Personal Finance Mistakes and How to Correct Them
To achieve financial goals, get your personal finance basics right.
All investors invest to achieve their financial goals. But, while they may have started investing in mutual fund SIPs, they may falter on their financial planning journey unless they get some of their finance basics right. These personal finance basics are the building blocks of a successful financial planning journey. This article will explain the personal finance mistakes that people make and how to correct them. So, let’s get started with them.
Personal Finance Mistake 1 -No Emergency Fund
A lot of people either don’t have an emergency fund or have one but with inadequate balance. Due to this, whenever an unexpected or unplanned financial situation strikes, an individual has to either rely on his/her credit card or take a personal loan or dip into investments meant for financial goals. This is not a good situation to be in and can be easily avoided.
Before an individual starts investing towards his/her financial goals, it is essential to build an emergency fund. This fund should ideally have 3-6 months of income. While this is a good starting point, you can always create some extra buffer depending on your profession.
To build your emergency fund, you can download the Glide Invest App, select the “Emergency Fund” goal, and get step-by-step guidance on building your emergency fund.
Personal Finance Mistake 2 - Living beyond means
Many people don’t follow a monthly budget, and as a result, they have no control over their expenses whatsoever. At the end of the month, they don’t have any money left for savings and investments. They are left scratching their heads about where they end up spending all the money during the month.
They are using credit cards to spend on frivolous expenses. In such situations, people who are not disciplined enough to save money, their financial goals suffer.
Budgeting helps segregate essential and discretionary expenses and set aside money for savings and investments. Various budgeting methods are available. An individual should choose one that suits their needs so that they have control over their expenses.
An individual can start with the 50/30/20 budgeting method. As per this budgeting method, an individual can spend 50% of his/her monthly income on needs, 30% on wants and reserve 20% for savings and investments. Once an individual gets comfortable with this budgeting method and has better control over his/her expenses, he/she can shift to the “Pay yourself first” budgeting method.
In the pay yourself first budgeting method, an individual first sets aside money for his/her savings and investments. After that, whatever money is left is used for expenses. By using this budgeting method, chances are very high that you will achieve all your financial goals.
Personal Finance Mistake 3 - Buying life insurance for investment rather than pure protection
A lot of investors mix insurance and investments into one product. In the process, they end up buying either market-linked insurance products (unit-linked insurance product - ULIP) or non-market-linked insurance products (endowment, whole life, money-back insurance products).
Most traditional life insurance products have high charges (commission paid to agents), low life insurance cover, and low returns.
An investor should always keep life insurance and investments separate. For life insurance, an individual should buy a term life insurance policy. This policy pays the nominee on the death of the life insured. These plans are the cheapest and provide high life insurance cover at a low premium.
While calculating the life insurance cover, the individual should consider his/her financial liabilities (home loan, car loan, and any other loans) and financial responsibilities (money required for child’s higher education and marriage, spouse’s retirement, etc.). Like building an emergency fund, an individual should buy an adequate term life insurance cover before he/she starts investing for financial goals.
For investments, an investor should follow proper asset allocation based on his/her risk profile, age, time to achieve financial goals. Insurance should not be a part of asset allocation. Insurance should be for protection, and investments should be for achieving financial goals. Do not mix these 2. An investor should make this distinction very clear.
Personal Finance Mistake 4 - No Health Insurance
Most people rely on the health insurance cover provided by their employer. They should note that these days there is no job security. The day they lose their job or switch them, the health insurance cover provided by the employer will end. The new employer may or may not offer health insurance.
The other point to note is the health insurance cover provided by the employer may not be adequate. Also, the employer can either reduce the body or withdraw the surface at any time. So the short point is you should not rely on the health insurance cover provided by your employer.
Many self-employed professionals or business persons don’t have health insurance, or even if they have it, the cover amount may be inadequate.
Whether you are salaried or self-employed, you should buy health insurance cover for your entire family. You should consider your employer’s health insurance coverage an added advantage and not a substitute for buying your health insurance cover.
If you have health insurance cover, you should review it and check if it is adequate compared to the current healthcare costs. In future also, you should review your health insurance cover from time to time to make sure it keeps pace with medical inflation.
If you or anyone in the family is hospitalised, and if you have health insurance cover from your employer, then you should use that first.
Personal Finance Mistake 5 - Saving Money but Not Investing
Some people are disciplined enough to save a decent amount of money every month. They are good savers, but they may not necessarily be good investors. Their money may be lying idle in their savings bank account. The return earned is not even able to beat inflation.
Some may be investing, but the amount invested may be lower than what they can or what is required. Some of them may be investing most of their money in debt instruments like bank fixed deposits or small savings schemes like Public Provident Fund or National Savings Certificates (NSC). They may not be following the correct asset allocation, and hence the returns earned may be low and tax-inefficient.
When investing for financial goals, you should follow a systematic goal planning approach. You should seek professional help from an expert goal planning platform like Glide Invest. Before you start investing, the app assesses your risk profile based on a simple questionnaire. Based on your risk profile, you are recommended a personalised asset allocation.
In the Glide Invest App, you can select from common financial goals like child education planning or retirement planning, or you can define your own goals. Then, depending on the time to achieve the goal, risk profile, asset allocation, amount to be invested, appropriate mutual fund schemes are recommended for you.
Personal Finance Mistake 6 - Fulfilling Wants with Loans
Some people fund their vacations or purchase of consumer durables or the latest gadgets, etc., through credit cards or personal loans. These are expensive loans.
There is nothing wrong with enjoying vacations or buying the latest gadgets if you need them. However, rather than funding them through expensive loans like credit cards or personal loans, you should plan for them in advance.
Plan for your vacations 6-12 months in advance. Then, when you return from one holiday, you can start accumulating funds for the next one, one year down the line giving you enough time to plan.
You can invest in debt mutual funds for these goals. Then, once you accumulate the required amount, you can enjoy the vacation or gadget with your own money rather than borrowed money. This way, you don’t need to worry about repaying loan EMIs, thereby doubling your vacation enjoyment.
Personal Finance Mistake 7 - Using Credit Cards for Daily Expenses
Some people have to rely on credit cards at the end of the month due to unplanned expenses and improper budgeting. As discussed earlier, some people enjoy vacations or buy consumer durables or gadgets with credit cards. However, they cannot pay the entire credit card bill and carry forward some balance to the next month. In the process, they end up paying hefty finance charges and interest rates ranging from 30-45% p.a. Please note that credit cards offer one of the costliest loans.
Credit cards are a double-edged sword. They are a boon if used properly or a bane if misused. They can be a boon as they offer you interest-free credit for up to 50 days and also come with excellent discount/cashback offers from time to time. In addition, they offer reward points in exchange for transactions or gift vouchers or merchandise.
You should use credit cards for convenience and the benefits that they offer. However, pay the bill in full without carrying forward any balance to the next month. Regular, timely payment of the monthly bill will help you improve your credit score, which will help you get loans like a home loan or vehicle loan or any other loan at a lower interest rate.
Using your credit card for regular monthly expenses, you can redeem them for booking flight tickets and hotel accommodation if you accumulate enough reward points. Thus, credit card reward points can help you sponsor your annual vacation.
Personal Finance Mistake 8 - Not Taking Professional Help
Some people don’t seek professional help for important decisions like goal planning, buying insurance, debt repayments, tax planning, etc.
But, by not seeking professional help, sometimes people end up making the wrong financial decisions. In addition, the notional or real losses incurred from such wrong financial decisions can sometimes be much higher than the advisor’s fees.
You should always seek professional help. A goal-planning platform like Glide Invest can help you identify your financial goals, plan for them and achieve them. An insurance advisor can help you identify the correct term insurance plan. A debt repayment counsellor can help you repay your loans at the earliest and become debt-free. With early loan repayment, you will also save on interest costs. Finally, a tax advisor can help you save more tax than what you may be currently saving.
Personal Finance Mistake 8 - Pause/redeem investments midway
Volatility is the inherent nature of financial markets. Hence, markets always keep moving up and down in cycles. Many investors are not able to stomach volatility during market down phases or correction phases. During such times, they try to time the market by pausing their systematic investment plans (SIPs) or redeeming them.
Some investors also pause their investments midway and redirect the money to other unplanned expenses. Some investors even break their investments midway for unplanned expenses. These expenses may sometimes be avoidable.
After every market down phase, there is an up phase. During the up phase, the market recoups all the losses of the previous down phase and eventually makes new highs. So, you should always continue with your SIPs, even during market down phases. In addition, you should use market corrections to your advantage by accumulating more mutual fund units at a lower cost.
An investor should never pause/break their investments for redirecting money towards other unplanned expenses. Instead, an investor should maintain an emergency fund for such expenses. Also, if the unplanned expense is avoidable, then it is best to avoid incurring such expenses.
Personal Finance Mistake 9 - Living paycheck to paycheck
Some people are used to living paycheck to paycheck. There is no emergency fund to fall back on. There are either no or very few savings and investments. If there is an emergency, they have to borrow money from family members, friends, colleagues or rely on loans. This is certainly not a good situation to be in at all.
An individual should always follow budgeting. The 50/30/20 budgeting method is an excellent place to start. In this budgeting method, an individual can allocate 50% of this monthly income towards needs, 30% towards wants, and the remaining 20% towards savings and investments.
Personal Finance Mistake 9 - Random investments
Some investors invest only to maximise profits. There is no financial plan or financial goals attached to investments. Emotions of greed and fear guide such investment decisions. This is not the ideal way of investing.
An investor should follow comprehensive financial planning for all his/her investments. He/she should identify financial goals, do risk profiling, follow proper asset allocation, have a goal plan for every financial goal and then invest towards accomplishing them.
To accomplish your financial goals, you can partner with the Glide Invest platform. You can plan and systematically invest towards your financial goals with Glide Invest. You will get guidance for:
- A personalised risk profile assessment
- Identifying your financial goals
- Appropriate asset allocation
- Making a financial plan for each goal
- Automating the financial plan
- Review and analysis of your financial plan
- Hand holding you till your financial goals are achieved