Even money is the most important factor in today’s life, everyone has some goals to achieve concerning it, be it building a dream house, making considerable savings, or planning for retirement. However, often we tend to make some mistakes in handling and managing our finances, which in turn pose a challenge to us in the near future.
In this article, we will examine ten such sort of common money mistakes that almost everyone makes and ways in which they can be avoided. So let’s check this out and find the mistakes and how they can be rectified.
- Failure to Track Monthly Expenses
The first mistake is anything they will not track their monthly budget. In the situation where one does not have a budget plan to follow in order to manage his or her spending, its very probable that all savings will be redeemed.
How to save:
Make a Budget: Make sure you monitor you income versus expense each month. Fixed costs (rent bills excess) and discretionary costs (shopping dining out etc.) need to be listed separately.
50/30/20 Rule: It is the most basic rule that 50% needs to be for necessities, 30% for indulgences, and 20% for savings/investments.
- Early Saving or Investing is not possible
Most of the people tend to delay in the saving and investment wait for the future. Failure to make early investments will bar one from enjoying compound interest in due course of time.
How to save:
Early Start: Start your savings early, be it mutual funds, PPF or stocks. If you invest at the age of 25-30 years, the returns will be far greater years later.
Systematic Investment Plan (SIP): Through the madness of SIP one can very conveniently invest each month a specific amount saving against such fixed expenses.
- Disregarding the Risks of Financial Emergency
In case you have not built up an emergency fund, any sudden cost such as a health crisis, unemployment, or repair works can leave you financially depressed.
How to save:
Establish an emergency fund: This seeks to create a fund valued at three to six months of the simple average household monthly expenditure. This will enable one to remain economically stable even in unpredictable problems.
Open a Separate Account: Place the emergency fund in a different account with a strict policy barring any withdrawals before emergencies arise.
- Going Overboard With Expenditures
A substantial number of individuals wish to live their standard of living which is beyond their income. These habits of spending lead you to financial pressure and expose you to borrowing.
How to save:
Do Not Overspend: Structure your expenditures to correspond with your earnings. For instance, if your salary in a month is ₹50,000, aim to spend only up to ₹45,000.
Do Not Change Your Way Of Life Once You Are Given A Salary Increase: If your salary goes up, learn to maintain your current way of living. The additional salary will be better placed into savings or other forms of investments.
- Overusing Credit Cards
Credit cards are easy to use; however, if they are not kept in check, it may lead to a situation of incurring debts and heavy spikes in interest rates.
How to save:
Moderation in Use of Credit Card: Spend only that amount which you are sure of repaying from your bank balance. Ensure payment of all dues on or before the due date and avoid payment of interest.
Limit Yourself: Advisable that you start placing a spending limit on your credit card in order to adhere to your budget.
- Not Purchasing Adequate Insurance
Another unfortunate trend that we are seeing in the society today is that many people are neglecting health, life, and other critical insurance. Lack of proper insurance cover exposes one to devastating financial losses when emergencies arise.
How to save:
Insurance : Make health and life insurance primary on the agenda. Health insurance offsets the costs incurred for medical treatment while in life insurance some upon death the beneficiaries of that person are given money as security for their family.
Adequate Coverage: Know what is needed before applying for insurance and get the appropriate coverage without going overboard.
- Not Monitoring The Implementation Of Financial Objectives
Failure to delineate and monitor your financial goals might make your financial journey void of meaning and focus.
How to save:
Set Clear Goals: Clearly define your short-term (vacation, car purchase) and long-term (retirement, home) goals. Set a target amount and timeline for each goal.
Review Regularly: Review your goals every quarter or half-year. Adjust them if necessary.
- Not Diversifying Investments
Some people increase risk by putting their investments into a single type. If one of your investment assets does not perform, the entire portfolio can be in loss.
How to save:
Diversify Investments: Diversify your investments into stocks, mutual funds, bonds, real estate, etc. This spreads your risk and gives you steady returns.
Understand Risk Tolerance: Choose investments by understanding your risk tolerance. If you are risk averse, invest in fixed income instruments like FDs and PPF.
- Neglecting to Prepare for Taxes or Doing It in Such a Way That It Impacts the Family Finances
Neglecting to plan properly for taxes is also a mistake that many families make. In a scenario where nothing is planned for and assets are bought, there is a nice possibility of wasting money in unnecessary taxes.
How to help:
Tax-saving Instruments: Invest in tax-saving instruments like PPF, ELSS, NPS, etc. These instruments help reduce tax liability by lowering the taxable income.
Consult a Tax Expert: In case you feel that the entire process of tax planning is a bit too complex for you, you should talk to a tax practitioner.
- Not Seeking Professional Financial Advice
If for some reason you decide to control financial planning by yourself and do not understand well enough how financial products work, chances are you will commit mistakes.
What’s even more effective is for an individual to invest in a different agenda or seek for assistance from somebody or a professional organization that specializes in investment. A financial adviser will provide the best investment options that suit one’s goals and will also assist with tax planning, pension planning, etc.
Self Study: It also carries weight when one knows the different financial products available for investment. The financial information may be found on the web or even in books.
My Opinion:
These ten reasons are among the most frequently committed irrational actions by the majority of people while managing their finances, however if one does not do them, one can make sure their financial sustainability and progress. On the other hand, these are lessons one learns through experience and time, but should you grasp and correct these issues earlier, it will be possible for you to improve how you manage your finances.
This happens because financial planning does not occur overnight and need a lot of effort and persistence together with the right information. So understand these mistakes and take your financial journey in the right way!