Your financial future will significantly influence the financial decisions you take today. A poor financial decision can adversely affect your future. Here are some of the common financial mistakes that you should not make. Learn from them and make sure that you don’t commit them:
Not Maintaining Emergency Fund
It is essential to have a cash buffer at all times to overcome the financial crisis, like a medical emergency, job loss, etc. Caught unprepared, you may have to take a personal loan, which comes with high-interest rates. To prevent this, it is advised to set aside a certain amount regularly from your earnings and create a fund that is equivalent to 7-8 months of income. You should remember that contributing to this fund is non-negotiable and you should never use this fund to meet non-vital expenditure.
Taking Too Little Term and Health Insurance Policies Cover
Well, one may never get to regret taking a life cover, but your dependents will surely feel the burden. An insufficient life cover means that your family will have to go through a tough life after your death. The term insurance cover should be adequate to generate necessary income that can take care of the expenses of your dependents till they become self-reliant. One broad estimation is that life cover should be 6-7 times of the annual salary. Whatever cover you choose, make sure it is sufficient enough to take care of household expenses, including loans and liabilities in your absence. In addition to this, the insurance cover should be adequate to generate income that can take care of life’s different goals, like child’s education, marriage, etc.
Just like term insurance, make sure your health insurance policy is sufficient to beat the rising medical costs. A sudden hospitalisation can wipe out your years of savings in a single blow. You can go for a family health plan to cover all the members of your family under a single plan. Choose the cover by looking at the size of your family, their lifestyle along with current medical costs in your city.
There are many expenditures which need to be taken care during the early stages of a career. As a result, many people find it difficult to invest money. ‘Essential’ spending on holiday and shopping in the 20s is replaced by child’s education, loan EMIs, in 30s. As a result, such people never have ‘enough’ funds to start investing.
However, in reality, despite the small size of your savings, the power of compounding can build a sizeable amount over the period. The longer you wait to build your investment portfolio, the smaller the corpus you will be able to generate. Remember, the power of compounding can grow your money in a long run. However, it also needs time to show its magic.
Depending on Conservative Investments
For most of the people, fixed deposits and public provident fund (PPF) are the only investment options. While they are safe investment options, they are not lucrative and might not give returns enough to beat the inflation impact in the long run. To grow wealth, make sure to choose mutual funds’ investments that can grow your wealth faster than the inflation rate. You might need to change your investment strategy of your 30s if you want to earn a high income in your 40s and beyond. If the time is at your side, go with aggressive investment approach and choose mutual fund investments. With mutual fund investments, you get a chance to invest both in equity and debt as per your risk appetite.
Getting Lured by Uncertain Investments
Greed can affect the financial decisions of many people. People flock to those investment schemes which promise to give them 15%-20% returns every month. However, it is impossible for any scheme to churn out 10% or more returns every month. Therefore, stay away from such schemes. Otherwise, you might have to lose your money as well.
While investing in any scheme, make sure it has SEBI approval. In many times, fraudsters upload the images of PAN card and incorporation certificates to mislead investors. However, all these certificates don’t mean SEBI approves them, so be wary before choosing an investment option.
Assuming inflation at 7%, Rs 1 lakh today may worth less than Rs 15,000 after 30 years. It means, things will get expensive and you will be able to buy fewer things at the same amount of money. It is essential to plan your investments in such a way that they generate enough returns to beat the inflation impact.
You don’t need to be a financial expert if you want to avoid the financial mistakes. A little bit of commitment, awareness and self-discipline can help you in enjoying a worry-free financial life.