Friday, May 30, 2014 / TheAnalyst
The need for financial literacy in order to effectively manage one’s personal financial matters cannot be over emphasized, as this remains essential in order to avoid costly mistakes.
The requisite knowledge and understanding if not gathered by being financially literate can lead to making poor financial decisions that can have adverse effects on the financial health of an individual.
There is no doubt that everyone makes mistakes knowingly or unknowingly, but financial mistakes which most times occur when money matters are taken for granted or ignored for a long time, can have adverse effects on one’s financial health and even deprive one of all the luxuries that can be enjoyed today.
Hence, it is necessary that you avoid such mistakes than to make fences later. For this reason, we have listed below a few common financial mistakes that you must avoid so as to live a stress free financial life:
Not saving enough for retirement:
Most people are worried about paying off their home loans, children's education or marriage, etc. In this eventful life, many either forget or postpone planning for their retirement. People often picture themselves relaxing in an arm chair in the beautiful country side when asked how they would wish to spend the golden years of their life.
Many also desire to see the world and do things that they didn't get to do in their working years due to other obligations and priorities. However without planning and working towards your retirement corpus, it would be difficult to even maintain the same standard of living that you enjoy today, a world tour would be a day dream. Remember that, you must calculate the corpus you would need post retirement (keeping in mind medical emergencies, rise in the cost of living etc.) and then save for the same on a regular basis without fail.
Having more debt than one can handle:
One of the gravest financial mistakes that people usually make is increasing their debt obligations excessively. Due to the immediate gratification that one gets on purchase of things such as electronic gadgets, expensive clothes, jewellery etc. credit cards are being over used.
However, at the end of the month when these bills become due, people often find themselves unable to pay the entire amount. Having large debt or a high debt-to-income ratio could also have an adverse impact on your borrowing capacity and servicing debt. You see, most banks would prefer giving loans to borrowers who have less debt in their balance sheets.
Loans and financial obligations must always be taken seriously and repaid in due time as any default on the payments can harm your credit rating and ability to seek loans in the future. We believe that taking a loan is not a bad thing as long as you know your means to service it; but one must borrow money only if there is really a need to. For instance, if you have several crucial financial responsibilities (such as children's education, marriage etc.) for which you have not saved enough, taking debt for other less important goals (such as buying a car) should be delayed.
Lack of adequate contingency reserves:
Life can sometimes give us unpleasant surprises when we least expect them. Contingency reserves (or emergency funds) are a means to take care of you and your family's expenses during an emergency situation, such as loss of job, markets crashing, medical emergency or any unfortunate event that comes with an economic loss for some time.
For these reasons it is advised that you must keep about 12 months of your regular expenses in a savings bank account or you can also opt for sweep in account, flexi deposit or liquid funds if you desire a better rate of interest. Many people do not maintain a contingency fund due to which they undergo both financial and emotional trauma during such extra ordinary circumstances.
Being under insured:
Remember that none of your dreams or wishes that you have towards your family might be fulfilled if something unforeseen happens to you, especially if you are the only earning member in the family.
Contingencies in life can leave the entire family's financial future in jeopardy. Due to a fast paced life and many other responsibilities, most people do not give priority to their insurance needs.
It is very important to pay attention to this aspect from an early age. However, will merely buying any insurance policy indemnify you against risks? Definitely not! You need to have the right amount of insurance cover and the right policy so as to protect yourself from financial losses or uncertainties.
Making ad hoc investment decisions:
Many people invest their savings without proper planning or based on irrational 'tips' from friends or relatives. As a result most of these investments result in a mess. Although, investing your hard earned money is imperative to fight the inflation, investments must only be done if they suit your financial goals and risk appetite. Making ad hoc investments can erode your savings and create a mess of your finances.
Not doing estate planning:
Most of the people believe that they are too young to write a will. While being optimistic is a good thing, it is important for you to know that dying intestate (without preparing a will) can lead to various complications and disagreements among your heirs.
You can't even imagine the mess and inconvenience that might be caused to your loved ones because of your laziness in not drafting a will for them. It is prudent to make provisions to leave behind assets from the very first day you acquire one. Moreover, all insurance policies and investments must also have nominees registered to avoid confusion. It is better to make provisions to transfer our fortune (immaterial of big or small) while we are alive, then to leave it for the court of law to make decisions for us.
All this mistakes can be avoided if you endeavour to be financially conscious enough to gather all the resources and knowledge needed to ensure you make intelligent investment, and that’s what TheAnalyst is here to do. Helping you make intelligent investment based on tested, credible and reliable information!