While the financial mistakes we tend to make in our 20s and 30s are mostly due to lack of discipline or awareness, the ones we make in the later stage happen mostly due to complacency or sheer inability to learn from past mistakes.
Not increasing emergency fund
Emergency funds are meant to cover your mandatory monthly expenses in case your income stops due to your unemployment, sickness or other unforeseen events. The size of this fund should increase proportionately with your increased monthly expenses. Not increasing your emergency funds with time may lead you to redeem your long-term investment in times of financial emergency, thereby affecting overall long-term financial goals. Ideally, your emergency fund should be six times your average monthly expense. Invest in liquid funds and ultra-short term debt funds for creating emergency fund.
Not investing for retirement
Often, people over 45 years of age postpone their retirement planning in order to save for their child’s education or loan down-payments. They become complacent by solely relying on EPF/PPF savings for their retirement. However, this corpus will prove insufficient as their rate of returns rarely beat the retail inflation rate. One of the ways in which you can build up on your retirement corpus is by investing in equity funds if your retirement is at least five years away. Invest in balanced funds to cut the risk from short-term volatility in equities.
Too conservative with portfolio
As we grow older, we tend to follow a conservative approach towards investment and hence, end up decreasing our equity exposure and increasing fixed income investments. However, it is not the age but our liquidity that determines the exposure to equity and debt instruments. If you have adequate savings to meet your short-term goals, you may choose to opt for higher investments in equity funds to reap higher returns. You could consider the Rule of 100 when it comes to investing in equities — equities should be equal to 100 minus your current age.
Inadequate insurance cover
Most people in their late 40s and 50s remain under-insured by buying insurance policies that provide insufficient cover. Ideally, your life insurance cover should be at least 15 times your annual income. Anything less than that means that you are under-insured. Also, get adequate health insurance and personal accident cover to take care of medical and disability costs, respectively.
Not investing for child’s education
The cost of higher education in India has witnessed a steep rise and many rely on education loans. However, your child would have to bear the debt in the initial years of his career, thereby affecting his own investments. Also, banks may find it difficult to lend you when you reach your late 50s. Therefore, it is always a good idea to start investing for your child’s education earlier on. Consider investing in equity mutual funds if your child is at least five years away from higher education or else, invest in balanced mutual funds.
The writer is CEO & co-founder, Paisabazaar.com