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Below, we have
identified some of the more common financial mistakes that lead to
economic hardship so that you can try to avoid them in 2011.

Not having a financial plan

Apart from maybe
winning the lottery, or inheriting a fortune, financial success doesn’t
just happen. Most people live from day to day adopting a “spend as you
go” lifestyle with no clear plan in place to save for specific future
events or protect their families from unforeseen circumstances. Are
there big financial decisions you need to make, like buying a house or
a car, paying your children’s school fees? If you don’t plan for such
events, you might not have the outcome you envisaged.

The adage “if you
fail to plan, you plan to fail” highlights the importance of having a
clearly defined plan or achievable goal in place that you can work
towards. You can’t just sit back and expect things to fall into place.
It’s your money; if you are not proactive about your finances, nobody
will do it for you. Even though you can’t predict the future, you can
be better prepared for it if you plan ahead.

Borrowing on behalf of someone else

A good friend asks
you to help them get a loan from their bank. You then accede to the
offer and borrow in your name on their behalf and sign off on the
dotted line. Your friend may have very good intentions at the time of
borrowing but if they should run into financial difficulty and fail to
pay you back, you are liable to pay the loan back in full.

If your friend or
relation couldn’t get a loan through a bank or other lender, there may
have been a good reason for the decline. Be very careful in considering
such a request if you are approached.

Not paying back money you owe

One of the worse
mistakes you can ever make is not paying back money that you owe. This
might be a large financial loan or a small personal loan from a
relative or friend. Ideally, you should not get into the habit of
borrowing but worse still is getting into the habit of not paying it
back on time or even at all. Eventually, it all comes back to haunt you
as no one will want to lend you money, even if it is just to tide you
over a difficult patch.

Don’t invest in what you don’t understand

What works for one
person may not work for another as each person’s risk profile, goals,
and circumstances, differ. In 2008, many people heard about the
possibility of borrowing to buy the latest “hot” stocks; many
un-informed investors jumped on the bandwagon without really
understanding margin investing and were left in debt.

Putting your money
in investment vehicles that you do not understand or getting involved
in some of those “get-rich-quick” scams can have devastating
consequences. Invest only in what you understand and try to make
financial decisions based on adequate research and advice from
experienced and tested professionals.

Ignoring the stock market

Even if you were
one of the thousands of people that got burnt during the stock market
crash, it is a big mistake is to ignore it completely. With some blue
chip stocks still selling at considerable discounts, it is an ideal
time to invest. If you have been scared away from the markets, at least
consider buying into a mutual fund. This way, your portfolio would be
more diversified than buying individual stocks and this reduces your
risk.

Be careful not to speculate; consider your risk appetite, your time horizon, and your goals before investing.

Not having adequate insurance

Most Nigerians are
under-insured. Imagine the number of people who do not have even third
party insurance in respect of their cars! Not having adequate insurance
in place can have devastating effect on your finances should you hit an
expensive car when you are at fault. The bill could run into hundreds
of thousands of naira. Yet, the simple payment of the annual premium
could help one avoid this.

Accidents do
happen. Nobody wants to be left paying expensive hospital bills or
witnessing a family unable to make ends meet because of the untimely
death of its primary breadwinner. Make sure your health insurance is up
to date and that you have adequate life insurance particularly if you
are the bread-winner of a young family.

Borrowing to buy a car that you can’t afford

Thousands of new
cars are sold each year, but very few buyers can actually afford to pay
cash for them. Remember that by borrowing money to buy a car, you are
paying interest on an asset that starts to lose value from the moment
you leave the car showroom. Of course, many people have no choice but
to take out a loan to buy a car. Some vehicles are very expensive to
buy, insure, fuel and maintain. If you need to buy a car and must
borrow to do so, consider buying one that is fuel-efficient and with
reasonable maintenance costs.

Likewise, avoid
buying a house that you can barely afford. It is great to have masses
of space but naturally, a large house requires significant expense in
terms of maintenance and utilities. Instead, identify a property that
is less than what the bank says you can afford. That way, your payments
will be manageable and you can continue to build your savings and
financial security.

Living above your means

Yes, of course
there is a thrill in getting behind the driver’s seat of your brand new
car and inhaling the new car smell, but living beyond your means can
put you into a precarious financial position. Trying to have someone
else’s lifestyle is a big mistake.

Many young people
believe they should be able to move straight into a perfect apartment
in a nice area with all the latest gadgets. This is a lifestyle that
you build up to and strive to achieve usually through the dint of
several years of hard work and savings.

Keeping up with the
Jones, or with your own parents who have been working and earning for
several years, is one of the most damaging things you can do for your
future financial security.

Putting money above everything else

While most people
don’t do enough towards achieving financial success, there are others
whose priorities have become so warped that money takes the first
position in their lives. Remember that money is simply a tool, a means
to an end, and should never be considered the end in itself.