Avoiding Common Financial Mistakes

Managing finances can be challenging, especially when our primary education rarely focuses on this essential life skill. In this age of excessive data flow, it's easy to make financial mistakes with so many distractions and mixed voices. Starting on the right foot with our finances can be a daunting task. Financial advice sounds simple, but it can be difficult to figure out which advice is worth following. One of the best ways to start is to arm ourselves with the common mistakes people make. Being conscious of such pitfalls and making an effort to avoid them is half the job done.

As Sam Levenson said, 'You must learn from the mistakes of others. You can't possibly live long enough to make them all yourself'

Most financial mistakes can be broadly categorized in 4 key themes

Investments

• One of the biggest mistakes people make when it comes to personal finance is waiting for the 'right time to invest'. When money is not invested, it typically finds in way to overindulgence and unnecessary expenses. It's actually a double whammy, this creates unsustainable spending habits and no wealth creation. Exactly opposite of this mistake is another issue and that is being impatient once money is invested. The urge to remain active with investments, especially equity oriented investments actually ends up hurting the portfolio with very frequent reviews. As an investor, it is absolutely essential to strike a fine balance between doing nothing and being aggressively active.

• Inappropriate Asset Allocation with a propensity to allocate higher allocation to a particular asset class mainly, real estate, FDs or gold.

• Excessive diversification of investments leads to owning multiple assets / securities which then becomes way too difficult to track or manage

• Ignoring one of the most important financial goal of life i.e. Retirement Planning. With an increasing life span and reducing efficiency of passive traditional investment strategy (FDs, rental income etc), it is imperative to have a sound retirement plan that ensures sufficient cash flow during the retirement phase

• Investing in emotionally-charged schemes like 'Childcare' or 'Womencare' can also be a costly mistake. These investments are typically expensive,illiquid propositions packaged capitalizing human emotions

• Another common financial misstepis having too many mentors (relatives, friends, parents, friendly bankers) who may or may not be necessarily qualified to guide your financial journey. One must remember that when it comes to personal finance, a one-size-fits-all approach is a disaster in the making.

• And lastly, making investments just to save tax or making last minute tax saving investments. While taxation is an important element of investments, it cannot be the sole driving force to invest

Debt Trap

Debtcan be a major concern for individuals. Some debts can help build wealth, but too much can ruin your financial life. Some of the common red flags for spiraling uncontrolled debt are having a revolving credit card or more than 50% of monthly income being diverted towards EMI for a fairly long time. Developing the right mindset is key to avoiding increasing debt. One must figure out a deadline to become debt-free and spend within their means.

Insurance

• Common financial fallacies can lead to wrong choices and have a significant impact on both insurance cover and investment returns. One such fallacy is mixing insurance with investments.

• Another misstep observed by corporate employees is over reliance on insurance cover (life and health) provided by the company.

• Some individuals may view insurance as an unnecessary expense, particularly health insurance. However, with the inflationary trends of medical expenses, it's important to remember that a single hospital bill can lead to tremendous financial difficulty.

Succession Planning

Our society still treats succession planning as an event reserved for senior age. Financial decisions and operations are often managed solely by senior male family members, leaving dependents in financial and emotional turmoil in case of an untimely death. A proper succession plan, including a toolkit to track all relevant financial documents, is crucial to avoid compounding these challenges.

Remember, learning and evolving is the key to effective financial management!

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