As storm clouds gather over the economy again, avoid these five mistakes if you want to stay afloat.

Do you get the sense that all things money are about to become more challenging? Our euphoria at coming out of the global financial crisis appears to have been premature. Yet in Australia we are grappling with interest rates that are already back at 2008 levels. Meanwhile, reports abound that the cost of living - think electricity, child care and groceries - is headed higher.

So what kind of position are you in to cope? Are your finances shipshape or are you sailing headlong into trouble? Here are the five money mistakes that - particularly when conditions get rough - could sink your personal wealth.

Keeping up with the Joneses

You'll probably never catch them and it will do your finances the world of good to stop trying. After all, no sooner do you acquire the latest and greatest consumable than a new model renders it obsolete or a slightly different incarnation is released to tempt you - and yes, my finger is pointed firmly at Apple. Before you can say i-anything, there can be nothing left of a pay cheque to build wealth.

Spending more than you have

But it's even worse if your consumption means every month you slip further into the red. That means to secure your future you first need to earn enough to repay what you've spent in the past. So getting ahead becomes that much harder.

Coasting aimlessly along

If you are to resist the temptation to spend, spend, spend, however, you need good reason. What is it that you want your money - ultimately - to do for you? This could range all the way from a trip to Tasmania at the end of the year and a new kitchen in two years' time, to securing a comfortable retirement, complete with the requisite recreational vehicle to traverse the country.

The fun part is deciding on your goals, which should be divided into the short, medium and long term. The more challenging task is devising a plan to achieve them. But it's all about prioritising, setting a timeframe and then putting aside enough money from each pay before you have a chance to spend it - to get what you want when you want.

Just bear in mind in this process that if you blow all your dough as soon as you earn it, you'll have nothing left for the possibly 30 years after you retire. You need to stretch maybe 40 years of salary over, say, 70 years of spending.

Donating money to the bank

No goal-setting exercise is complete without consideration of probably your biggest debt: your mortgage. The interest you pay is swelling the bank's coffers and depleting yours. But by how much and for how long is within your control. Truly. By simply moving from the worst to the best deal, you can expect to shave percentage points off your rate. Because the savings are potentially so big, repaying debt is actually the best way to build wealth and once you have, you can invest the amount freed up to watch your finances progress in leaps and bounds.

Failing to think defensively

An oft-overlooked but vital part of financial management is protecting what you have. And if you think you have nothing, remember that your income is possibly your most important asset. To ensure your circumstances steadily improve rather than dramatically and unexpectedly take a turn for the worse, you need an emergency fund of more than three months' salary, income-protection insurance and life insurance sufficient to repay your debts. At the very least.

 

Nicole Pedersen-McKinnon
Money Masters
Sunday Age June 6 2010