HOW TO AVOID COMMON FINANCIAL MISTAKES
1. Cash balance exhausted as month ends
a) Contingency fund with 3-6 months of salary is a must.
2. Spending windfall income on lifestyle expenses
a) It often happens when lump sum payments are received through performance incentives and annual bonus.
b) Repayment of high-cost loans should be the first priority.
c) Also, invest lump sum in a liquid mutual fund and transfer regularly to equity mutual funds through a combination of systematic withdrawal plans and systematic investment plans
3. No personal medical insurance as the employer provides it
a) External medical insurance is a must to meet exigencies like change in job or a job loss.
b) Cover your family at a younger age itself for optimal security.
4. Insuring self and family through costly traditional policies
a) For a combination of lower premium and higher insurance coverage, term life insurance is a better option.
5. Not buying a house as the employer provides accommodation
a) This is often the case with government and industrial township employees.
b) One must have personal housing as a goal at a younger age rather than nearing retirement.
6. The provident/ pension fund deducted from salary is enough for retirement
a) Additional investment savings would be beneficial to have a larger corpus at retirement to maintain one’s lifestyle.
7. No allocation to investments in early professional life
a) It often happens due to high personal discretionary expenses.
b) Start saving early, invest monthly and rationalize spending.
8. Investing at the last minute to claim tax benefits
a) Invest systematically throughout the year for efficient tax planning.
b) Consider tax-saving mutual funds, provident and pension funds.
9. Investments are random
a) It happens largely to save taxes, or else through relatives and friends who sell financial products.
b) Investments must be mapped to goals and individual risk profiles.
c) Always consider inflation while calculating the value of your goals.
10. Investment is based on trying to time the market
a) It happens when equities are chosen during a bull phase and redeemed in the bear phase.
b) Diversify across asset classes, through asset allocation, based on one’s risk profile.
c) Track investments at regular intervals to gauge their performance.
d) Rebalance them to match your pre-defined asset allocation.
11. Investment decisions are based on overconfidence
a) This happens when you are driven by profit and loss, rather than careful calculations.
b) If so, it is better to choose the right financial advisor with un-biased advice and reputation.