In this article let’s talk about most common money mistakes that many of us keep repeating, some by ignorance and some by procrastination. Financial mistakes lead to financial disasters. This can simply be attributed to our negligence. Awareness can also be an issue with some of us. Here are the most common problems and their possible but very practical solutions-
Money Lying Idle
We Indians traditionally are conservative about money. We love to put away our money under mattresses, in almaris, in the kitchen ‘dabbas’ and what not!
This gives us an illusion of setting aside the money. But actually that makes us lose our money, as the money is sitting idle and is not working for you.
We often have substantial sums lying in Savings accounts or Current accounts. This amount does not earn great interest and hence is as good as idle.
Don’t let your money sit idle. It should work 24*7 for you. Pull out the amount from every possible place where it earns less than the inflation rate. (Currently it is around 4 to 5%). Invest this money at the places where it earns 1 to 2% more than the inflation rate. The possible avenues can be Arbitrage Funds (with better taxation), Ultrashort Term Funds etc.
As soon as someone starts making decent money, they start thinking of buying an apartment, car, expensive gadgets etc. But this buying is done on EMI. A trap for next 20-30 Years.
The asset is something that puts money in your pocket. There are many things that can be considered as an asset. These include things like real estate investments, Mutual Fund Units, Dividends from stocks, Business, etc.
Liability is something that takes money out of your pocket. Common liabilities include car loans, housing loans, unused subscriptions, and more. Liability which brings you cash flow can be a good liability but the one which takes money out of your pocket is a bad liability. Taking a loan for depreciating assets such as cars or bikes is a bad liability. Taking a loan for appreciating assets such as house, land, business is a good liability.
Poor usage of Credit Cards
Think about it- why do Credit Card Companies exist? It’s not because for people who use credit cards carefully; it’s for those of us who spend more than they can afford and end up paying a huge interest.
A credit card can be smartly used. We can use it to get up to 50 days interest-free loan. But never ever use it on the things you can not afford to buy. We should never miss the payment on the due date of the credit cards. A credit card can be used in emergency situations to a limited extent.
Buying too much Gold
They see Gold as an investment in every situation, which can be a mistake. Gold gives low returns if it is not bought at the right times. Another problem is buying Gold in the form of ornaments. Gold in any physical form such as chips or coins is a no-no.
Instead use gold as an insurance (hedging) as it retains value in crises. Buy a limited amount of gold (say 5 to 10% of your portfolio) preferably in paper form.
Buying too much Gold is always a bad decision. How much Gold we should buy depends upon our portfolio’s asset allocation and our risk profile.
Putting all eggs in One Basket
We often tend to invest all our money in just one category of assets. Some people tend to invest only in Real Estate and some others only in Gold. This leads to the catastrophe if that particular asset doesn’t perform.
Our Investment should be diversified in various asset classes such as Equity, Debt, Gold, etc. A well-diversified portfolio will have minimum risk across the asset category. Risk profiling and asset allocation are utilized to create a well-diversified portfolio.
Not Having a Plan
We spend countless hours watching movies and series or scrolling through the social media feeds but don’t try to set aside a few hours for our finances. Creating financial goals is out of question for many people. Even for a small outstation tour, we plan things like date of travel, the mode of travel, staying arrangements, places to visit etc. Why not for a life journey of 70-80 years?
Get your Financial Plan in place. Try to understand your Cash Flow, your Net-worth, the amount required for each of your Financial Goals, your Risk Profile and Asset Allocation.
Many people look towards insurance as a waste of money product or an investment
Product. We are eager to get our nonliving assets like Car or Building, but not the living asset – your body.
Insuring the earning person of the family is a great Financial protection to your family. Insurance policy (Term Insurance) compensates the income of the person if he is no more. Your family is financially safe after you.
Not including your Partner
We Indians usually don’t talk about money with our partners. We usually don’t share the information about the financial documents as well as the investments or insurance with our partners. And this puts the family of the deceased person in crises.
Letting your partner know about the financial documents and your investment will help her in case of an unforeseen event. Creating a Will is also a way to protect your assets from creating unwanted disputes within the family.
Most of the above mistakes are common to all of us. But there can be many personalized challenges. To address those challenges, we should start planning for our financial future as early as possible. The early you start your financial planning, the better it is.
Every family’s financial problems will be different from others so the solution to their problems will also be different. Because every person’s risk-taking ability and willingness differ from others.
Financial Planning is Not Standard. It’s Personal!
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