Have you ever wondered why some people go through financial struggles despite earning sufficiently? Have you been in that situation yourself? Well, the reason behind it is simple. Most of us do not realise that managing money is as important as earning it.
In today’s article, let us go through some basic financial mistakes people make and how to avoid them.
Common financial mistakes
Financial mistakes are those practices that push people into financial hardships, debts and even bankruptcy. While most of these may seem trivial, their impacts are heavy when they become regular habits. Recovering from one financial mistake leads to another, causing issues like debt traps and insolvency.
Hence, identifying those incorrect practices early on and taking corrective measures to stop them is essential to achieving financial success and freedom.
Also read: Discover what’s inside a financial literacy camp!
Extravagant or frivolous spending
One of the primary mistakes we all make is to spend more than necessary. Does that mean you must stop enjoying your lives and spending only on immediate needs?
Well, that is not what we mean here. We all have one life, so we must live it to the fullest. But spending beyond your means for enjoyment may not be the right approach. Impulse shopping is an example of this.
A lot of times, people spend money on something they may never use just because they are unable to resist the immediate urge to own it. Consumers also fall prey to marketing gimmicks and end up overspending on products available at cheaper prices. So, the issue here is not about spending but about being irrational. We do not have to be frugal at all times, but being wise is essential.
Some simple tips:
- Make a shopping list.
- Compare the prices of different brands and products before you buy.
- Be aware of your needs and wants. Prioritise them.
- Use the 7-day rule: Wait for seven days before buying something out of your needs. If you still have the same urge to buy, go for it.
Not following a budget
A budget helps in forecasting future incomes and expenses. It helps individuals plan their expenses per the funds available. Without a budget, you may not have an approximation of funds at your disposal, because of which you may end up overspending.
A budget not only talks about incomes and expenses but also lists in detail the amount available for each category of expense. Creating, following and reviewing your budget is one of the basic steps to develop financial discipline.
Some simple tips:
- Prepare a realistic budget. Don’t try to squeeze too much when you begin. Failing to stick to it may demotivate you to continue the habit.
- Track your expenses and review the budget regularly. Shuffle your amounts between different categories if needed.
- Follow thumb rules until you are comfortable in preparing a foolproof budget. The 50:30:20 rule is an ideal start, which suggests keeping 50% of your income towards needs, 30% towards wants and 20% towards savings.
Not setting personal financial goals
Financial goals are the driving forces behind achieving financial independence and success. Not having goals leaves you wandering in your financial journey. When your earnings don’t find the correct purpose, you spend on unnecessary things.
Also read: Your guide to setting S.M.A.R.T. financial goals
Financial objectives help individuals in their professional lives as they motivate them to earn better and climb the corporate ladder. This, in turn, improves your overall lifestyle. It helps in retirement planning, debt repayments, family finances, etc.
Some simple tips:
- Set realistic goals. Use the SMART approach (Specific, measurable, attainable, realistic, time-bound)
- Set short-term and long-term goals. Achieving short-term goals motivates you to work towards long-term aspirations.
- Treat yourself every time you achieve a goal.
Falling into a debt trap
Taking multiple loans simultaneously is one of the most severe mistakes people make. Repayment becomes difficult, causing penalties and fines. Sometimes, people take new loans to clear older ones. They then end up with multiple debts, not being able to close any of them. Stay away from such debt traps.
Loans are here to help us. It is ideal to use them only when in need. Relying on loans for daily expenses should be a big no for a smooth financial ride. Defaults and late payments on loans and credit cards can adversely affect the credit score. Hence, being mindful of that is vital.
Some simple tips:
- Clear an existing loan before taking a new loan.
- Look for long-term loans for a smaller EMI. The loan duration may be high, but you will not feel the burden of paying interest.
- Do not live on credit cards. Use them only in case of emergencies. As for your wants, try spending out of the money you already own. Credit cards tempt you to spend more, so leave them at home while shopping.
- Keep a constant check on your credit score. Aim to maintain a clean credit report.
Saving but not investing
“Don’t waste money, save it” – We have all heard this advice multiple times. But, do you know it is not sufficient to just save money?
Yes, this is another mistake people often make. They save money and wait to get rich. But, how will wealth grow if money is kept idle in your locker or savings bank account? That is where investing comes in.
The next step of saving is to invest it in the right avenue to let your wealth grow. Stock markets, real estate, businesses, etc., are some of the many investment options today.
Some simple tips:
- Do not ignore the effect of inflation on investment. Growing assets like stocks are better than depreciating assets like cars and houses.
- Incorporate investment in your budget. Start by allocating at least 10% of your income to investments.
- Diversification is the key to a profitable investment portfolio. So, invest in different classes of assets.
Also read: SIP investment: Your path to wealth building
Not having an emergency fund
Smart investors maintain a separate fund to use at the time of emergencies. Not having an emergency fund might force us to rely on funds allocated for different purposes, thereby damaging the entire financial plan. Some people rely on debts for urgent requirements. An emergency fund can help you handle such urgent situations with ease.
Some simple tips:
- Set aside a specific percentage from your income for emergencies.
- Ensure your emergency fund has liquidity for immediate use.
- Follow thumb rules such as maintaining at least three to six months of your salary in emergency funds.
Lack of retirement planning
People fear retirement because they assume it creates financial dependency. However, it is not true if you plan for it, in advance. There are various facilities, including government schemes, that help save money for retirement.
Investing in mutual funds, provident funds, pension funds, etc., are a few ways to save money for retirement.
Some simple tips:
- Own medical and life insurance. Do not depend on office insurance alone. Have a personal one, too.
- Be frugal in spending money from your retirement fund. Post-retirement, follow thumb rules like the 4% rule, which suggests not using more than 4% of your retirement fund per annum.
Not planning your taxes
While tax evasion is a crime, tax avoidance is well within the country’s legal framework. Not being aware of strategies to save taxes leads to paying most of your income as tax to the government. This impacts one’s disposable income, which then forces them to rely on loans, credit cards and other sources.
Some simple tips:
- Look for investments providing tax exemptions and deductions.
- Get assistance from experts like CAs and auditors to learn about the benefits.
- Update your knowledge of taxes frequently.
Bottomline
During today’s uncertain times, finding ways of earning sufficient income is important. What is equally important is to learn the options to save and grow wealth. The third significant aspect of this is to avoid financial mistakes. All three are consequential in one’s comfortable journey to financial independence.
