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How To Become Your Own Financial Planner?

An exclusive Program To Develop The Skills To Manage Your Personal Finance

We believe by signing up for the initiative, you too endeavour to develop the skills needed to understand the nuances of personal finance and be money-wise.

Module IV: Prudent Ways To Plan Your Investments

In this module, we'll share insights on how you can be smart money managers in the journey of creating wealth and achieving your financial goals.

Session 10: 10 Financial Mistakes To Avoid Which Derail Personal Finances

"All men make mistakes, but only wise men learn from their mistakes."- Sir Winston Churchill

Here are 10 financial mistakes you should clearly avoid making in the interest of your financial health / your financial wellbeing.

10 Financial Mistakes To Avoid Which Derail Personal Finances

  1. Spending more than you earn:

    As legendary investor, Mr Warren Buffet says, "Don't save what is left after spending. But spend what is left after saving." This is the cornerstone of personal finance.

    He even says, "If you buy things you don't need, soon you will have to sell things you need".

    The objective here is to ensure your financial wellbeing.

    If income < expenses = you land into debt (a financial health problem),

    When income > expenses = you're left with surplus (keeping your financial health in pink)

    Over the short-term, these equations may seem less significant, but in the long-term, they have a lasting impact.

    So, cut down on unnecessary expenses. Draw a stringent budget, and follow it religiously, so as to facilitate investments towards your financial goals.

  2. Not Setting a Budget:

    A monthly financial budget helps you be in better control of your personal finances; as well as curbs unnecessary expenditure.

    Limit the use of credit cards; before the repayment of credit card dues becomes a herculean task, avalanching you into a debt-trap.

    Likewise, don't get caught up with the "Sale" fever. Discounts, offers come, go, and return differently packaged. Purchase only when you need to.

    We'll not talk much about how to make your budget. We've covered that in Module 1, which we suggest you revise and perfect your budgeting skills!

    But we want to reiterate that, you ought to consider vital financial goals such as buying a dream home, providing for children's education and marriage expenses, your own retirement, among a host of others in the budgeting exercise, so that you're left with a sizeable investible surplus to achieve the financial goals envisioned.

  3. Not saving enough for retirement:

    Many individuals foresee themselves spending the golden years relaxing in an arm chair in a beautiful country side, reading a book, and exploring nature.

    Many even desire to travel the world and do things that they didn't do in their working years due to personal obligations and priorities.

    However, it goes without saying that without planning and working towards achieving your retirement corpus, it would be difficult to even maintain the same standard of living that you enjoy today - a world tour would be a day dream.

    Remember that, you must calculate the retirement corpus you would need post retirement (keeping in mind medical emergencies, rise in the cost of living etc.), and then save for the same on a regular basis without fail. We'll talk more about this topic in module 5-Tested Ways to Retire Rich.

  4. Having more debt than you can handle:

    One of the gravest financial mistakes that people usually make is increasing their debt obligations excessively.

    So, only avail an 'xx' amount of loan that you can service or repay. Because, with too much loans to handle, you'll face a debt-overhang.

    Don't let immediate gratification nudge you avail of a loan offer or shop on your credit card. It can be hazardous to your wealth and health.

    Assess the debts against your income, and keep your debt-to-income ratio under check; otherwise it could also have an adverse impact on the financial wellbeing of your family.

  5. Lack of adequate contingency reserves:

    No matter how much you plan, life can always throw some unpleasant surprises - and more so, when they're the least expected.

    So, while we hope and endeavour for the best, it's also vital to plan for the worst.

    Not planning for exigencies can set your investments and goal planning on a rocky road. Therefore...

    Min: 6 months of regular monthly expenses (including EMIs) should be maintained as contingency reserve; and

    Max: 24 months regular monthly expenses (including EMIs)

    This can take care of outgoings when one goes through a loss of job, medical emergency, or any other unfortunate event that comes your way with an economic loss for duration of time.

    Parking money in a:

    -Savings Bank account

    -Liquid funds

    -Short-term fixed deposits

    -Flexi-deposits

    -Sweep-in deposits

    ...are some of your options to park funds as contingency reserve.

    Please note: When you park money aside for the contingency reserve, returns are not the objective; it's capital preservation.

    Don't forget to optimally insure yourself for life and health.

  6. Under-insurance:

    This is a risk! Insurance comes to the rescue in case something untoward were to happen. It indemnifies the risk involved.

    God forbid, tomorrow something untoward happens to you as the breadwinner of the family; insurance stands as a financial security for your family. Not having adequate insurance can leave the entire family's financial future in jeopardy.

    Merely buying any insurance policy to indemnify you against risks is not enough.

    Employ a scientific approach to determine your life insurance based on your Human Life Value (HLV). And for life insurance opt for none other than a term plan. Term plans offer the highest cost-to-benefit.

    Never mix your investment and insurance needs (with the aim to kill two birds with one stone). Deal with each of them separately.

    Besides, remember to buy a suitable health insurance policy as medical and hospitalisation bills can sometimes lead to financial turmoil.

    Make sure to implement the actionable discourse shared with you in the previous module, i.e. module 3.

    Likewise, when you invest...

  7. Making ad-hoc investment decisions:

    This won't help as you vie to achieve your financial goals. The objective of course is to clock inflation-adjusted returns. But, at the same time, your investments should be aligned with your financial goals and risk appetite + risk tolerance, or you could end up with a hodgepodge portfolio.

    Remember, if you aren't confident do not hesitate to seek services of a SEBI registered investment advisor or a financial planner or a Certified Financial Guardian who can handhold you in investing and goal planning exercise.

  8. And while deploying your hard-earned money, avoid

  9. Borrowing to invest, and buying depreciating assets:

    Borrowing money to invest - especially risky assets viz. stocks, equity mutual funds, gold, etc. - can potentially be a recipe for disaster.

    Likewise, purchasing too many cars on borrowed funds and other expensive gadgets, serves no good; because effectively they are depreciating assets. Their value is going to decrease with time.

    Avoid spending on assets you don't need, and your financial condition/health will improve when you invest the same money in wealth creating avenues. If you require a car, settle for one that is less expensive, yet that it commands a premium you deserve.

    And this principle even applies to...

  10. Buying an outsized house:

    When it comes to buying a house, the general belief is bigger the house, the better it is. But it's often a myth!

    Unless you live in a joint family, choosing a 6,000 sq. ft. home will only mean more maintenance, taxes, and expensive utilities.

    Thus before purchasing an outsized house, sincerely assess if you really 'need' one. We recognise that many of you hold the aspiration. But, typically a family of 3-4, doesn't need it unless it's supported by your economic status and you're ready for the high maintenance and taxes.

  11. No estate planning:

    When quizzed, most investors believe that they are too young to write a Will. While praying for a healthy long life is a good thing, it is important for you to know that dying intestate (without preparing a Will) can lead to various complications and disagreements among your heirs.

    You can't even imagine the mess and inconvenience that might be caused to your loved ones because of your laziness in not drafting a Will for them. It is prudent to make provisions to leave behind assets from the very first day you acquire one.

    Also make sure all the insurance policies and investments have nominees registered to avoid confusion. It is better to make provisions to transfer our fortune while we are alive, than to leave it for the court of law to make decisions for us. So, undertake prudent estate planning. And remember that there's more to estate planning than just writing a Will.

For those who have just started off your career, it will be prudent to avoid all these common errors. If you have committed any of the aforementioned mistakes already, take a corrective course right away without wasting any time.

We are of the view that by avoiding these common mistakes, you can keep your financial health in pink and accomplish your financial goals.

Finally, here are a few...

Points to Remember

  • Live within your means. First save to plan for your financial goals, and then spend.

  • Monthly budgeting can bring in the required discipline and streamline expenses.

  • While taking a loan, borrow only as much that you can repay.

  • A high debt-to-income ratio can jeopardise your financial well-being. So, be careful!

  • Calculate the corpus you would need post retirement (keeping in mind medical emergencies, rise in the cost of living etc.) and then save on a regular basis without fail.

  • Contingency reserves (or emergency funds) can help you manage expenses on a rainy day, during exigencies such as loss of job, medical emergencies or any unfortunate event that comes your way.

  • Insure yourself optimally for health and life. It can provide financial security to your family when an untoward incident strikes.

  • Making ad-hoc investments can lead you nowhere in the journey of wealth creation and accomplishing financial goals. Engage in prudent financial planning.

  • Borrowing money to purchase assets like cars is an example of investing on a depreciating asset.

  • Ensure that you have an estate plan in place to pass on assets to your loved ones.

Thank You For Participating!

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