Everyone is bound to make financial mistakes because of complex personal finance world. Even i also learnt from my financial mistakes after paying price for the same. Financial wisdom says that “Listen to your mind”. Most importantly “Heart should not overtake mind while making financial decisions”. In my opinion, the biggest problem in our country which in turn is sole reason for committing financial mistakes is “FREE ADVICE”. Its a fact that anyone giving FREE FINANCIAL ADVICE will have vested interest in mind. Be it insurance, stock or financial investment. Assuming i ask a bank employee which insurance product is suitable for me. Now i can’t expect genuine advice from his end as he will push the insurance product which help him to meet his monthly insurance targets. I explained it in my post Beware of Relationship Manager. Another source of information is friends, they will give advice what they received for FREE from insurance agent or stock broker. This vicious circle of free advice lead to array of financial mistakes which can potentially ruin your financial portfolio. Like western countries, You should hire a financial planner for fees who understand your requirement and suggest without any vested interests. This can be one of the strategy to avoid financial mistakes. Now you must be wondering “What is the guarantee that even after charging fees, he will share genuine advice?”. There is NO Guarantee.
Besides financial advice there are some financial mistakes which can be avoided at individual level. Amount lost due to these financial mistakes may be too small but compounding effect over a period of time make it a substantial amount. Lets check out 7 Financial Mistakes You should AVOID
Insurance / ULIP
When i got my 1st job, my 1st investment (read financial mistake) was traditional money back policy. I told my father that i would like to save tax and he called his friend to help me who happen to be an insurance agent. Same day evening he came to our house and i happily handed over cheque of Rs 20000 as 1st premium. At the time, it was more than my monthly salary. After few years i realized that i made a big mistake as i am paying premium of 20000 for insurance coverage of just Rs 2 lakh. The return on money back policy is only 4%-6%.
My 2nd tryst with Insurance was ULIP in 2007. This investment (read 2nd financial mistake) was through my Banks Relationship Manager. She didn’t explain me the cost structure and after 2 year i realized that my first 2 premiums were donated in charity. The wisdom gained from this experience inspired me to write posts on ULIP. One such post is on ULIP – Investment or Insurance?
The lesson to learn from this financial mistake is that Insurance should be kept separate from investment. Both the goals should not be mixed else its a cocktail of financial mistake. Online Term Insurance cover is only alternative for insurance needs. It is available at dirt cheap rate compared to traditional insurance plans.
The savings formula for most of the people is Income – Spend = Savings. As a result, RHS of the formula is mostly ZERO. One of my friend and his wife are earning 3 lakh per month but believe me their savings is almost NIL. When i asked them about savings, they told that they do save. I sigh relief but they save only for Holidays Abroad twice a year :). With the increase in income level we tend to spend more but don’t increase savings at same rate.
The lesson to learn from this financial mistake is that formula for savings should be reverse i.e. Income – Savings = Spend. Savings rate should be min 25% of total income. First we should save and then balance should be spent. It is always advisable to maintain separate account for savings.
Greed is another factor which lead to path of financial mistakes. Everyone wants to make quick money. There is a famous saying that “There are no shortcuts to success”. Same holds true for money, “There are no Shortcuts to make money”. Fact is we have to earn everything in life. Stock market is one such place for making Hot Money. I am not saying that we should not invest but financial mistake is to run after hot money. Stock market is under control of big operators and as a retail investor we cannot understand its nitty gritty. Instead of finding ways to multiple money fast, we should protect principal and target decent returns which can beat inflation.
With the kind of today’s lifestyle, Healthcare cost will be single largest guzzler of savings in future. We are concerned about food inflation which is 5% now but we are not aware that Healthcare Inflation in India is 15%-18%. Many of my clients give me justification that they already have health insurance from their employer but they forget that average retirement age is now 45 years. How they will cover future healthcare costs. Health Insurance along with Term Insurance are must for basic financial planning.
The lesson to learn from this financial mistake is that even if we have health insurance cover from employer we should opt for personal health insurance cover. The cost of good healthcare is very high in India and is not available everywhere.
Contingency fund or Emergency fund as the name suggests should be separate fund to meet financial commitments in case of any emergency situation or unforeseen circumstance like job loss. Contingency fund should be between 3 months to 6 months of monthly household expenditure. If you have any debt liability like Home Loan or Personal Loan etc then 3 months EMI should also be a part of contingency fund. The financial mistake people make is that they assume that nothing can go wrong in life. Life is uncertain we should be ready to face it. Any financial mistake can become financial blunder if we are caught unaware.
There is close relative of mine who hold a world record of not paying any of the dues on time till date. Be it electricity bill, insurance premium, Credit card bill, telephone bill or society charges. He is dream customer for utility companies. I call such people financially lazy. Its nothing but a habit. This financial mistake may look small in no but with wide spread and compounding effect, it cost substantial amount every year. I did rough calculation for my relative and found that he must be losing around Rs 50000 to Rs 60000 every year.
The lesson from this financial mistake is to use technology. I installed calendar on his mobile and told him to feed reminders. Secondly, i suggested him to opt for ECS facility or Bill Payment service like Visa Bill Pay etc.
Financial Mistake of being Emotional with Investment
Another financial mistake which is last in the series but not least is people get emotional with investment. I will not call it financial mistake but a financial blunder. The golden rule of financial world is to Learn, Unlearn and Relearn fast. One of my client who keeps investing in NSC on regular basis. I suggested him to open PPF but the reason he gave was that in his family everyone invest in NSC only. Another case wherein one of my client keep his money in Savings Account only. The reason given was that his wife work in same branch of bank therefore he would like to maintain healthy balance in the account.
I hope you liked the post and avoid these 7 financial mistakes. You should always listen to your mind and question the financial wisdom of your financial advisor. I personally believe that to some extent we are also responsible for our financial mistakes.
Copyright © Nitin Bhatia. All Rights Reserved.
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