- 1 COMMON FINANCIAL MISTAKES
- 1.1 Spend the Real Money
- 1.2 Waiting For Income To Get Higher
- 1.3 Taking To Little Investment Risks
- 1.4 Not Following Asset Allocation
- 1.5 Getting Lured By Dubious Schemes
- 1.6 Dipping Into Provident Fund Account
- 1.7 Treating Insurance as Investment
- 1.8 Spending on Items You Do Not Need
- 1.9 Not Setting Up An Emergency Fund
- 1.10 Managing Credit Score
- 1.11 Lending Money
- 1.12 “The only man who sticks closer to you in adversity than a friend is a creditor.”
COMMON FINANCIAL MISTAKES
Everyone has at-least once mishandled their money reason could be anything.
And it has cost them a bomb.
In a survey, it was found out that most people find Insurance as their worst Investing Mistake.
Perhaps what they fail to understand in First place. Never treat Insurance as Investment.
Spend the Real Money
We have been living in the world of credit cards and we spend money which we are expecting to receive.
I have done this for years.
Sometimes I had money in hand and most of the times I did not have.
This did not stop me from spending.
“Money often costs too much.”
–Ralph Waldo Emerson
Keep your spending account different from your saving account. Have an auto deposit saving account.
This goes a long way.Saving does Better when out of Sight, Out of Mind & Out of Hand Click To Tweet
Saving as a monthly action never happens. Saving as an auto action is bound to happen.
Waiting For Income To Get Higher
When was your Income enough for your Wants?
Answer is No
Then waiting for higher Income to save money is going to be futile.
A very meager amount started at a very early age can give a good amount of funds later in life.
For example, none of us think of saving for retirement from our first salary.
A small amount of Rs. 5000 started as early as in your 2o’s
The Return one can expect from this is as follows:
It works out to be as high as Rs. 3.3 Crores.
Now if you would have started at 30’s
The Return would be very shocking to you.
It is around Rs. 64 Lakhs
It’s for your to decide to should you really wait for your income to Increase or start early.
Taking To Little Investment Risks
Too little Risk in Your entire Saving can be Dangerous Too.
Sticking your entire saving to most secured and fixed income can have a dent in your Income.
I cannot give you a specific formula but long term return will not be able to beat even inflation.
Most Secure Saving & Investments
- Bank Fixed Deposit
- Recurring Deposit
- Tax Saving Fixed Deposit
- PPF (Public Provident Fund)
- MIS (Monthly Income Scheme)
- SCSS (Senior citizen saving scheme)
- NSC (National Saving Certificate)
- Debt Mutual Funds
- Saving Bank
For the above investment and saving the return would range from 4% to 8%.
For example, if you are investing around Rs. 5000 for 30 years your return would be around Rs. 60 Lakhs.
And if the same amount is adjusted for inflation it would be meager Rs. 20 lakhs.
Now we all now that High Risk is High Return.
Even if you add only 10% of your Saving e.i. Rs. 500 for 30 years with an average return of Rs. 25%.
The results are astounding.
A whopping Rs. 4 Crore.
Hence the total return by just adding 10% to High Risk could give you a return of Rs. 4.6 Crore.
Where in later you get Rs. 60 lakhs alone.
Now it’s for your to decide.
Not Following Asset Allocation
When we look at Investing and Saving most of us end with First Buying a House, Next A Bulk Fixed Deposit and Finally a Car.
I used to think this is the Key to Asset Allocation.
And If something is Left go for Mutual Funds.
Asset Allocation as quoted in wikipedia.com,
“Asset allocation is the rigorous implementation of an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investor’s risk tolerance, goals and investment time frame”
But the concept of Asset Allocation has changed than what it was 20 years ago. Now asset allocation has become more dynamic.
Let start with first types of Asset Allocation.
Types of Asset Allocation
- Strategic Asset Allocation
- Dynamic Asset Allocation
- Tactical Asset Allocation
- Hybrid Asset Allocation
Types Of Asset
- Contemporary Asset Options
- Commercial Real Estate
- Crypto Currency
- Venture Capital
- Private Equity
Well, now the options are endless.
Investing your entire amount only in one asset class and not diversifying, in theory, is high risk in itself.
Getting Lured By Dubious Schemes
These days a number of such schemes are going up very high very soon.
Money is a terrible master but an excellent servant.
Some of the points one should consider.
- Be very cautious while investing in seemingly attractive scheme offerings out way high returns.
- No one really gives your money for free.
- Do not invest in unregulated entities or companies.
- Avoid responding to unsolicited offers for the money.
- Don’t believe hearsay – Check yourself.
- High Returns is High Risk (Don’t forget your risk appetite.)
- Understanding money is easy to lose and hard to earn.
- Consult with a Certified Financial Advisor.
In short High Returns in Very Short Time = Dubious Schemes
Things to Consider Before Investing in a Scheme
- Draw a Personal Financial Roadmap
- Appropriate Mix of Investments
- Maintain Emergency Fund
- Pay off High-Interest Debt First
- Consider Re Balancing your Investments
- Ask Questions and Check the Scheme Prospectus
Dipping Into Provident Fund Account
The Public Provident Fund (PPF) Scheme, 1968 is a tax-free savings avenue that was introduced by the Ministry of Finance (MoF) in India in the year 1968.
The PPF of interest rate for the financial year 2015 – 2016 was 8.7%.
It is backed by Government.
And most importantly it’s Tax-Free making it very Popular.
PPF accounts can be opened at specific private banks as well.
The government of India announces the interest rates for the said year.
PPF accounts can be opened at any nationalized, authorized bank and authorized branches of post offices.
Historical rates for PPF account.
|Financial Year||Interest rate (p.a.)|
|2016 – 2017||8.1%|
|2015 – 2016||8.7%|
|2014 – 2015||8.7%|
|2013 – 2014||8.7%|
|2012 – 2013||8.8%|
|2011 – 2012||8.6%|
|2010 – 2011||8.0%|
|2009 – 2010||8.0%|
|2008 – 2009||8.0%|
|2007 – 2008||8.0%|
|2006 – 2007||8.0%|
|2005 – 2006||8.0%|
|2004 – 2005||8.0%|
|2003 – 2004||8.0%|
|2002 – 2003||9.0%|
|2001 – 2002||9.5%|
|2000 – 2001||11.0%|
The maximum that a person can deposit in a year is currently Rs.1.5 lakhs.
If a person yearly saving is Rs. Rs. 4.5lakhs and if he invests the entire amount into PPF account.
In Long term, he will not be able to beat the Inflation.
Treating Insurance as Investment
If you treat your Insurance as Investments and invest in ULIP.
Then you are not in a position to separate your Investment and Insurance.
Never spend your money before you have it.
It is also difficult to maintain different financial goals.
In a case of emergency, you will have withdrawn funds and compromise with your returns.
It becomes a very costly way of Investing.
Investment Management Fees at times is very high. Insurance profit adds up in this.
This can easily drag your returns down.
Spending on Items You Do Not Need
Either you’re in a Habit or You want to Impress people.
Spending wisely is what we are saying in short.
Save for the unexpected.
We all suffer from the urge to splurge.
“Wealth consists not in having great possessions, but in having few wants.”
There are so many reasons such as lifestyle, Peer Pressure, Family, Emotions etc.
Never go for out of Budget objects just because you have the options of EMI.
Not Setting Up An Emergency Fund
Treating your Saving and Investments as Emergency Fund
This could save you from emergency but slow you down to achieve financial goals.
These are the common mistakes people make thinking of not setting up an emergency fund.
- I’m still young.
- Not keeping that as your priority.
- First clear Debt.
- Relying on Credit Cards.
- Borrowing money from Friends, Family, Relative for Emergency.
- Considering saving money as an emergency.
- Thinking of investment as a better alternative than an emergency fund.
Managing Credit Score
Most people take their credit score lightly.
This talks a lot about you.
People are not aware that your credit score can be repaired.
Learn how to Repair your Credit Score.
Understanding How CIBIL works.
There are many ways you can use to Improve Your CIBIL Score.
You can also Understand and Improve your Company Credit Report.
Understand How to Read your CIBIL Report.
This is a different task altogether.
Bad Idea if you do not have prior experience in this.
Be prepared if the borrower avoids you out of shame and awkwardness.
Do not take the trouble to lend every other person you meet. It is tough to manage. Especially if you know the person it is even more difficult to manage.
You can always give them ideas and introduce them to contemporary ways of getting money.
“The only man who sticks closer to you in adversity than a friend is a creditor.”
So, go ahead and try to implement the above points, and have a happy financial Life.
Never think that investing in your financial advisor as a waste of money.
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