Recovering from financial mistakes could be very difficult but
How to avoid Financial mistakes?
We are not talking about world Finance or neither I am explaining what is finance or Financial market, we are talking about the basic finance mistakes which everyone does in their life.
1. Not saving for those rainy days/ Emergency Fund/ Not setting up an emergency fund
Everyone needs an emergency fund. There will many times sudden expenses will knock your wallet like you could lose your job, or somebody in the family may need medical care—you never know what lies ahead. You hadn’t planned for these expenses. How will you manage it now?
This is where an emergency fund comes handy. Not having one is also one of the reasons behind debt accumulation. Stashing away 3 to 6 months’ worth of expenses is ideal for an emergency fund, although, the best would be to have around 12 months’ worth of expenses parked.
“Even Chanakya in his book “Chanakya Neeti” has mentioned about Emergency Fund.”
Check this book for Top Finance mistakes and how to Recover
2. (a)Mixing insurance and investment
This, according to me is the BIGGEST MISTAKE that we as Indians are committing. We mix insurance with investment. The main purpose of getting insurance is to provide Financial Protection to overcome the losses when they occur and not the investment. Very few people understand the difference between term plan, endowment plan, Money back policy, etc.
(b) Purchasing LIC policies to save taxes
Instead of concentrating on wealth expansion, we Indians concentrate more on tax saving and therefore we invest in LIC and other such instruments that do not give any returns.
Moreover, This is because of financial illiteracy in the masses and marketing tactics of the insurance agents who succeed in selling them some rubbish plan which blocks up a good chunk of capital each year and yields barely a return of 4–5% (negative if adjusted against the inflation) These give 4–5.5% post-tax in your hand. Neither do they beat inflation in most years nor are they great for building wealth.
Note: This is an utter waste of your money. Our lack of financial knowledge is leveraged by these agents who sell the policies and make good commission on them.
3. Use of credit cards:
The biggest mistake of all, it tempts us to spend more. Credit cards make you spend money which you don’t have; to pay interests which you really don’t have to. Banks entice you to shop on credits by giving offers like save Rs. 1000, get cashback up to 20%, etc. However, you really don’t save anything. You only end up spending. Heavy interest is levied for non-payment of credit card bills and makes things worse. Some credit cards charge interest rates over 20% on a regular basis which is just insane.
Let me tell you my experience of carrying a credit card:
I have a salary of almost half of my credit limit on my card. Initially, I was too comfortable using the credit card, so much so that today a good portion of salary goes to this money-hungry credit card which I initially thought of as my friend. Matters get worse for some of my peers who have taken more than one credit card and have maxed out every single one of them.
4. Not buying a proper Health/medical insurance:
Well, one may never get to regret taking a low life cover but your dependents will surely feel the impact of this mistake. I have seen people losing out the lifetime savings just because they did not take medical insurance. One accident can shatter all financial dreams. Better be insured. Healthcare cost is rising and it is impossible to manage it without insurance.
5.Home Loan
Many people think buying a house is their smartest investment. They consider their home as an “ASSET” but they don’t know that their home is a liability rather than an asset because when you buy a home on loans then EMI burns a huge hole in your pocket. Basically, the bank owns the house and you pay rent to the bank in the form of EMI’s. Besides EMIs, insurance premiums and personal expenses eat into earnings quite quickly. I am sometimes surprised to see people with a seven-figure monthly salary finding it difficult to save. This is because they have major expenses such as penthouses, bungalows, yachts and so on. Since these are big-ticket items, servicing debt and maintaining these often result in a liquidity crunch even for affluent families
Therefore, a Home loan is not your investment. Investment is what gives you returns.
6. Investing in Fixed Deposits
Fixed Deposits give a nominal assured return of 7%. Thus, Indians think that they can put their money in an FD and think that all is well. However, this is not the end of the story. People tend to ignore two very important factor which affects their returns-INFLATION & TAX
Keep in mind that 7% is the nominal rate of return on FD. We need to pay 30% tax on our return. Thus, after deducting the tax, we are left with a 4.9% return. Now, the inflation rate in India is around 2%. So if we deduct that from 4.9%, we get just a 2.9% return on our FD.
7. Online Shopping & Useless Offers
Websites like “AMAZON”, “FLIPKART”, “MYNTRA” etc are becoming a trend these days. Like other people, Indians get mad too when they see a sale, discount, buy one and save a certain percentage on your second purchase or combo pack offers. Regardless of their need, they think, grabbing these offers are going to save them a lot. When you buy those offers considering discounts, you actually pay more. You are actually offered the slightest portion of the margin. We live in a myth that we are saving but actually, we are losing.
One has rightly said that
“If something costs $1000 and it is on sale for $750 and you decide to buy it, you did not save $250 but you spent $750.
8. Putting All Eggs In One Basket:
Let’s accept it; we Indians love Gold and Real estate. There’s nothing wrong with investing in land and precious metals. I have seen many people who only invest in either Gold or Real Estate. Some would just keep it in the locker, some would invest all the money in the stock market and at the end, such people experience losses just because they have not diversified their portfolio
Note: Have a well-diversified portfolio of assets and you’ll never regret it.
9. Lavish Weddings
No matter whose marriage it is, marriage is a complete waste of money. We buy Expensive outfits, we do destination wedding bla.. blah… blah…Thanks to our hypocritic society! I do not know, why most people want to spend more on their children’s marriage than on their education? People save their entire life just to spend all the money on random relatives who only bother about the food and arrangements.
Note: Instead of spending on weddings you must spend on the financial education of your child.
10. Buying Excessive Gold
Gold worth lakhs is kept in lockers only to be used once or twice a year. This is resulting in the money getting blocked and hence not getting any returns on it. Indians have Emotional attachment with gold, jewelry, etc. I think Gold is an unproductive asset it generates very low returns. Instead of buying gold we must invest in different instruments to get balanced returns.
11. Lifestyle
After Salary increases, the desire to increase your spending will increase just because your friends are living a certain lifestyle. Most people will want to spend their money on buying new things like New phones, Furniture, cars, designer goods, etc but because of this, you will lose the ability to generate more wealth.
Best principles of financial planning revolve around the following points
- Pay off all your debts before you spend more
- Make sure you spend less than what you will earn.
- Financial Discipline and Growth are co-related
- Most times value gets created over a long time.
- Keep long term savings safe, never fund your short term expenses from your long term savings.
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