It can be incredibly difficult to always choose the logical route and avoid common mistakes that many of us can fall victim to.

Sometimes, it doesn’t even matter if you are highly financially aware. Even if you are meticulous and take diligent care of your finances, you can still inadvertently fall into the same emotional traps that lead you to make less effective decisions with your wealth.

Fortunately, being aware of these pitfalls can make all the difference. Knowing that these potential stumbling blocks exist on your path toward your long-term financial goals can help you navigate them and ensure you remain on track.

So, read on to find out about three of these traps, and how to avoid them.

1. Failing to set a savings goal

Failing to set a specific savings goal is a common mistake, and one that you might make because you’re concerned about overspending.

Certainly, overspending your wealth is a danger. If your expenditure exceeds your income, you will almost certainly run out of money in the long run.

But, saving too much because you don’t have a set savings goal can be just as much a risk. If you strive to save an unknown amount for an unknown purpose, you’ll never know how much is “enough”, and might end up over saving your wealth and not enjoying it as much as you could do.

Instead, it can be sensible to consider your goals. That way, you know how much you really need to set aside in savings. Then, you can use the rest of your wealth as you see fit.

You might want to split these goals down into short-, medium-, and long-term. For example, short-term goals might revolve around what you want to achieve in the next year, whether that’s topping up your emergency fund so it is sufficient in the event that you lose your income, or saving for a big holiday or trip you know you have coming up.

Medium-term goals might be those that are happening in the next five years, and potentially even up to 10 years. This could be moving to your dream home, or perhaps saving towards a child or grandchild’s education.

Finally, long-term goals are those that you’ll look to achieve in more than 10 years. In particular, this could involve your retirement and the type of lifestyle you’d like to live when you get there.

Knowing that you have these goals can help focus how you save your wealth so that you enjoy your lifestyle, rather than simply saving for saving’s sake because you’re concerned that you might run out of money in future.

2. Not noticing lifestyle creep

Conversely to saving too much and not enjoying your wealth in the way that you could, it’s also important to keep an eye out for the phenomenon of “lifestyle creep”.

Lifestyle creep describes the gradual process in which your outgoings slowly increase over time in line with your income.

To understand this practically, imagine the type of clothing you buy when you’re in your 20s. You might choose cheaper brands because it’s more affordable within the confines of your more limited budget.

Then, in your 30s when you’ve progressed in your career, you might go to slightly more expensive brands because your income has risen, and so you want to spend it on better quality, higher-end clothing.

By the time you’re in your 50s and at your peak stage of wealth accumulation, you might have developed a taste for the finer things, and exclusively purchase clothes from luxury brands.

This process is very natural and can happen across all areas of your finances. It’s often so gradual that you barely notice until you take a step back and reassess your budget.

There’s nothing inherently wrong with lifestyle creep – it’s important to enjoy the wealth you earn, after all. However, it’s key to also increase your savings and investments in line with your income over time.

To do so, it can again be useful to budget according to your goals, as explained previously. That way, you’ll continually save an appropriate amount toward your targets, while also feeling comfortable to reap the rewards of your hard work and spend with confidence.

Alternatively, you could take a percentage-based approach. A common version of this is the “50/30/20” method, in which you allocate:

 

  • 50% of your income towards necessary expenses, such as bills and household expenditure
  • 30% toward savings and investments
  • 20% for discretionary spending on whatever you’d like.

 

By following this framework, you won’t need to worry about lifestyle creep as you’ll continually increase your savings as your expenditure rises too.

3. Not discussing your finances with your loved ones

It can be all too easy to get into the mindset that your money is yours and yours alone to manage. This might be because you think it will be awkward to discuss wealth with a partner, or you feel that money is a taboo topic for the dinner table.

Yet realistically, one of your biggest reasons for earning your wealth is to provide for you and your family. So, it makes perfect sense to discuss your finances openly with your loved ones.

For example, if you are married, in a civil partnership, or in a long-term relationship, you likely envisage your future with your partner. As a result, discussing your financial situation is a practical, logical way to check that you’re both saving and investing towards the same goals.

There could be financial benefits here, too. Doing so might help you ensure that you’re both making the most of all the allowances available to you, such as the pension Annual Allowance or ISA allowance, that could help you save tax-efficiently.

Similarly, discussing wealth with your children or grandchildren could be sensible. You might want to explain how important it is to save toward their future early on in their career, using your own experience to describe why this is so valuable.

Or, you could talk to them about your estate plan, explaining what wealth you have, where it is kept, and the steps they might want to take when you pass away.

By fostering a culture in which you all discuss wealth openly and honestly, you could achieve better outcomes for you and your family. Meanwhile, you could help your younger loved ones to avoid some of the mistakes you might have made on your own financial journey.

Get in touch

If you’d like support managing your finances so you can steer clear of these emotional traps and pitfalls, we can help at Cordiner Wealth.

Email hello@cordinerwealth.co.uk or call 0113 262 1242 to speak to an experienced adviser today.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

The Financial Conduct Authority does not regulate estate planning or tax planning.