Benjamin Franklin said, “Failing to Plan is Planning to Fail”. The most common mistakes people make is not having a personal financial plan. Having a personal financial plan helps you understand where you stand financially and enables you to realize your financial goals and aspirations. Once you have set your priorities and goals, it paves way to scrutinize your money habits, cash flows, asset allocation, net worth among various other factors. A financial plan gives more meaning to your cash flows and helps you allocate resources judiciously.
Common mistakes people make with their personal finance
Not having Emergency Corpus – Life is unpredictable, all of us face ups and downs. Some might faces medical emergencies, while a few others might face loss of employment. The purpose of an emergency fund is ensure that during these turbulent times, you have enough financial resources to take care of your loved ones. Not having one forces us to borrow at exorbitant interest rates leading to lower savings later.
Paying Minimums on Credit Card – The ease with which you can buy your fancied gadget through credit cards draws all of us. Why not? when you can satisfy your wants today, why should you wait till you accumulate the required savings to catch up. Instant gratification rules the roost and you latch on to easy money. And when it comes to paying off bills, we stick to the easy option of paying the minimum amount due, without realizing that the interest cost on credit card dues is exorbitant and varies between 24% to 48% per annum.
Saving but not Investing – Indians are among the best savers in the world but not very prudent when it comes to investing. Majority of savers leave their savings in their bank accounts earning a meager 4% per annum. It’s sad that once you work hard for your money, your money is not working hard for you. Most people tend to be ultra conservative with investments and do not realize how taxes and inflation eat away their purchasing power.
Mixing Insurance with Investments – Majority of investors confusing insurance with investing or even worse as a tool for tax savings. Sadly, its neither an investing instrument nor a tax saving tool. Most investment linked insurance products carry very high commission structures, have a very low insurance cover to premium ratio (for example – for a 30 year old, a 50 lakh traditional cover will require a 40k monthly premium vs a 50 lakh term insurance cover will require a monthly premium of only Rs. 400). In addition, such traditional instruments that mix investments and insurance have a history of poor returns.
Start Investing Late – Person A aged 30 years investing 5k per month for 10 years and stayed invested till he is 60 years, would have accumulated Rs. 1 crore at 12% annual returns vs Person B aged 50 years investing 10k per month for 10 years till he is 60 years will have only 22 lakhs. In this case, evening doubling your investment won’t compensate the the delay in starting to invest.
Not Opting for a SEBI Registered Fee-Only Investment Adviser – While investing in mutual funds and other instruments have become easier, most people do not realize that the people who recommend them are not registered to provide advisory services. Besides they also do not realize that they end up paying huge commissions to mutual fund distributors while buying Regular Plans of Mutual Funds.
By opting to invest in Direct Plans of Mutual Funds, you stand a chance to save 30% of your corpus. So if you plan to accumulate 5 cr in investments, 30% of that accounts to a large sum. By opting to work with a Fee-Only Financial Planner who charges a flat fee for the advisory services provided, one stands to gain by designing a personal financial plan, save tons of money in fees and have confident financial journey. Read here for advantage of working with a flat fee financial planner.
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