What are the biggest and worst finance or finance mistakes?
I have observed that many young people who have just graduated or just started their career care less about their savings and make serious financial mistakes. They will realize it at a later stage, but the results of these mistakes cost them greatly and seriously.
1. Not having a Contingency/Emergency fund:
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Many young people, every time they receive their salary/income, spend immediately and have nothing left in hand during the ends of the month. Just imagine if any medical emergency or any other critical cash pressure occurs at that moment! You will borrow money from outside sources. Borrowing money is the worst and biggest financial mistake of your life.
How to prevent this error? Very simple, just keep a Contingency or Emergency fund that is equal to 6 months of your net monthly salary/income. An important tip here is to keep this amount in any good Liquid fund, which will also earn some interest and be available whenever you want.
2. Insufficient Life Insurance:
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Most of the youth in India are easily attracted when told about the benefits of an insurance policy by an agent. They end up investing in expensive endowment policies/money back policies, resulting in insufficient life insurance for them. For example, a 25 year old takes an endowment policy to the tune of 1 lakh, he needs to pay a premium of Rs 10,000 or so for a period of 12 years and at the end of 15 years, and he will only get around 2 lakh after maturity. During this insurance period, if anything happens to him, his family only receives 2 lakhs only. Making insurance an investment product is the second worst mistake in your life and because of this mistake your family will be greatly affected.
How to prevent this error? Simply take out a term policy in the amount of the sum that is equal to 8 – 10 times your annual gross salary. For example, a 25-year-old can take out a term policy of 50 lakhs for an annual premium of Rs 5,000. If any unequal event happens to him, his family receives Rs 50 lakhs, which is a very comfortable amount to live on after that date.
3. Insufficient health insurance:
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Many young employees, especially those who work in private companies, think that their company offers group health insurance and that this is enough for their medical needs. This is the next biggest mistake that takes its toll on your pocketbook in times of need. Today’s job market is very volatile and you cannot be sure of your current job. You can change your job or you can lose your current job. During this transition period, if a medical emergency occurs, your existing group health insurance will not protect you and you will have to pay your medical bills out of pocket.
How to overcome this error? You must have another Market Health Insurance policy for you and your family. Don’t worry about the extra premiums you have to pay and they are worth paying. One more important piece of advice here is that if your parents are there, it should not be included in your Mediclaim policy, you should take out individual health policies for them. This will reduce your premium charges.
4. Not defining financial goals:
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Not defining your financial goals for both the long and short term is another biggest and worst mistake that young people often make. They just invest in different products without any financial goal. This will lead to choosing the wrong product for the goals and results in insufficient funds for those goals.
How to mitigate this problem? Define your long-term goals, such as your children’s education and marriage, your retirement life, etc. and attach with a good investment product for this purpose. Similarly, you need to define your short-term financial goals such as buying a house/car, vacations, etc. and accompany it with a suitable investment product. The definition of the investment product depends on the time frame and the financial objective.
5. Invest heavily in debt investments:
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Most of the young generation invests in gold, insurance policies, bank FD or postal insurance products. These are all safer products, there is no doubt about that. However, these products will not generate returns that exceed inflation and neither will investment products be very tax efficient. Ultimately, you will earn insufficient returns for your goals.
How to handle this error? You need to invest in the stock market directly or indirectly. If you have enough knowledge about stocks or if you have some financial adviser, you can directly invest in good stocks for the long term. Otherwise, you can go for mutual funds and invest through the SIP approach for a long period. This is sure to generate returns above inflation in a tax efficient manner.
6. Carrying a lot of credit cards and excessive spending:
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Nowadays, the young generation feels great to hold more credit cards and swipe them from left to right. This is one of the biggest financial mistakes that leads to your financial journey in bad shape. I know that many people (especially young software engineers) are using most of their earnings to pay credit card interest.
How to overcome this error? You should keep only 1 or 2 credit cards. Use them wisely and better pay cash payments that will reduce your unnecessary spending.
7. Invest at a later stage:
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Many youngsters feel that investing is an older person’s concept and do not think about investing or saving in their early stage. Suppose a 25 year old person keeps investing Rs 100 a month in a good mutual fund, can you imagine how much he can have when he reaches retirement age? Fair
1 CRORE!!!!!! That’s the power of investing early. Investing in the early stage will have the power of compounding and will lead to higher returns.
8. Investments are not diversified:
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You shouldn’t put all your eggs in one bucket. Many people invest all their savings in savings products like FD, gold, real estate, etc. This is not at all a good idea and will not produce good returns over a period of time. During 2007 – 2008 times, many young people heavily invested in real estate or stock market. After 2008, the housing boom and the stock market crashed, and all these people lost all their savings.
How to overcome this? Investment diversification is the best medicine for this. You allocate your investment amounts to different investment products. This would not only average your losses but also maximize your profits over a long period.
9. Financial Illiterates / Not having knowledge in Taxes:
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How many of you know that the Section 80C limit is increased to 1.5 lakhs? How many of you know that the Section 24B (mortgage loan) limit increased to 2 lakhs? I bet only a few people know about these amendments in the recent Budget-2014. Saving taxes equals saving your money. Therefore, each young person should be very aware of the current financial situation and knowledge of the taxes that are levied on her income. Then only then will you be able to manage your taxes efficiently.
10. Without financial planning review:
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This is the last but not the least biggest mistake of the youngsters. Many of you are only investing in one product and will not look back to see the progress of the returns on this investment product. That is not recommended. Every person must review their investment portfolio at least twice a year and must make the corresponding modifications. It is better to be advised by experienced financial advisors.