7 Common Personal Finance Mistakes To Avoid

From entering late into investment to indulging in unnecessary borrowings, almost everyone makes financial mistakes at some point in life. And these mistakes often go unnoticed. Here are some common personal finance mistakes that you must be careful of.

1. Confusing Between Insurance And Investment: Insurance and investment do not serve the same purpose, hence they cannot replace each other. While insurance is meant to support you and your dependents financially through difficult circumstances, the sole purpose of investment is to build wealth.

2. Not Investing Early: Many of us procrastinate when it comes to investment. We often prioritise spending and keep savings for later. Remember, starting investments late will only limit your returns and not allow you to get the full benefits of compounding. This could leave you in a fix when you near retirement. Starting early also gives you the liberty to explore various investment instruments as you have a bigger horizon and a greater risk appetite.

3. Impulsive Loan Buying: The easy availability of Personal Loans and Credit Cards often tempts people to borrow without a care. Repaying your debts is your moral and legal obligation. Therefore, borrow up to a level where you’re comfortably able to repay with your regular income. As a benchmark, it would be ideal to keep all your EMIs at 30-40% of your disposable income. Borrowing beyond this limit may put you at the risk of default.

4. Investing Without Clearing Debts: To make wholesome investments while paying off loans and outstanding payments is challenging. Every now and then, you would have surplus funds, and you must choose whether to use them to reduce your debts or to invest for higher returns. Adequate thought must be given to this decision. Sometimes, reducing the balance of long-term loans such as Home Loans would save you a lot of money. 

5. Not Reading The Fine Print: Going through all terms and conditions before taking a loan, or an insurance product, or any other financial instrument, might appear to be a tedious task. But it is the right thing to do, and you should not be hurried into signing the dotted line. Reading the terms carefully gives you insight into the product and mentions little details that can help you in decision making. Don’t rely solely on the words of an agent or a salesman lest you want to be caught off-guard later.

6. Non-maintenance Of Statements And Accurate Records: Bank statements and financial records need to be kept in order as these documents come handy at various points – be it during filing your returns, or getting into a dispute redressal process with a financial institution. You might even need to submit these documents while applying for a loan. Going through these statements would also help you keep track of your account balance, returns, expenses, and also ensure your personal details are mentioned correctly.
7. Stretching The Budget:  Spending beyond means can stretch your budget. People who spend without saving first often invest poorly, and are inadequately prepared for financial emergencies such as a hospitalisation. It’s important to budget for various contingencies, long and short term requirements, and only then make discretionary expenses out of your remaining disposable income.

While these are some of the commonly made mistakes, you must identify your weaknesses and work on them to keep your finances on track.

BankBazaar is a leading online marketplace in India that helps consumers compare and apply for Credit Cards, Personal Loans, Home Loans, Car Loans and insurance.