Financial mistakes have the power of derailing our financial future. Here is a look at some of the more frequent financial mistakes and how to avoid them.
To err is human. However, while other mistakes are normally ignored, that shouldn’t be the case with financial mistakes. For, such mistakes have the power of derailing our financial future. Financial mistakes, in fact, may be a result of several reasons like ignorance, fear, greed, ego, desire for immediate gratification and many more. However, to achieve financial goals, even a single financial mistake may be a detrimental one. For so many aspects of financial planning, there is no going back, at least without some sort of penalty.
Here we are taking a look at some of the more frequent financial mistakes and how to avoid them:
Mistake 1. Money lying idle in cash or savings bank accounts, generating negative returns, is one of the biggest financial mistakes which an individual makes by ignoring the effect of inflation on the money invested.
What to do – The investor should not keep the money in a savings bank account more than the amount required for the emergency fund.
Mistake 2. Having insufficient funds in the saving bank account for emergency purposes.
What to do – Emergency fund is required in case of emergency/ exigencies like loss of job, leading to no income. The idle amount of the money to be kept in the saving account shall not be more than the sum total of 3 to 6 months’ expenses.
Mistake 3. Absence of life and medical insurance, and under insurance. Life insurance in true sense is an asset for an individual. People in today’s scenario are buying insurance as investment which may not be most appropriate. Clubbing investment with insurance involves binding oneself to pay a big amount of regular insurance premium, leading to a fixed liability.
What to do — Insurance is an asset because it works as a safety net in case of an unfortunate event whereas most of the times it is being treated as a return generating financial product. An individual should take an insurance policy on the basis of Human Life Value (the quantum of money required by the family in case of death of the bread winner) with the advice of a qualified professional, if required.
Mistake 4: Most investors try to time the market – thinking that timing is the key to successful investing.
What to do: Empirical evidence suggests that asset allocation policy is multiple times more important than stock picking and market timing combined. While market timing and security selection are obviously important, very few people achieve long-term success in the former, and fewer in the latter. Asset allocation is the only factor affecting an individual’s investments that one can actually influence and control.
Mistake 5. Ignorance leading to wrong selection of fixed or floating interest rate instead of the prevailing interest rates in the market. An individual having inadequate knowledge is unable to identify the market scenario/changes and sometimes step into the wrong shoe.
What to do — Normally when interest rates in the market are on a higher side, an individual may opt for floating rate and vice-versa.
Mistake 6. Lack of diversification. Putting all eggs in one basket, i.e. a major part of the portfolio is invested in a single or same type of financial instrument which increases risks, resulting into high losses/profits.
What to do – Individuals should diversify their portfolio, i.e. all the money should not be invested in the same asset class. Investment portfolio should be diversified in accordance to one’s risk appetite.
Mistake 7. Procrastination is a critical mistake, as not to start savings in young age for retirement planning.
What to do – There is no fixed time to start retirement planning. One can start from any time he is willing to, keeping in view his financial situation, by investing through Systematic Investment Plans. The common thought that retirement planning should start in the late 40’s or 50’s should be avoided/neglected because a mishap in an individual’s life leading to loss of income may occur any time. Therefore, an individual should start retirement planning as early as possible.
Mistake 8. Paying higher cost of debt for non-payment of bills on time on purchases made through credit cards and simultaneously investing in low-yield financial instrument/s, which is contrary in nature.
What to do – Paying off all high-cost debt/s by liquidating all low yielding investments on immediate basis.
Mistake 9. Investing in different financial products on the consideration of tax saving without evaluating other parameters of financial products.
What to do: One should invest in a financial instrument only if desired objective and the investment objective of the financial instrument are the same and not for the tax benefits attached to it. First, an individual should understand own circumstances and needs, and secondly, understand the features and the investment objective of the instrument and suitably compare both the objectives.
Mistake 10. Estate planning not done by an individual. No planning for transfer of assets to heirs, leading to disputes in the family, and distribution of the property not as per the desire of the owner.
What to do: An individual should go for estate planning so that the property can be distributed among legal heirs or other person in accordance with the desired proportion. Estate planning can be done by writing a Will or creating a trust.