Yes, I know you never make mistakes. And this is why you only want to know what you should do to make yourself financially well off.
You prefer to read success stories, like to emulate successful investors, like to invest where they had invested. But As written by Rolf dobelli in his book “The Art of Thinking Clearly” –
Same way behind every successful investor there are thousands of others who could not succeed. So, to be a good Investor one should also learn from the mistakes unsuccessful investors have made. Along with knowing what you must do, you should also learn what you must not do. (Read: Survivorship Bias is not good for success)
Here is the list of Money Mistakes that you should avoid to have a better financial future.
1. Copying other Investors –
You are different. Your needs are different, your risk attitude, your responsibilities, your family profile, everything is different, then why do you think that the advice given by some expert to Mr. or Mrs. X on TV Channel or newspaper story can be applied on you. This is the biggest mistake you make when you try to copy the advice to others on self. Even Warren Buffet says that anyone looking for investment advice should “never listen to people like me”.
2. Acting on Unprofessional advice –
Your family and friends maybe your well-wishers but they surely are not the best financial advisors for you. You should not expect professional advice in a casual relationship.
You do more damage to your finances when you take and even act on advice received on social media. There are many Facebook groups or WhatsApp group where people give and receive advice for free. And this is where the Risk lies.
As they say, when you are getting something for FREE, you are not the customer, you are the Product.
How can someone advise you without knowing you completely?
3. Having Too Much of everything- Bank accounts, Insurance Policies, Credit cards, Mutual funds, stocks, loans, etc.
You switch jobs and open new bank accounts, you shift places and open new accounts, You buy investments/Insurances or open accounts just to please your relative, friend, some known person, You take credit cards from every bank as they are providing some exciting offers, you have many mutual funds in the name of diversification, you Convert every purchase into EMI or love buying things on “No Cost EMI”…and so many other things you do without realizing the complexity it may bring in your financial life.
Keep things simple and manageable is the mantra that you should follow. More is not always better, less is always manageable.
4. Not knowing where are you Spending:
If you have no clue where you spend your money, this shows your Money is not in your control, or I should say you are not taking care of money or being responsible for it.
You Invest your life energy to earn it, you exchange your valuable time to get it, you compromise on your health to have it…how could you say you don’t know where it is going.
Even if you spend it in cash or swipe a credit card or it is an auto-debit, you have to be aware of where your money is going. If your cash flow is in your control then it’s the half battle won towards your financial wellness.
5. Not Maintaining the Emergency fund or thinking all Investments are for emergencies only:
Emergencies can strike anytime and in any form. You have to be prepared for it always. That is why I advise you to always have a decent emergency fund (3-6 months of expenses) with you. That money should be easily accessible and in a safe financial instrument. You cannot take a risk with that money. (Read: Options to invest emergency fund money in)
However, it has been experienced that when things are going good you tend to ignore this important advice and thus either do not save for emergencies or if you do then do not like it lying in your bank saving accounts / FDs or Liquid funds…citing the reason that it is not earning anything out there. And thus, withdraw and invest it in some volatile instruments.
You have to understand that this money is not meant for growth, but protecting the growth of other investments which you may like to redeem when emergency strikes.
6. Buying Insurance Policies in Children name:
When you are Investing in a directionless manner you are bound to get mis-sold or you may mis buy yourself. You tend to buy nonsuitable products or may buy it in the wrong manner with some vague reasons attached to it. Buying Insurance policies in the name of children is one such example.
You may either buy it under the impression of cost-saving (or sold to you like this) as this may attract lesser mortality cost due to the age of the child or you buy it due to emotional reasons as when your agent or relationship manager convinces you to provide some kind of security to your kids’ future.
Both ways you are not doing justice to your investments. Your Child does not need any insurance cover, but you, so if something happens to you, then your child’s financial future be secured.
And Investing in the name of your grandchildren post-retirement is the worst thing you can do with your Retirement Planning.
7. Ignoring the Adequate cover through Term Plan
Term insurance is not an expense. It’s an investment to ensure your family’s financial security. Considering it as waste is one of the biggest mistakes you make.
This is important to understand that the purpose of life insurance cover is to protect the financial future of the dependents in case of the demise of the Breadwinner. And when you try to buy the adequate insurance cover through the investment-linked plan, then that proves to be quite expensive. Even if you can afford that premium in the beginning.
These plans will not generate the expected returns due to the inherent cost structure, which further increases with the mortality cost for the higher cover you have bought.
First Thing first, Do have adequate Life insurance cover at the place.
8. Depending Solely on Employer-Provided Health Cover & Personal Accident cover
You should not depend on the employer-provided Health and Personal accident insurance cover. By providing you the insurances, the employer is just covering up its liability, and thus may not be adequate for your requirement.
An employer may decrease the cover in the future if the premium is proving to be a burden on its Profits. But with age, your requirement of higher coverage keeps increasing. And god forbid, if you get diagnosed with some illness before buying your individual cover then Insurer may out some exclusions in your policy.
So, it is always wise to have a separate personal and family cover at the place.
9. Swiping Credit card for all Big & Small Ticket expenses –
It’s easy these days. You buy online through credit card to get cash backs or discount offers or to earn reward points. You prefer swiping credit cards for every purchase as it will not put your cash flow in immediate stress. You add your credit card details on some sites so the buying becomes easy for you in the future and this way you end up spending more.
All this without realizing how this way you are building up your spending behavior.
Credit card buying takes you away from the real cash flow picture and thus when there is a time to repay the card and you find that you had overspent, then either you will roll over the card by making minimum payment or convert the dues into EMIs.
In the former case, you ruin your credit score and, in the latter, once you get easy with the cash flow you tend to spend the same way you used to do earlier till the time you do not reach the rolling over the stage. (Read: How to improve your Credit score?)
Precaution is always better than cure, and in finances cure always takes a lot of time, and the sickness period is quite painful. So, keep a check on your credit card usage.
10. Borrowing Just to get Tax benefit:
I have seen many people taking loans just to get tax benefits. I don’t get this at all. Like you want to pay interest to the bank so on the interest you can get some tax saving.
Loans are there to help you to make big-ticket purchases or to fund your needs in case of some emergency or immediate requirement.
Tax benefit on a home loan is there so to encourage people who cannot fund the purchase themselves to go for a loan, and have their own home and this way gives a push to the real estate sector too.
But later people start taking it as another source to do tax saving, which is the wrong way to look at it. (Read: Income Tax deductions List 2019-20)
You should do your cash flow management properly, and in the requirements, if you need a loan then you may go for it, and look at tax saving as an additional benefit.
11. Personal Loans are as bad as Credit Card, and nowadays there are P2P loans in the Market.
All borrowing does not happen through Credit cards. These days Your bank debit cards are also eligible for EMIs. Many NBFCs like Bajaj finance, Home credit etc. are supporting the people to buy consumer goods through EMIs. You can even get loans through mobile phone apps of P2P lenders.
All these are making bets on your uncontrolled wants and personal finance mismanagement. This is high time you should take control of your money and make better financial choices.
12. Ignoring Goal-based Investment Planning. Investing only for Returns, High Returns
You do not like investing for goals. The whole purpose of your investment is to multiply money faster. And in this lure, you end up getting into the wrong products.
Goals give direction to your savings; help you get into the right asset allocation and select good products.
However, this is also true that now a day’s misselling is happening in the name of goal-based Investment planning only. Every product seller calls themself an advisor even if the one is not registered or certified. And sells the high commission product in the name of financial planning.
So, this is where one should be cautious. But do not ignore the basics…Always invest for Goals and Getting High Return is not a Goal.
13. Always on Lookout for What’s New?
“What’s new?” is a question that has the potential to ruin your investment portfolio. When you ask this question, the seller tends to suggest the same flavor product with a different name, and with this, you end up buying too many products in your kitty.
This is not a good investment strategy. Ask the right questions to get Right Advice.
14. Having a skewed Investment Asset Allocation- Going too safe or too aggressive in your Investments
You have to have a mix of asset classes as per your risk profile. Even the Conservative investor should have some percentage of Equity in their Investments, and the Aggressive investors should not ignore debt completely. (Read: Asset Location is as important as Asset Allocation)
Every asset class has its role in portfolio growth and safety. The ultimate purpose of a good investment portfolio is to get you better post-tax returns higher than Inflation. And Equity has the potential to beat inflation, but due to its volatile nature, it’s not everyone’s cup of tea.
Too Much of Real Estate is also bad. (Read: Reasons why the Real estate is riskier than Equity)
15. Investing in Spouse’s or Children Name to evade taxes
If you still feel that by depositing money in the name of your spouse or children you can escape taxes then you are wrong. This attracts clubbing provisions as per the income tax act.
Nowadays your pan card number is in your bank account, Pan is linked to Aadhar, your e file your IT returns, your passport details are with Income Tax office…and with so many other linkages, your every transaction can be traced. (Read: How your kids may help you in tax saving?)
So, keep yourself safe, don’t try to escape the law, and yes Ignorance is No excuse as per law.
16. Asking for a tax benefit in every investment structure
You seek tax benefits in every investment. If the product is giving taxable returns then that is enough for you to ignore it. This way you end up investing in such products which though give tax-free returns but are not generating enough returns or are not suiting your liquidity/safety and growth requirements.
When Equity Returns were made taxable, Insurance companies took this as an opportunity and campaigned against Mutual Fund to induce people to go with ULIPs. But taxation is only one aspect, there is Flexibility, Liquidity, Lock-in and many other factors that investors should understand before selecting any investment instrument. (Read: ULIP or Mutual funds, which are better?)
17. Not Filing IT Returns
A salaried person feels that if the employer has deducted TDS then there’s no need to file ITR. A Retired person feels that when TDS is already been deducted from a pension, and banks also deduct TDS on the fixed deposits interest then why to file ITR.
But Income Tax rules say that every person having Income above the basic threshold limit i.e. Rs 2.50 lakh for Individual, Rs 3 lakh for Senior Citizen and Rs 5 lakh for Super Senior Citizen, has to compulsorily file Income Tax Returns. Else there is a Prescribed penalty of Rs 5000 – Rs 10000, besides a penal Interest on non-payment of taxes (If any)
ITR besides legal requirement is also required while taking loans, buying life insurances for a higher cover, Visa application, and many other purposes. So one should file income tax returns every year and that too on time.
18. Tax Planning in January
This is a very bad habit. Your complete tax saving planning should complete in the month of April at the start of the financial year. Delaying it till the time your employer asks for tax saving proofs result in haphazard investments, and again many times you end up in some non-suitable or non-required instruments.
19. Not having or updating Nominations in the financial accounts
There has to be a proper nomination in all your financial Investments, and it is important for you to Review that time and again. If there is no proper nomination or it is the name of some person not available to claim the money post demise of the account holder then it is going to be a big hassle for the claimants. (Read: How nominations help in Wealth Distribution)
Along with nominations, it is wise to write a WILL and mentioning of nominations in the same to. The bequeathed should be the same in the WILL as per the nomination in the bank accounts. (How to write a Will?)
20. Finding Solutions in Bits and Pieces.
It is important to look at your financial life in totality, asking solutions in bits and pieces will lead to nowhere. You Insurance requirement depends on your Lifestyle, which comes from your expenses, loans, goals, etc. Your Retirement goal calculation also comes from your spending structure. You should not take a loan just to cover up one goal, without knowing its impact on the other goals. (Read: Financial Planning does not work in Bits and Pieces)
Almost everything in your financial life is interlinked. Make decisions based on understanding the impact on each other.
21. Bonus point. Unorganized financial Records – Plus making it accessible to the stakeholders
Having too-much scattered information is too much trouble. You have to have all financial information at a single place which should be accessible to all stakeholders. If you like to compile it in an excel sheet than the password to open the PC/Laptop and the sheet should be known to all important people.
These days most of the data is locked under many different passwords which are not accessible to all, so I would like to advise you to have a physical file where you note down each and every financial detail of yours and keep reviewing and updating the same at regular intervals.
This file may be kept along with the other important papers in a bank locker or in the custody of a Reliable family member.
I hope avoiding the money mistakes as I shared in this article will make not only 2020, but the decade and your complete life much richer and Organized.