We often end up adopting the characteristic traits of our parents knowingly or unknowingly and this includes their financial habits. While some of these habits might be good, some might need watching out for.
Financial management was a lot more difficult for our previous generations due to a lack of information and guidance. You must learn your lessons from their mistakes and refrain from repeating them in your life. Here are some of the big personal finance mistakes you might want to be careful of.
Focusing On One Asset Instead Of Having A Diversified Portfolio
Saving through time-tested, safe instruments such as Fixed Deposits was favoured by our previous generations. Often, the post-tax returns from such “safe” instruments are low and sometimes don’t even beat the average rate of inflation. In essence, these instruments are not “safe” since locking your money in them means taking heavy inflation risks which limit your ability to create wealth.
It’s important that you invest in assets with different return potential and different risk exposure. This would allow you to build wealth aggressively while having your money hedged against risk. For example, liquid and debt instruments such as bank deposits and PPF will protect you against market volatility, but you also need to invest in equities for handsome long-term returns.
Fund Left Lying Idle In Bank Account
In order to have liquidity, our previous generations would often hoard money at home or leave it idle in bank accounts, settling for low-interest earnings. Such underutilization of funds should be avoided. For urgent needs, you can invest money in liquid funds and short-term bond funds and earn a relatively high rate of return.
Delay In Investing
Many investors start out late and regret it later. Time is as essential to wealth creation as is the rate of return on an investment. If you delay investing for a later stage in life, your compounded returns would be lower and you may have to take higher risks to achieve a target (such as creating a retirement corpus) that could have been created with limited risk. No matter how small the contribution, investment over a longer period of time provides better-compounded returns, which helps you achieve bigger investment targets.
Being Uninsured Or Underinsured
People from the generations gone by often didn’t realize the value of Life and Health Insurance, thinking it to be an avoidable expense or at best a tax-saving avenue. With the growing costs of hospitalisation, a Health Insurance is mandatory for every person. And if a person has dependents, they must absolutely buy Life Insurance. These two covers should not be overlooked and are mandatory for most people.
Concentrating On Tax Savings
While saving taxes is a necessity, your investment plan can’t be completely driven by it. Many members of previous generations often invested for tax-saving purposes, considering wealth creation secondary. Tax-saving should be only one objective you should look to fulfill while picking an investment option. Wealth creation should also be high among your objectives.
No Retirement Planning
It’s not uncommon to see the elderly mix up their various investments – for example, they may break their PF (which is meant to provide them an income in retirement) to fund a child’s marriage or to buy property. Retirement planning is an important goal in managing personal finance and it requires starting early. You must invest in a long-term fund to create a corpus for life post retirement.
Above all, keep a tab on the changing economy. Review your investment portfolio from time to time to make necessary amends based on the macroeconomic environment and your changing priorities.