A new year can be a fresh beginning for many things (if you wish): eating healthy, being responsible for your actions, and avoiding certain financial mistakes you’ve been doing time and again.
Yes, we know that to err is human, to forgive divine but the same doesn’t apply to finances. If you mess with your money, it is not for the divine to intervene but for you to bear the consequences. Only the smart learn from the biggest financial mistakes, so be one!
With 2019 gone and 2020 finally here, say bye to these 5 financial mistakes and embrace the new year with a spirit of being responsible for your finances.
Saving what remains after spending
While your salary is your employer’s reward to you, savings are what you gift yourself. But saving doesn’t mean spending first and only setting aside what remains. No, this is one of the biggest financial mistakes and the primary reason why you can’t save in the first place.
Ideally, your first move after receiving a paycheck should be to save for your goals and only then spend. This is a time-tested equation that boosts savings. One way of doing this unfailingly is setting up a standing instruction to transfer a sum towards your goals and big-ticket expenses on your payday. Once this happens, your savings are safe and not available for you to spend unnecessarily.
Not saving for a rainy day
This is another common financial mistake that individuals do. Creating an emergency fund to meet unplanned expenses should be your foremost goal. Doing this will help you address contingencies swiftly. In contrast, not having a dedicated emergency fund can force you to dip into your savings meant for other goals. This can be frustrating, if not today, tomorrow or when the goal becomes due but you are left with no funds to meet it.
When creating an emergency fund, keep in mind that it should meet your total expenses of at least 6 months. This includes your groceries, children’s tuition fees, insurance premiums, EMIs, and other expenses. With an ample emergency fund, you can stay afloat and pass a storm without bearing damages.
Investing too much in fixed-income investments
Typically, investments that yield high returns also entail high risk. That is why, conservative investors prefer investing in safe options such as fixed deposits and bonds. While this mitigates risk and prevents capital loss, the returns may not beat inflation. This financial mistake, thus, results in a loss in the real value of money. The only way to avoid this is to diversify your portfolio. Besides investing in fixed income options, also invest in other vehicles that offer better returns.
One such option is equity as it has the potential to offer high returns in the long run. However, it is important to exercise caution when investing in stock as it is highly volatile. Two of the biggest financial mistakes to avoid here are day trading and holding stocks for short-term as these only intensify risk. As a retail investor, it would be better to consider goal-based investing and holding stocks for the long term to even out volatility.
Treating insurance as investment
Remember ULIPs and mutual funds? Do you consider these as investments? If yes, this qualifies for another common financial mistake to avoid. Understand this: ULIPs and mutual funds are like apples and oranges. Both are different fruits serving distinct purposes. While ULIPs are insurance-based investments, mutual funds are pure investment vehicles.
That said, a ULIP is a hybrid-insurance product that offers both life coverage and returns. However, the coverage it offers may not suffice your insurance needs, something that you shouldn’t compromise. Therefore, it is advisable to differentiate between the products, buy ample insurance coverage, and invest in pure investments based on your goals.
Not setting definite and clear goals
You may have heard that the universe responds to clear and specific messages. Likewise, you ought to be clear and specific in the subject of finance. The more clear and specific you are, the better it is. Say that one of your new year resolutions is to not spend unnecessarily. Good one!
But what constitutes ‘unnecessary’? Is it reducing how much you spend on buying new clothes or entertainment? And how much less do you want to spend on these during the new year? Not knowing the answer to these questions is also a financial mistake to avoid. The reason is simple: knowing the answers to such meaningful questions motivate you to stick to your resolution, which can make a difference to your financial health. If you choose to remain in the abstract, your efforts can go waste.
Well folks, any change takes time. So, do not be disheartened if you find it difficult to manage your finances well initially. But remember, financial mistakes can be disruptive and cost significantly in the long run. Therefore, managing your wealth sooner than later is for your own good.
Acknowledge that you need sufficient money to live a fulfilling and secure life, and act accordingly. If you do this, you’re all set for 2020 and the years to come.
And yes, a very happy and prosperous 2020! 🙂