6 worst financial planning gaffes people make

By | April 11, 2015

Financial Planning for a Family

‘Luck by chance’. If this movie happens to define your investment story, chances are that it will bomb at the box office of financial success. The success of your financial planning hinges completely on the financial decisions made by you during your life. If you have left something to chance, be prepared to be handed a dud.

Financial planning mistakes that people make can confound and stun at the same time. Here are 6 worst financial planning gaffes people have made.

Ignoring emergency funds

Rakesh and his wife Priyanka together were earning Rs.12 lakhs per annum. They had prudent savings in both equity and insurance, and a well thought tax plan. While their savings appeared to be a great asset for their future, the reality was that it was in fact a liability for them.

If you’re asking how could that be, you’re not alone

Their savings are simply squeezing out the liquid funds in their hands. The couple realized their folly only when Rakesh’s father had to undergo an immediate bypass surgery. Rakesh did not have enough liquid funds on hand at such short notice.

Most financial advisors stress on the fact that people should always keep aside an emergency fund to see them through at least three to six months.

Succumbing to wrong advice

Paying heed to expert advice is good. But, what is also required is healthy doses of judgment. Dr. Ram, a busy professional hardly had time for researching his financial goals and relied only on the advice of his office colleagues.

Consequently, wrong real estate investments, unplanned insurance products and a host of unwanted credit cards landed up in his kitty. He also lost a good chunk of money at some untrustworthy private chit funds.

Heeding wrong advice is often times worse than not heeding any advice. Listen to third party opinion but apply your common sense. After all, it is your hard earned money.

Lack of transparency

Financial planning is one area where ‘Ignorance is bliss’ can be given the boot. In many families, the wife is usually not aware of the financial investments made by the husband.Mr. and Mrs. Khurana were one such couple who were accustomed to investing together.

A mishap occurred, leaving Mrs. Khurana to tackle financial investments on her own. Since Mrs. Khurana was not involved in any financial decisions, she did not know what her husband had invested in and where they lay.

That left her with no liquid funds on hand, forcing her to restart her investment from scratch and miss out on few insurance plans that they already had in her husband’s name.

Make sure your investments are transparent and known to your spouse or family members. This can offer them clarity on their total investments in case something unfortunate happens to you.

Using your savings to close debt

It is a common misconception that extricating oneself from debt traps is condonable at any cost. While freeing yourself from debt is smart, using your savings to do so is not.

Peter, a small-scale businessman, took a home loan of 20 lakhs in 2012. Far from being excited about owning a home, he began getting a nagging feeling that he is ‘under the burden of debt’. Two years after taking the home loan, he closed his mutual funds to bring down the loan to just 2 lakhs.

However, Peter’s initial happiness was shortlived. He was confronted with a financial emergency when his business slipped into the red and he had to rely on bad debt sources like personal loans and borrowing from private lenders at high interest to pull his business back from the brink.

It is quite easy to take out funds from your savings and pay your way out of debt, but it is not easy to rebuild the savings. Also once you repay the debts, you might develop a laidback attitude which could result in more debts and no savings to fall back on.

Not investing in equities

You have not invested in shares and mutual funds because you think it is a risky business. But remember, inflation will beat the growth of your money if it is tucked away in your savings accounts or fixed deposits.

Deposits earn only around 8-9% on average in the long run, while equity can fetch close to 15-20% over a long term horizon.

Getting started early can help you make small and regular investments in the equity markets, and build a corpus for your retirement funds, beating inflation. Also remember, never get swayed by market volatility. Once you have chalked out your investment strategy for the equity markets after research and with expert help, stick to it any cost.

Staying on rent

Many people procrastinate real estate investments due to expectations of price fall, better deals and better loan rates. The illustration below show how much you can lose if you wait too much.

In the year 2010, one of Vijay’s friends showed him an option of buying a flat in an upcoming project. Deterred by questions on the credibility of the builder, timely completion of project etc, Vijay postponed his decision to purchase the flat and preferred to stay on rent.

Later, in 2015, he finally booked a unit in the same project, but at double the cost. Rates had doubled and the price of the flat had zoomed to Rs. 1 crore from Rs. 50 Lakhs five years earlier. Vijay lost Rs.50 Lakhs just due to procrastination.

Worse, he was paying Rs.12000 as rent for all these five years, which added up to a tidy sum of  Rs.1.44 Lakhs per annum, or Rs. 7.2 lakhs for the five years from 2010 to 2015.

Are there any such investment or financial planning mistakes you see people committing? Write in.

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