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6 financial mistakes you should avoid making - Outside View by PersonalFN
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6 financial mistakes you should avoid making
Apr 4, 2014

All of us make mistakes knowingly or unknowingly. Financial mistakes usually occur when you take money matters for granted or when you ignore your finances for a long time. The after effects of committing such financial mistakes can be extremely detrimental to your financial health and can even deprive you of all the luxuries that you enjoy today. That is why it is always better to avoid such mistakes than to make fences later.

Hence for your convenience we have listed below a few common financial mistakes that you must avoid so as to live a stress free financial life:

  • Not saving enough for retirement: All of us are worried about paying off our home loans, children's education or marriage, etc. In this eventful life, many either forget or postpone planning for their retirement. People often picture themselves relaxing in an arm chair in the beautiful country side when asked how they would wish to spend the golden years of their life. Many also desire to see the world and do things that they didn't get to do in their working years due to other obligations and priorities. However without planning and working towards your retirement corpus, it would be difficult to even maintain the same standard of living that you enjoy today, a world tour would be a day dream. Remember that, you must calculate the corpus you would need post retirement (keeping in mind medical emergencies, rise in the cost of living etc.) and then save for the same on a regular basis without fail.

  • Having more debt than one can handle: One of the gravest financial mistakes that people usually make is increasing their debt obligations excessively. Due to the immediate gratification that one gets on purchase of things such as electronic gadgets, expensive clothes, jewellery etc. credit cards are being over used. However, at the end of the month when these bills become due, people often find themselves unable to pay the entire amount. Having large debt or a high debt-to-income ratio could also have an adverse impact on your borrowing capacity and servicing debt. You see, most banks would prefer giving loans to borrowers who have less debt in their balance sheets. Loans and financial obligations must always be taken seriously and repaid in due time as any default on the payments can harm your credit rating and ability to seek loans in the future. We believe that taking a loan is not a bad thing as long as you know your means to service it. But one must borrow money only if there is really a need to. For instance, if you have several crucial financial responsibilities (such as children's education, marriage etc.) for which you have not saved enough, taking debt for other less important goals (such as buying a car) should be delayed.

  • Lack of adequate contingency reserves: Life can sometimes give us unpleasant surprises when we least expect them. Contingency reserves (or emergency funds) are a means to take care of your and your family's expenses during an emergency situation, such as loss of job, markets crashing, medical emergency or any unfortunate event that comes with an economic loss for some time. For these reasons it is advised that you must keep about 12 months of your regular expenses in a savings bank account or you can also opt for sweep in account, flexi deposit or liquid funds if you desire a better rate of interest. Many people do not maintain a contingency fund due to which they undergo both financial and emotional trauma during such extra ordinary circumstances.

  • Being under insured: Remember that none of your dreams or wishes that you have towards your family might be fulfilled if something unforeseen happens to you, especially if you are the only earning member in the family. Contingencies in life can leave the entire family's financial future in jeopardy. Due to a fast paced life and many other responsibilities, most people do not give priority to their insurance needs. It is very important to pay attention to this aspect from an early age. However, will merely buying any insurance policy indemnify you against risks? Definitely not. You need to have the right amount of insurance cover and the right policy so as to protect yourself from financial losses or uncertainties. At PersonalFN, we believe term insurance policy is the best while safeguarding your family's financial future and you should never mix your investment and insurance needs. Apart from life insurance, also remember to buy a suitable health insurance policy as medical and hospitalisation bills can sometimes lead to a financial turmoil.

  • Making ad hoc investment decisions: Many people invest their savings without proper planning or based on irrational 'tips' from friends or relatives. As a result most of these investments result in a mess. Although, investing your hard earned money is imperative to fight the inflation, investments must only be done if they suit your financial goals and risk appetite. Making ad hoc investments can erode your savings and create a mess of your finances. At PersonalFN, we understand the importance of customisation of a financial plan and have a firm belief in a research oriented unbiased approach. While you select an unbiased financial planner be sure of his / her qualifications and understanding of the financial markets. Moreover, be careful in your selection and seek services from the one who is qualified, unbiased and who would adopt as much care and prudence as he would do while managing his own finances, but taking into account your needs and risk profile. Remember, investing in the advice of an expert will not be a waste of money and could put your personal finances on the right track.

  • Not doing estate planning: Most of the people believe that they are too young to write a will. While being optimistic is a good thing, it is important for you to know that dying intestate (without preparing a will) can lead to various complications and disagreements among your heirs. You can't even imagine the mess and inconvenience that might be caused to your loved ones because of your laziness in not drafting a will for them. It is prudent to make provisions to leave behind assets from the very first day you acquire one. Moreover, all insurance policies and investments must also have nominees registered to avoid confusion. It is better to make provisions to transfer our fortune (immaterial of big or small) while we are alive, then to leave it for the court of law to make decisions for us.
For those who have just started off your career, it will be prudent to avoid all these common errors. If you have committed any of the aforementioned mistakes already, you must take corrective actions without wasting any time. PersonalFN is of the view that by avoiding some common mistakes, achieving a sound financial position and satisfying your financial goals can become an easy task.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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