The financial market is pretty much unforgiving. Once a mistake is made, you are left with few choices to undo it. The repercussions of a mistake could land you in deep distress, so the decisions you take today need to be calculated well.
Here are some common personal finance mistakes that people should do away with.
Not having a contingency fund in place
Financial distress can hit anybody, anytime, which is why having a contingency fund in place is a must to help you recover.
People often ignore the importance of a contingency fund, assuming that their monthly incomes would be enough to take them out of a situation, although for many, monthly incomes exhaust in meeting regular requirements.
Circumstances such as a sudden loss of job without having an appropriate source of income for the next six months could put you under pressure in paying EMIs, credit card bills, school fees and regular household expenses.
We suggest a contingency plan that would suffice for at least 9 to 12 months. Reviewing and increasing the fund size need to be done time to time to match the growing requirements and tackling inflation.
Spending first and saving latter
Spending always seems easier than saving and most people tend to spend first and save the residue. We say this is a big mistake as spending becomes a habit and you start thinking more about today, putting your tomorrow at risk!
Saving money first and spending the leftover helps you keep your financial goal intact, ensuring big corpus at the time of retirement.
Keeping money idle
Money, when left idle, loses value over a period of time, as inflationary forces determine its value. The illustration below shows the fluctuation in values due to inflation:
If a product costs Rs 1 Lakh currently, with inflation prevailing at 7 per cent, it would cost Rs 1.96 Lakh after 10 years. With inflation at 8 per cent and 9 per cent, the product would cost Rs 2.16 Lakh and Rs 2.37 Lakh respectively in 10 years. Therefore, keeping your money invested is a must to beat inflation in the long run.
Lack of tax planning
Effective tax planning is vital to financial stability, as it helps in saving and investing more. Large portions of the total income go in paying for taxes, thus deferring or avoiding taxes through the tax-law provisions is a must for good financial planning. So we suggest choosing an appropriate tax-saving instrument in order to increase your investment while reducing your tax liability.
Ignoring the importance of retirement planning
Retirement seems like a distant idea to most, although taking voluntary retirement is an increasing trend. Most people don’t have a retirement plan in place when they are young and are thus left with inadequate funds in the later stages of life. Planning early for funds after retirement helps you build a large corpus and live a tension free life. It also prepares you better to cover for treatment and other unforeseen expenses during the later stages of life.
Other common Mistakes
Some other common personal finance mistakes people make are spend more than what they earn, not get adequate insurance cover, put money in a single investment instrument, indulge overtly in market speculations, and spoil credit history through undisciplined borrowing.
It is important to assess personal finances time to time and take corrective measures to achieve your financial goal.
The author is CEO, BankBazaar.com