Become financially fit this 2023: 5 money pitfalls you need to avoid

GIVEN today’s economy, consumers all have financial concerns. While worrying doesn’t solve much, having a plan to manage these challenges can help ease some of the stress.

Jed Velarde, an investing advocate of COL Financial, one of the country’s leading stockbrokers, shared five money traps to avoid and ways to spare consumers from serious financial worries.

His insights appeared on the latest issue of COL’s “Your Investing Journey” wherein experts share their tips on how to set one’s finances right and become financially fit this coming 2023.

1. Becoming a victim of lifestyle inflation

He said lifestyle inflation happens when you allow your spending to increase over time with your rising income and desire for a luxurious lifestyle. “It usually happens when your income is growing, but the amount you are able to save stays the same. While getting a raise or switching to a higher-paying job is undoubtedly a positive thing, not being mindful of how you spend your extra income can end up straining your finances in the future.”

He noted that lifestyle inflation is a real threat because it can cause your spending habits to spiral out of control.

This can lead people to spend more money than they actually have and make it more difficult to keep their finances on track.

The fix: Intentionally adjust your spending. Whenever you get an increase or additional income, be intentional and treat it as an opportunity to increase your capacity to save and invest. Implement a working budget and set up automatic savings. By tracking your expenses and sticking to a budget, you are less likely to allow your spending to get off track.

2. Forgetting to see the bigger picture

Short-termism refers to an excessive focus on short-term results at the expense of long-term value, he said. This is true for corporate reports as well as for our personal finances.

He recalled how the start of the pandemic affected the stock market. From the December 2019 PSEi of 7,815, it fell sharply to 4,623 at the start of the March 2020 lockdown. That’s a -40.8 percent just within a 3-month period only to recover to 6,583 or +42.4 percent by June 2020. Several ups and downs happen within the succeeding months thereafter that can really be disconcerting if you are just focused on a monthly view.

“Too much short-term thinking hinders our ability to think, plan and act in the long run and it can lead to irrational and counterproductive decisions. It’s easy for us to see how volatile the market has been for the last several months and lose sight of the big picture.”

3. Over-concentrating your investments

Over-concentrating your investments means investing in a few stocks only. While this is easier to monitor, it can create unnecessary risk. Failure to include a mixture of different types of investments with different levels of risk results in a lack of diversification. In the event of a market downtrend, over-concentrated portfolios risk suffering significant losses all at once, while diversified portfolios survive better over the long term.

The fix: Do not put all your eggs in one basket. He advised that having a properly diversified portfolio is the best defense against unexpected events that inevitably affect the financial markets. When you diversify, you spread across different types of assets and companies, preserving your capital and increasing your risk-adjusted returns.

4. Avoiding the stock market

It has been a very difficult season for investors. Stock markets have been very volatile, so it’s very easy to just pack everything up and totally avoid the stock market. However, Velarde noted that “we need to remember that panicking is not an investing strategy. Successful investing has always been about clear thinking and controlling your emotions. Being disciplined in your investing helps a lot in navigating volatile environments.”

5. Delaying your financial learning

For Velarde, it’s important to have open and honest conversations about money. Learning how to handle our finances should be one of our fundamental goals. “Financial illiteracy is costly to people and society as it prohibits us from becoming productive members of our country.

A lack of financial knowledge can lead to large amounts of debt and poor financial decisions. You don’t have to be an expert in finance to manage your money in a responsible way, but always keep in mind that you have the responsibility to own your learning.”