“All men make mistakes, but only wise men learn from their mistakes.” – Winston Churchill
Personal finance is all about avoiding costly mistakes and saving regularly to meet our financial goals. Nobody likes to make mistakes, but we are not perfect. We all make mistakes, but some mistakes can prove costly than others. So, it is better to be aware of them before actually making them. Or to take corrective action quickly in case we make them. I'm listing some common financial mistakes, which may help us in avoid these common pitfalls:
Not saving enough – We all need to save for various goals in our life, like, buying a house or a car, children’s education or for retirement (everyone has their own set of goals). Some people don’t save enough and when a goal approaches, they have to take a loan to pay for that. This only makes the bank richer. You need to list your financial goals and how much you need to save for them and how much time you have for each of them. Then start saving. The longer you wait to save, the harder it gets to reach your goal. As Warren Buffett says “ Pay yourself first (save), and spend what is left.”
Not having emergency funds – An emergency fund which can take care of the daily expenses for 3-4 months is a must for every family. Unexpected financial problems can happen any time and you need to be prepared for them. Covid is a great example that nothing could be predicted. But we can prepare for the uncertainties of life. It could be anything like a car breaking down to a family member falling sick. If you don’t have an emergency fund, you may have to borrow money when an emergency comes up and put your finances in a mess. It’s also important to keep your funds in a place where they are easily accessible and be safe at the same time.
Over-spending – This is the ages old advice: spend less than what you earn. If a person takes too many loans and uses credit to buy things, he will never be able to save for bigger things in life. Over-spending on little things can add up to a large amount. Over-spending on big things like buying a big car which you cannot afford can put you in debt for a long time.
It’s always better to have a monthly budget and allocate you spending and savings accordingly. If you want to buy a house or a car, it’s better to save for it first and put that amount as a down payment.
Being in debt – Many people in our country never take any loans. It’s a matter of pride for them. It really is. Being in debt is not a good feeling. You’ll always feel worried about paying it off. Though taking a loan in some cases can be beneficial also. When you want to buy a house, you may have to take a loan. Now, this can be a good loan that you’ve taken. A home loan will give you tax breaks, save you on rent and create an asset (conditions apply). But when a person takes loans to buy consumption items, he is not creating anything, he’s just paying interest to the bank.
Not paying attention to asset allocation – As the saying goes “Never keep all your eggs in the same basket.” You cannot invest everything that you earn in stocks or keep buying gold only. This may give you’re a high return for some time but may also wipe out your earnings in one go. Have a proper asset allocation, while keeping your income and age in mind. You should invest in stocks, fixed deposits, gold, real estate, mutual funds, etc. When one of the assets does not perform well, you may still earn a decent return on your overall portfolio as some other assets have performed well.
Buying a house when you should be renting – If you know you are going to stay in the same house for more than 5 years, you may go ahead and buy a house. But buying a house because you would rather pay EMIs instead of rent is not a good decision. A house or an apartment can be the biggest investment that you can make in your lifetime. You have to keep paying the EMIs for 15-20 years, you have to maintain it, pay property tax, pay maintenance if you live in a society flat, keep track of your tenants if you rent it out. If you need money, it cannot be sold quickly. If you are not going to live in a house for a long time, don’t buy a house unless it’s a real estate investment.
Waiting for the right time to invest – Some people invest regularly while others keep waiting for the right time to come. For an ordinary investor, it’s not easy to time the market. So, it is best to start an SIP in one or more mutual funds. SIP (or Rupee Cost Averaging) is an easy way to save regularly and create a meaningful corpus for your financial goals. An SIP could be started with as little as Rs. 1000 per month (you can choose any amount that you want to save monthly). You can select a mutual fund which has a good track record over a few years and start investing on a regular basis.
Not buying health insurance – Most of the people in our country are under-insured or not insured at all. Some people never buy health insurance. As coronavirus has shown us that health insurance is the most important insurance product that an ordinary person needs to have.
While buying insurance, make sure you buy simple insurance products which are easy to understand and not ULIPs which are being sold by insurance agents to earn higher commissions. Don’t think of insurance as an investment but as an emergency fund which will be provided if the need arises.
Not saving for retirement – There will be a day when we will stop working, that means no income but there is no end to expenses. If we have not saved for our retirement, we have to keep working in order to pay for our daily expenses. It’s better to start saving for our post-work life as soon as we can, so that we have a peaceful retired life and don’t be dependent on anyone for money.
Not buying Term Life Insurance - A term plan would be a good life cover for most of the people. But in India, people do not buy insurance but it is 'sold' to them via insurance agents, whose only goal is to earn more commissions. A life insurance should be carefully selected as per your needs and not what the agent is telling you to buy. Every earning member of the household should have a term-life plan to secure the family.
Not paying credit card bill in full - When we buy anything by using a credit card, we are basically taking a loan from the bank which has issued the card to us. Most of the credit cards in India charge an interest rate of 36 percent per annum + GST. But on a monthly basis it reflects as only 3 percent + taxes. So, people tend to take it casually. If you have not paid your bill in full for 2 months, you have already paid more than 6 % interest. A credit card charges the highest interest rate in all kinds of loans. It is better to pay off your credit card bill in full rather than paying only the minimum amount due.
Not writing a will – Most of us never bother to write a will until we are old and sometimes not even then. Though we should do the opposite – create a will when you have acquired some assets. Describe all aspects of your wealth in it in detail and to whom you will like it to bestow. Your family will be thankful to you for this will, in case something happens to you.
We all make mistakes, the difference is what we do after we make the mistake, how we see the mistake - a learning experience or a failure.
Really good read Milan👍