10 Financial Mistakes to Avoid
Be it frivolous spending or living on borrowed money, we all make mistakes that hamper our finances. Here are 10 commonly made mistakes and how you can avoid making them.Updated: Aug 14, 2017 15:52 IST
Be it frivolous spending or living on borrowed money, we all make mistakes that hamper our finances. Here are 10 commonly made mistakes and how you can avoid making them.
Spending excessively or living beyond your means: “People often go to restaurants more often than their wallets allow or pay for lavish birthday parties (or sometimes trips) that empty out their bank accounts,” says former investment banker Dipti Singh. “Living beyond your means and spending money to impress others is a financial and emotional black hole.”
Sometimes, excessive spending comes not from a wish to impress but purely from carelessness or frivolous purchasing. Trivial purchases—such as a daily latte, gym memberships we rarely use, or that magazine we barely read but have been too lazy to cancel our subscription to—may seem petty when considered individually, but add up in the long run.
Spending first, and saving later: A common misconception people have is that our savings comprise what we have left over after our monthly spending. However, this approach has it backwards—it’s better to first define an amount you wish to save every month and then budget your spending accordingly—this not only helps with cutting out the excessive spending mentioned earlier, but also helps focus your savings goal and achieve them within a fixed timeframe.
Delaying your savings: If there’s one mantra you will hear from several financial experts, it’s this: “Don’t underestimate the power of compounding.”
“Every time you delay savings by even a year, you’re making a huge difference on the corpus you eventually want to build,” says Pushkar Sharma, an independent consultant at Add Wealth Financial Services
Pushkar Sharma, an independent consultant at Add Wealth Financial Services, says, “Every time you delay savings by even a year, you’re making a huge difference on the corpus you eventually want to build.” For example, according to Add Wealth’s calculations, 20K per month saved over 5 years at a 10% CAGR can build a corpus of over 16 lakhs in 5 years and over 42 lakhs in 10 years. At higher CAGRs, this corpus, of course, increases.
Saving without investing: While building savings in itself is a great first step, our approach to savings often involves simply accumulating money into a savings account. The better approach involves saving in a way that our money doesn’t just build, but also grows. Making investments helps secure our future and ensures enough money for retirement or for a “rainy-day” fund.
Failing to diversify: So you’ve curbed excessive spending, accumulated savings and started investing—sounds like all’s clear, right? Unfortunately, people make their share of mistakes while investing as well, of which one of the most common is failing to diversify their portfolios. Making the majority of your investments in a single kind of stock or asset is akin to putting all your eggs in one basket—any market turbulence that affects the basket you’ve chosen, immediately puts you at great risk.
Not trusting professionals: One way to effectively diversify your portfolio is to engage the help of a financial advisor; however, often people try to handle their investments themselves as they believe hiring professionals is an unnecessary expenditure. This is an example of being penny wise, pound foolish as not enough research or failure to perform the right kind of analysis can lead to big losses. Sales trader Amir Shah says, “It’s wiser to give your money to a professional to manage. Most of the time the cost to you is a minuscule fraction of what you will be investing.”
Neglecting to insure yourself and your family: Expect the best, but prepare for the worst is a mantra we often forget. While it’s great to maintain a positive attitude about life and believe that nothing bad is going to befall you, if you don’t have a plan in place for unfortunate incidents, you could cause both your family and yourself great harm. Sharma says “Every individual, especially earning members of a family, should insure themselves early because for every 5 years that your age increases, your insurance could go up as much as 15-20%. Insuring yourself early, helps lockdown lower premiums.”
Besides life insurance, you should also look into other forms of insurance such as health insurance and insurance for your children. Research different plans and see what’s available to you. With numerous plans available online, you can no longer use the excuse of inconvenience. Insurers like HDFC Life offer multiple plans to suit your all insurance needs
Not discussing finances with loved ones: While money matters might seem a dry topic and may not make for the most romantic conversation, it’s important to have an open conversation about finances with your fiancé or spouse. A lifetime together means sharing much more than home and family; it means also inheriting each other’s debt; it means one partner’s impulsive spending affects the other’s bank balance. Take time to sit down and establish what your attitudes toward money are and to discuss common financial goals and how you can work toward them as a unit.
Accumulating debts and bad credit: Finally, one of the most common financial mistakes people make is building debt, which can happen for a variety of reasons from not paying our bills on time, to building up amounts on our credit cards that are more than we can pay off at the end of the month, to taking on too many loans. Many of these problems can be solved by following a combination of the tips above such as budgeting, reducing frivolous spending, and building savings and investments to tide over unanticipated expenditures.
In fact, many of these mistakes can be avoided if we keep in mind certain core philosophies: don’t procrastinate; plan for the future; and never, ever, underestimate the power of compounding!