One cannot rely on his or her destiny purely to reach the heights where one aims to. But there are few financial mistakes which many of us commit knowingly or unknowingly, which can hamper our financial objectives and goals in life.
Let us look at those 5 major financial mistakes:
Delaying the Investments
Delaying the investments is the biggest financial mistake one can make. The majority of people don’t start investing in their early earning years, which may result in lower accumulation of funds, later in their life. Starting an investment in the early years of your career will fetch you long run results.
Most of us focus towards spending than saving when we start earning. The practice of saving in the first few years of your career will give you an exponential growth of funds in your later life. Some of us wait for our incomes to reach a set pinnacle, so that we can start investments which is a sheer fallacy. This can prove detrimental too. Young investors often think that they have a very low income to invest, but they tend to forget that the small portion of their income towards some investment scheme may yield long term returns as you have a longer duration available for the money to grow and invest. The element of compounding will yield exponential returns if you kick start your investments at an early stage. This will allow small sums of money to grow into a gigantic pool.
Waiting for your income to increase to start an investment scheme is a fatal mistake. You may enhance your investments with an enhanced income, but entirely procrastinating the idea to start investing is a blunder. None the less, it’s never too late. Start investing timely and systematically to be a part of the rich cadre of the population.
Neglecting the Insurance Needs
Another grave financial mistake is ignoring the benefits of buying an insurance plan. Most people think buying a life insurance or health insurance is primarily an expense, especially in one's younger age. This myth is another inaccurate fact whereby, many refrain to create financial backup for their financial exigencies. Buying a pure life insurance plan (Term Plan) is as affordable as buying tea if compared on a per day cost. The life cover offered is huge which will safeguard all your financial worries at an affordable premium cost.
Buying a life insurance plan early is cheap and economical, as lower the age of the person, lower is the premium. You may not regret your decision of “not buying an insurance plan” or “buying less life cover than required (under insurance)” but your family members will certainly regret it in the event of your untimely departure. With growing medical inflation, neglecting a health insurance policy can disrupt your financial equilibrium at one go. With changing lifestyles, attaining a critical disease at a younger age is not unrealistic anymore. Liquidating your assets or investments to take care of the medical and financial needs will make you take a u-turn and head you towards the path where you started from. Insurance forms an important part of financial planning and avoiding it is certainly not a prudent financial decision.
Depending on Low Risk Appetite
We all have heard of the business concept “Higher the risk, higher the gains/profit”. Relying completely on conservative form of investment or saving schemes might be another financial mistake done by many. Investing entirely into portfolios like PPF, Bank Saving Scheme, Post office schemes, Fixed Deposits, etc. which needs low risk appetite can help you to build a sustainable corpus but might not help you with a big leap, which is required to show a significant increase in your investment graph. Most of the young investors also shrink their risk appetite and invest entirely into conservative schemes of investment.
Equities account an iota of the total investments even for the young investors. Investment in equities in the long run will fetch you enormous gains which can’t be possible by parking all of your invested money into low yield investment schemes. Investment in equities will help you attain returns, which will surpass the inflation figure and help you to prosper rather than merely sustain. However, it does not mean that one needs to invest 100% of the money in equities or other high yield investments where the risk is certainly more but at least there has to be an ideal mix between the conservative and high yield providing investment schemes.
Not Reviewing the Investment Portfolio
Investment once done is done. This is another type of financial mistake made by many. Reallocation and rebalancing of your investment mix is vital and imperative. Market trends change, economical, financial and political frameworks change like we recently witnessed “Demonetisation”, which will have a direct or indirect impact on your investments. Even at the micro level, the scenarios do change like there is a salary increment, there is a windfall gain, there is an unpredicted financial disbursement, etc. which cannot be overlooked as far as investments are concerned. Not reviewing or rebalancing your investment portfolio is yet another mistake one may regret later. Over time, the differential returns can significantly change the asset mix of your portfolio. Reviewing the investment allocation is important because the returns from different investment schemes can vary. Rebalancing reinstates the investment portfolio too, thereby helping in monitoring the risk and the returns time to time.
Spending More than you Earn
Spending greater than your earnings is another disastrous financial mistake which takes less time to make you financially weak than making you look rich. Easy financing options available at a phone call and the unplanned use of plastic money may not allow you to distinguish between a “want” and a “need”. Many of us invest what is left in our income after deducting our expenses which is a wrong financial trend, rather one should spend that much amount which is left in our income after investing. Spending callously on latest smartphones, unplanned holidays, etc. will not make you account as a wise person in your race to become a rich person.
The author, Harjot Singh Narula is Founder & CEO, www.comparepolicy.com.