What are the most common financial mistakes and how to avoid them? Financial planning plays a pivotal role in everyone’s life. But, one needs to be very careful while planning his/her personal finances. Every small but right step taken will help you reach your financial goals in a smooth and effective manner.
As quoted by Robert Kiyosaki, “Financial freedom is available to those who learn about it and work for it.”
So, planning and working towards financial freedom helps you open the doors to success, may it be your financial success or your overall success in life. We all have an urge to seek perfection in life through systematic planning. But even the best of our plans can go awry, if not dealt properly.
We often tend to make some common financial mistakes that scare us away from reaching our financial goals. Especially, when you are a newbie investor and still making a way for investing, you need to be extra cautious while heading towards your financial journey.
It is essential for you to make yourself aware of these biggest personal financial mistakes, avoid them and plan your short term as well as long term investments wisely, so that you don’t land yourself in debt and can lead a healthy financial life. Here we have compiled a list of 5 Common Financial Mistakes that you must avoid in order to make yourself financially secure .
Common Financial Mistakes and How to Avoid Them?
Not starting at a young age
This is the biggest and the most common financial mistake young adults make. Delaying your financial planning not only adds to the hurdles in your way, but you tend to forego various benefits, that you could have otherwise got if you had started a bit early. You get to earn better and bigger, if started early through the power of compounding.
There is no particular age to start saving and investing your money. However, various experts are in favour of starting your investing journey in the early 20s. At a young age, you probably have less obligations and can increase your risk profile in the desired manner.
It is quite natural to shrink your risk area as you grow in years and look towards safer options. So, making the maximum by exploring different investment options in your early years can add to your retirement corpus.
Not creating a Budget for yourself
This is one of the worst financial mistakes to avoid in your 20s. Budgeting is an important part of financial planning process. If you don’t have a planned budget, you will end up overspending and hence increasing your debts in an undesired manner. Budgeting simply refers to your own personal saving and spending plan i.e. how much you will be saving based on your earnings and expenses.
You can have a flexible budget as per your convenience. But, not having any budget at all makes things more complex. So, if you want to control your finances in the right manner, setting a budget for yourself is a prerequisite to it. You need to have a balance between your income and expenses and try to live within your means. But, this can be possible only through a well planned budget.
Delaying your long term objectives
People generally focus on their short term objectives, without realising the importance of attaining your long term objectives. This is another common mistake that needs to be overcome on time in order to gain financial security.
Planning for short term is good, but focussing on your long term objectives like retirement planning is a must. You should have a balanced financial portfolio.
Your long term objectives can include anything ranging from buying a house, leading a healthy post retirement life, your child’s higher education and marriage etc. You just need to prioritise all of these based on your individual preferences. Keep yourself away from various excuses for not investing for long term and plan for them right now.
Not having an emergency fund
Not building an emergency fund to protect you against uncertain events is another addition to the above list of financial mistakes. No matter how well off you are, you need to prepare yourself for rainy days.
Your emergency fund should at least be equivalent to your 4-6 months of expenditure. This is one investment that should be untouched until severe need arises to withdraw this money.
Such investment should be done in highly liquid asset class where you can easily withdraw your money as and when need arises. A fixed amount towards emergency fund, every month shall help you tackle any kind of emergencies in a better way.
Mixing Insurance & Investment
This is another area where people get confused and end up making huge mistakes. We consider insurance as just another investment option or to be specific, a tax saving investment.
Insurance should be done exclusively with the purpose of giving an adequate risk cover to your family. Health Insurance and Term Insurance are two important yet highly ignored parts of one’s financial portfolio.
Don’t think insurance as an alternative to save some of your taxes. Life insurance is even more essential than your car and home insurance. So, don’t forget to take an adequate insurance cover to provide financial support to your family.
If you want to align your money goals with your life goals, you need to take each and every step with utmost care. Keep these financial mistakes in mind and avoid them so as to simplify your financial matters.
Financial planning seems to be a tedious task, but if you get to know few basics including the mistakes, you can move towards building a solid financial plan. Having professional guidance is good, but firstly you need to make yourself equipped with these simple yet helpful tools to take correct financial decisions.
These are only few of the common mistakes in financial planning investors usually make, there might be many more. It is good to learn from our mistakes, but avoiding them at the first instance can help us save from big financial hassles at a later stage. If you have any other to add in these list or any experiences to share, go ahead and make your fellow investors aware of it.
This is a guest post by Harleen Kaur, a Chartered Accountant, a Finance blogger, running a Personal finance blog @ Fintrakk.com, simplifying things in the field of Finance & Taxation for the common man.