Ever found yourself in a situation where despite spending your money wisely and making feasible investments, you have not seen desired results? The reason for this is because we tend to focus on the factors that help us generate more wealth and overlook the most common financial planning mistakes. These financial blunders keep us from attaining a stress-free financial life.
So, let’s deep dive into these financial mistakes we need to work on.
- Not implementing a well-structured and sound financial plan:
Many people go wrong with their finances when they do not plan their wealth. It is best to have a pragmatic vision that gives you direction and aids to structure a financial plan based on it. Being indecisive or vague with your goals will only delay your plans, making them more challenging to follow over time.
In addition, you also need to review and update your financial plan at regular intervals to make any changes that can help you maximise your investments and achieve your goals resourcefully.
- Careless management of insurance:
As insurance is a contingency payment, people usually deem it as an expense or a liability. Being irresponsible with your insurance would completely sabotage your financial planning during an emergency. Therefore, avoid the mistake of ignoring your insurance and get yourself and all your loved ones insured against uncertainties. This will safeguard your financial strategy and provide you with the confidence to handle challenging times without worrying about your finances.
Normally, taxpayers make a few tax-saving investments to claim tax deductions. Tax planning, however, is rarely prioritized by people and is frequently left until the last minute, which eventually can result in poor investment decisions. This is why it is advised to never wait until the last moment or make hasty tax-related decisions. To keep your taxes in line with both your financial and tax-saving goals, prepare your taxes well in advance.
- Not expanding your investment horizons:
While holding a savings account or an FD may seem like a secure option for your money, neither one provides inflation-adjusted returns or advances your progress toward wealth accumulation. Expanding your investment horizons and making investments in other unconventional possibilities, such as the equities market, mutual funds, ETFs, real estate, or R.E.I.T., is crucial.
It is vital to study the various other investment options available, along with the risk they carry and the returns they deliver. Accordingly, evaluate your risk appetite and investment capacity before deciding on the right investment channels.
- Forgetting to maintain a budget:
This might seem like a basic concept, but it carries a great deal of impact if you think about it. You’ll notice that many of your purchases are needless and avoidable once you start keeping track of the expenses you believe to be insignificant. Controlling these expenses by preparing a budget and avoiding mindlessly spending your money.
A popular budgeting technique is the 50/30/20 rule. It simply implies that you need to divide your after-tax income into three sections.
- 50% of your income to be used for: unavoidable essentials and needs
- 30% of your income to be used for: avoidable wants
- 20% of your income to be used for: savings and debt repayments
As the phrase goes “Take care of the pennies and the pounds will take care of themselves,” if you want to be left with sufficient savings after retirement, you need to look after all your minor expenses, along with your major investments.
- Disregarding the idea of an emergency fund:
We generally dismiss the idea of creating an emergency fund, confusing it to be the same as insurance. Here is where we go wrong with our monetary management. Not every emergency expense can be covered by insurance. Emergencies have no predictability, as they can occur at any time, sometimes when you least expect them. Therefore, it is important to distinguish between insurance and an emergency fund because both are essential and require independent maintenance.
- Ignoring your credit scores:
You will come across many situations where you might feel the need to apply for a loan. Be it an educational loan, a loan to buy a house, or even for your business venture, etc. In India, it is also common to apply for a loan for organising a marriage for a loved one. First, the lenders check the credit standing of the borrower before lending money or even a credit card. Your creditworthiness is defined by your credit score, a three-digit figure. It is worked upon based on the history of your debt repayments and a few other factors.
If your credit score is high, you may be eligible for lucrative incentives like quicker application acceptance, lower interest rates, a bigger credit limit, or even a pre-approved loan offer. However, if you have a bad credit score, you can be deprived of these offers and may be liable to pay higher interest rates. As a result, it’s crucial to aim to keep your credit score at or above 750.
In summary, mistakes are what make us human. They are a fundamental component of life. Yet, it isn’t fair if somebody has to compromise on their aspirations after having worked so hard in this hustle culture. Therefore, make an effort to avoid committing these financial planning errors that could derail your aspirations and start making smart financial planning a priority.
Views expressed above are the author’s own.
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