Money management: 8 traps one must avoid

Written by Adhil Shetty | Updated: Jan 14 2014, 19:13pm hrs
TrapsA few basic rules you would do well to follow while making your investment decisions
Many people restrict their personal financial planning to saving, purchasing insurance and investing safe bank deposits or other such schemes. While this is recommended as the basic measure for managing personal finances, doing it without foresight and planning will limit the results and you may end up not achieving the same level of financial independence that you were seeking. There are a few common personal finance blunders that many commit at the onset of their financial planning phase which can be avoided by making a few basic principles that govern our income and expenses.

No fixed budget plan

If someone who has never held an account of their personal expenses were to write down all their expenses for the month, they would be in for some shock at the number facing them. The shock would not be a result of how much money they have spent but of how many unnecessary expenses they have incurred and how many places they could cut expenses in. The famous investor Warren Buffet says that our income must be deducted into amount for savings, amount for investing and finally amount for spending. Create a monthly budget plan and try adhering to it till it becomes a practice.

Investing to make quick money

Investment is not gambling and must not be treated as such. If you have made quick money from your investments, do not expect it to be the rule. Often, these quick return schemes turn out to be duds and many a big investor has lost his fortune in their chase of these quick-rich schemes. Investments must be planned as per the personal and financial goals of an individual and the amount of risk they are capable of bearing.

Balancing liquidity, investment

Though investments are essential for financial growth, there is a limit to how much a person can invest. Investment must always come after savings because no matter how secure an investment is, there is an element of risk involved and returns cannot always be guaranteed. Liquidity is essential to act as a buffer against investment risks as well as unforeseen calamities such as loss of job, accident or death, etc.

Impulse shopping

Not just women, but men are also victims of impulse shopping. Clothes, shoes and bags are womens vice, while men lose control over collectibles, gadgets and sporting articles. Impulse shopping also includes the number of times we eat or drink out when there is no occasion for the same. These are spur of the moment decisions that we treat as a one-time expense but which occur frequently or in such large amount that they end up denting ones bank balance.

Lack of diversity in portfolio

Diversity in investment portfolio is the main mantra of success and the biggest buffer against a downward trend of any single investment. It is important to diversify ones investment portfolio to earn the best returns from the various investment avenues. All investments are subject to market risks as well as different maturity periods.

No emergency funds

As a rule of thumb, the emergency fund must be six months salary; so that even in case of emergencies, there is a fallback option to maintain ones standard of living. Emergencies can also be change of job or city which involves large expense, and also include medical expenses which have to be incurred till the insurance claim amount arrives.

Renting an accommodation and not buying one

It is not surprising how many people prefer renting accommodation over buying one for various reasons. The most common excuse given is that they are not yet ready to bear the responsibility of investing in a property or to commit to a long-term loan plan. They do not realise that the amount they are paying for rent and deposit, if channelised towards paying EMIs would turn into an investment and offer security in the future.

Children unaware about basic money concepts

A mistake indulgent parents make is not educating their children about basic money concepts. Children learn how to manage money from their parents by observing their expenditure patterns. It is important to inculcate the value of savings and thrift in children from a very young age. Every demand from their end can be treated as a prize which they can win by performing a task so that they understand the value of earning.

Sound financial planning is the key to a happy life mainly because financial stability gives us the confidence to undertake any new venture and to meet our personal goals. Money management must be a habit, not an inconsistent effort.

* The writer is CEO