Have you ever found yourself in a situation where despite taking all the precautions to spend your money wisely and making feasible investments, you have not seen desired results? This could be because we tend to focus on the factors that help us generate more wealth and overlook the 10 most common financial planning mistakes. These financial mistakes keep us from achieving a stress-free financial life.
So, let’s talk about these financial mistakes we need to work on.
Not implementing a well-structured financial plan:
It is natural for us to want something better than what we already have. Imagination has no limit, and you might have already imagined what your perfect life should incorporate. A mansion, a car, an annual abroad trip with your family and friends, an overall upgraded lifestyle, etc. It is certainly good to have dreams but not when you start setting impractical goals for yourself.
Many people go wrong with their finances when they do not take planning seriously. It is essential to have a pragmatic vision that gives you a sense of direction and helps you to structure a financial plan based on it. Being indecisive or vague with your goals will only delay your plans, making them more challenging to follow with the passage of time.
Once you have made a clear, challenging but realistic, and achievable plan, you should follow it with perseverance. Otherwise, it will defeat the purpose of you curating a plan in the first place.
Apart from that you also need to review and update your financial plan at regular intervals to make any changes that can help you optimize your investments and achieve your goals resourcefully.
Being careless with insurance:
As insurance is a contingency payment, people usually deem it as an expense or a liability. Being irresponsible with your insurance would completely sabotage your financial planning during an emergency. So, do not make the mistake of ignoring your insurance and get yourself and all your loved ones insured against uncertainties. This will not only give you the confidence to face difficult times without worrying about finances but also keep your financial plan intact.
Lack of tax planning:
Taxpayers normally make a few tax-saving investments to claim tax deductions. However, most people do not give a priority to tax planning and leave it for the last moment which sometimes leads to making wrong investments. This is why you should never wait until the very last moment or make hasty tax-related decisions. Instead, plan your taxes well in advance to keep them in sync with your tax-saving as well as financial goals.
Not expanding your investment horizons:
While having a savings account or an FD could feel like a safe option for your money, however, neither do they provide inflation-adjusted returns, nor do they help you achieve your wealth creation goals any sooner. Therefore, it is important to expand your investment horizons and invest in other non-conventional options like the equity market, mutual funds, ETFs, real estate, or R.E.I.T., etc.
It is important to study the various other investment options available along with the risk they carry and the returns they deliver. Accordingly, evaluate your risk appetite and investment capacity before deciding on the right investment channels for you.
Forgetting to maintain a budget:
This might seem like an ordinary concept, but it carries a great deal of impact if you think about it. Once you start monitoring the expenses you consider to be trivial, you will realize that a lot of your purchases are unnecessary and avoidable. Yet they manage to slip away due to the amount being negligible. Bring these expenses under control by preparing a budget and avoid mindlessly spending your money.
A popular budgeting technique is the 50/30/20 rule. It simply implies that you need to divide your after-tax income into three sections
- 50% of your income to be used for: unavoidable essentials and needs
- 30% of your income to be used for: avoidable wants
- 20% of your income to be used for: savings and debt repayments
As the phrase goes “Take care of the pennies and the pounds will take care of themselves,” if you want to be left with sufficient savings after retirement, you need to look after all your minor expenses, along with your major investments.
Disregarding the concept of an emergency fund:
We generally dismiss the idea of creating an emergency fund confusing it to be the same as insurance. Here is where we go terribly wrong with our personal monetary management. Not every emergency expense can be covered under insurance. Besides, emergencies have no predictability, as they can occur at any time, especially when you least expect them. So, we need to have an evident distinction between an emergency fund and insurance as both are crucial and need to be maintained separately.
Having an emergency fund will make money more accessible to you for meeting the sudden expense without having to withdraw anything from your savings or other investments. It will also prevent you from getting yourself into any debts. An emergency fund acts as a pre-planned fund for unforeseen circumstances that cannot be availed under insurance. It is ideal to save up an amount that is at least worth six months of your expenses.
Ignoring your credit scores:
There could be many instances where you might feel the need to apply for a loan. Be it an educational loan, a loan to buy a house, or even for your business venture, etc. However, lenders first check the credit standing of the borrower before lending money or even a credit card. A credit score is a 3-digit number that dictates your creditworthiness. It is calculated based on the history of your debt repayments and a few other factors.
If you have a good credit score, you could avail some profitable offers like faster approval of your application, lower interest rates, receiving a higher credit limit, or even getting a pre-approved loan offer. However, if you have a bad credit score, you can be deprived of these offers and may also be liable to pay higher interest rates. Therefore, it is important to try and maintain a minimum credit score of at least 750.
How Inflation Affects Your Retirement Plans:
People often have the tendency to neglect inflation while planning for their retirement. We previously mentioned that it is of utmost importance to invest in places that will grant returns higher than the inflation rates. Similarly, you need to carry this perception for long-term investments as well. Retirement planning cannot be done without factoring in inflation as the future is indeterminate, and we can only move ahead with assumptions.
You do not want to be too overwhelmed with bills or forced to give up on a vacation you’ve always wanted to go on post-retirement while wondering where you went wrong with financial planning. Therefore, make sure you plan your retirement only after considering inflation as the prime influence.
Unknowingly spending more:
There are times when you make purchases without enquiring about the prices from other places in the market. You can easily save a lot more money on your home appliances, electronics, furniture, etc. if you patiently carry on a comparison shopping to find out the best value of a product. We usually end up spending more for the same product that is available at a cheaper price in another store.
It just requires a little effort to conduct research and scrutinize the market before buying. You could also be introduced to a better alternative while exploring the market. Just be wary of advertising gimmicks and do not fall for fraudulent marketing schemes.
As it is said a penny saved is a penny earned. These savings will eventually help you build up your finances in more ways than one.
Not consulting a financial advisor:
Finance is an intricate topic and not everyone is expected to have a 360-degree knowledge of the financial market and investment strategies. Moreover, each one has a different investment requirement according to their income, risk-taking ability, goals, etc. which gives rise to the necessity of a unique financial plan for every individual. It is not possible to always find the most reliable and accurate information on the internet as it takes a more generic approach that is oblivious to your personal needs and prior knowledge of finance.
You should be open to consulting a financial expert to get personalized guidance and a plan that specifically entails your desires and agrees to your capacity, giving you the financial freedom of your dreams.
However, people are still reluctant to wholeheartedly accept the services of a financial expert. Even though there is no compulsion related to consulting a financial advisor, getting a financial plan that is backed by expertise can surely give you added benefits. Also knowing that an expert is taking care of your portfolio every step of the way will put your mind at ease and give you a sense of assurance. In this way you can avoid any financial planning mistakes you would have otherwise made.
Mistakes are what make us human. They are a part and parcel of life. But after relentlessly working hard in this hustle culture, it is hardly fair, if by the end of it anyone has to compromise with their dreams. So, try to avoid making these financial planning mistakes that could cost you your dreams.
Disclaimer: The views expressed in the blog are purely based on our research and personal opinion. Although we do not condone misinformation, we do not intend to be regarded as a source of advice or guarantee. Kindly consult an expert before making any decision based on the insights we have provided.