Poor financial management frequently results in budgetary Laxman Rekha overstepping and inviting unnecessary debt. Planning for sizable long-term expenses in advance is a given. Saving for long-term objectives (such as purchasing a car or a home) is significantly more rewarding and wiser than giving in to momentary pleasures and instant gratifications and overspending on short-term goals.
Making plans for the future is always a good idea. Let’s examine the most frequent errors people make when it comes to financial planning.
- Not rebalancing your investment portfolio
A diversified portfolio’s rebalancing can boost overall returns and lower risk. Rebalancing is the process of making changes to your investment portfolio with the intention of reevaluating and reducing risks. A disciplined investor has a better chance of achieving higher long-term investment returns with annual rebalancing. Rebalancing your portfolio from time to time will help you stay on track with your investment strategy because no one can predict the market returns with perfect accuracy.
- Forgetting to keep a reserve fund.
Financial stability requires having an emergency fund with at least three to six months’ worth of expenses. The best course of action is to start a “emergency fund” as soon as possible. This fund can be used to invest in liquid, low-risk assets like debt funds that can be quickly and easily converted into cash in case of emergencies.
- Inadequate or nonexistent insurance protection
Life insurance doesn’t refer to the value we receive after a specific amount of time. It entails providing our loved ones with material security, mental tranquility, and happiness for oneself and one’s family. Risk management is crucial for both living a safe life and having big dreams.
- Postponing achieving your financial objectives too long
When we start making money, we frequently put off our long-term goals and plans. We fail to realize that “our enjoyment of today is a result of yesterday.” Thus, yesterday is the best time to begin your financial planning, that is, when you are young and as soon as you begin to earn. The second-best time is now rather than someday if you missed that train.
- Not examining alternative investment options.
It is a common error to limit one’s search to conventional savings instruments like life insurance or bank FDs (fixed deposits). As a result, the actual value of our money keeps declining over time. Investigate modern investment strategies that offer returns that can be adjusted for inflation and are tax-efficient. For example, mutual fund SIPs are a great way to introduce yourself to more effective saving methods.
- Purchasing investment products from friends or family out of emotion
We frequently purchase policies purely out of friendship or family ties, because they sell the product, or because a friend has already done so and is happy with it. This could harm your relationship as well as your financial situation, which is bad news all around!
- Conflating investment and insurance
Investments are not the same as insurance, and they both have different goals. Insurance policies are regarded as “practical savings tools” in India in order to achieve financial objectives. However, a packaged investment is any policy that charges more than the cost of risk coverage. So think twice before combining investments and insurance. Choose a life insurance policy that offers adequate coverage, and choose a separate investment plan using only investing-related tools.
- Ignoring inflation when making retirement plans
Retirement planning involves more than just multiplying our current annual expenses by 20 or 25! Inflation, potential lifestyle changes, post-retirement costs, medical expenses, and leisure expenses must all be taken into account. In this regard, the assistance and direction of a licensed financial planner are crucial.
- Making the incorrect frequency selection when paying insurance premiums
If you purchase a ULIP policy and choose to pay annually rather than monthly, you will be losing units, which will slow the average growth of the rupee.
No matter how the market is performing, paying the insurance premium on a regular basis will help to lessen its effects.
- Making a loan payment at the end of each month
If you pay off a bank loan at the end of each month rather than the start, you could end up paying many extra months’ worth of EMIs over the course of a 20-year loan, for example. Making this error when paying back loans is typical.
Financial planning will help you deal with your financial issues much more successfully. You may be better prepared to handle circumstances where you may require immediate or emergency financial assistance. If you are managing a family or a business, you can better understand your goals with the aid of sound financial planning, including why you must achieve them and how doing so will affect other aspects of your life.