Everyone has some level of financial blind spots. These areas may be overlooking important information or not having a clear understanding about a topic. To build a strong financial foundation it’s important to identify and address these financial blind spots. This will help you make informed decisions about your finances and reach your financial goals. Below are steps that you can take to see through your financial blind spots and gain a better understanding of your financial situation.
Start Identifying Your Current Financial Blind Spots By Creating a Budget and Tracking Your Expenses
The most important place to start to take control of your financial blind spots is to identify your current financial situation. The easiest place to start is to create a budget and track your expenses. It can help you understand how much money you are making after tax every month and how much you are spending every month.
By creating a budget, you can identify areas where you may be overspending and make adjustments to your spending habits. You can also identify if the income you’re making is too low for the lifestyle you want to live. If you know you don’t have the patience to track every single expense, you can use an app like Mint that will track everything for you once you link your accounts. By taking the time to identify your current financial situation, you can begin to develop an understanding of your financial blind spots and take action to address them.
Make A List of Your Financial Goals and Prioritize Them
The next step is to identify your financial goals. What do you want to achieve in the short, medium, and long-term? Potential goals could be paying off high-interest debt, saving for a downpayment, building an emergency fund, investing for retirement, or saving more money. Once you have your list of goals, prioritize them. It doesn’t mean you can’t work on multiple financial goals at once, but the top focus should be your first goal, and then less money should go toward the second goal. Be realistic about what you can achieve in the short-term with your current income and expenses. Likely, short-term sacrifices will have to be made to achieve future goals.
Comparing Yourself to Others
Comparing yourself to others when it comes to finances can be a potential financial blind spot that many people fall into. It is easy to feel jealousy when you see someone taking luxury vacations, have a nice house or nice car. You may want to live that same lifestyle and start living that lifestyle that you can’t yet afford. However, it is essential to remember that everyone’s financial situation is unique and often not what it appears to be. Comparing yourself to others can be detrimental to your financial well-being and financial goals.
It is always best to focus on your own financial goals, understand the lifestyle you can afford and develop a realistic budget. At the same time, you can work on growing your income so that if your financial goals do include things that others around you have, you can afford them. It is always best to work towards building a secure financial future that is tailored to your individual needs and circumstances, and not what others around you have.
Review Your Investment Portfolio And Make Sure It Aligns With Your Risk Tolerance and Goals
It’s important to review your investment portfolio and ensure it aligns to your risk tolerance and goals. An annual review or review when you have a big life change, like a child being born or nearing retirement, will help with this. Your risk tolerance and investment goals will change over time, and these reviews will help ensure it stays in line with your current needs and objectives. Consider your financial situation, investment experience, your age and your time horizon. For example, if you like taking big risks but are near retirement a more conservative approach may make sense. If you are risk-adverse but have a long time horizon an ETF that tracks the market so you can set it and forget it may make more sense.
Stay Informed About Financial News And Trends And Continue To Educate Yourself About Personal Finance
It’s important to stay informed about financial news and trends. One financial blind spot is not being aware of what’s changing around you and potentially leaving money on the table or increasing risk in your financial plan. For example, recently there have been a lot of layoffs in the technology sector. If you work in the tech sector, you may want to consider putting extra in your emergency fund. Another example is changing tax laws. This year, in 2023, the Roth 401k limit increased to $66,000. Depending on your financial situation, this higher limit could be something you’ll want to take advantage of.
Focusing Too Much on Cutting Expenses and Not Enough on Growing Income
While being frugal is an important aspect of managing your finances, focusing too much on cutting expenses can sometimes be counterproductive. You can only cut your expenses so much, whereas there is no limit on how much money you can make. Increasing your income can have a more significant impact on your financial situation than simply cutting expenses. By increasing your income, you can increase your savings rate, pay off debt more quickly, and reach your financial goals faster.
There are many ways to increase your income. This includes investing in yourself to land a higher paying job, negotiating a raise, starting a side hustle or passive investing. While increasing your income can require more effort than cutting expenses, it will ultimately provide you with greater financial flexibility and stability.
Spending More Than You Make
Spending more than you make is a significant financial blind spot that can lead to debt and hurt your progress toward achieving your financial goals. Over time, the cycle of spending more than you make will put you further and further from achieving financial independence.
To stop the cycle of spending more than you make, it’s crucial to create a budget and rein in your expenses. In the short term, this will likely be painful as you will not be living the lifestyle that you were. You’ll have to stay in more, cut down vacations, significantly reduce your shopping, and potentially even downsize your car or apartment. The sooner you can see through this financial blind spot, the less drastic of measures you’ll have to take.
Buying Things You Don’t Need Because They are On Sale
Buying things you don’t need because they are on sale is a common spending habit. It may seem like a good idea to take advantage of a sale, but if you don’t need it, you’re actually not saving money. To avoid buying things you don’t need, it’s essential you recognize that this is one of your financial blind spots. If you buy clothing because it’s on sale, create a list of clothing and accessories you actually need. If the item isn’t on that list, don’t buy it. Another strategy is to give yourself a waiting period before making any non-essential purchases. This can help you avoid impulse buys and ensure that you’re making informed decisions about your spending.
Another common financial blind spot is buying multiple of something because they were on sale instead of buying one of that thing you really like. For example, buying 3 shirts because they’re on sale for $10 instead of buying the shirt you really like that’s $30. You only needed one, you spent the same amount of money and yet now you have 3 shirts that you like less than the one you wanted. This is a hard cycle to break, and recognizing this financial blind spot may not save you money, but you’ll end up spending money on what you actually enjoy.
Consider Connecting with A Financial Advisor or Professional
Today, there is a lot of information online to help educate yourself about your finances. But, sometimes you need the help of a professional. A financial advisor or planner can provide you with a professional perspective on your finances, helping you make informed decisions and create a personalized financial plan that is tailored to your unique needs and goals.
Behavior experts at Cambridge University found that by age 7 most children understand what it means to earn money and what income is and that money can be exchanged for goods. Your financial blind spots may be deeply rooted in what you were taught about money and how you’ve observed people handle money for decades. If you have an unhealthy relationship with money, a therapist may also be able to help you better understand your overspending, or underspending.
Financial Blind Spots Summary
Seeing through your financial blind spots is critical for achieving your long term financial goals and financial independence. Financial blind spots can be anything from spending habits and poor budgeting to not aligning your investment strategies with your risk tolerance and financial goals. Identifying and addressing your financial blind spots is essential to achieving your long term goals and financial stability. It’s important to evaluate your financial situation at least once a year because things change and it’s important your finances and financial goals align to those changes. By recognizing your financial blind spots, you can improve your financial stability and achieve financial independence.