Investing is an activity most of us try to defer to a much later date. And those who do claim to 'invest' end up making all the mistakes that ultimately lead them to a messy financial situation. Here are 8 mistakes you should avoid while managing your money.
1.Delaying investment till later
The principal rule of investing is to 'start early'. And you should do that to get he benefit of compounding. To explain with an example. Person A started investing Rs 10,000 per year at the age of 30. Person B started investing the same amount every year at the age of 35. When they attained the age of 60 respectively, person A had built a corpus of Rs 12.23 lakh while person B's corpus was Rs 7.89 lakh, assuming a return of 8% every year. So the difference of Rs 50,000 in amount invested made a difference of more than Rs 4 lakh to their end corpus. That difference is due to the effect of compounding. The longer the compounding period, the better for you.
2.Ignoring the impact of inflation
Inflation is a devil that can stab you in the back. If you invest in an instrument like a bank fixed deposit, on the face of it, your money is safe. But what you won't know is that the value of that money is actually depreciating with time. For example, if you have invested Rs 10,000 in a bank fixed deposit for a period of 3 years at an interest rate of 5.5%, you will be assured of a maturity amount of Rs 11,742. Suppose during this period of 3 years, average inflation was at 6%, the real value of your maturity amount would be Rs 9,859. In simple terms, if the rate of inflation is more than the rate of return, the real value of your investment is negative.
3.Being careless in market investments
The only way to beat inflation in the long run is to invest a part of your total portfolio in equity markets. But you can't go overboard. A common mistake that people make is to invest too much in equity markets without diversifying risks. Equities give the much-needed kick to your portfolio in the long run, but too much of equity can cause harm. Depending on your profile you must allocate a right proportion in debt and equity. Another common mistake is to try and time the market. Only the likes of Warren Buffet have successfully timed the markets. Most others end up burning their fingers in trying to do so. Instead, adopt a method that will give you returns in equity without the need to time the market. Mutual fund systematic investment plan (SIP) is one such option.
4.Neglecting your retirement planning
Using your retirement funds to pay for your child's school fees is the worst mistake you can make. Your retirement funds are meant to provide for your life after retirement. By cashing that to pay for your child's fee is a disaster. Look for other means to pay for fees. There are loans aplenty. Create a separate corpus and name it 'Child education fund', if need be. But do not liquidate your retirement fund. You will never be able to build enough corpus if you do not let the money accumulate.
5.Cashing out your EPF when you switch jobs
This is another invitation to disaster. And laziness is the root cause. When you switch jobs, it's easier to encash your Employee's Provident Fund rather than go through the hassle of transferring it. But this doesn't make sense because that money is like a windfall and you will end up spending it to meet ends that are not your needs.
6.Going overboard on your credit card
This is no new advice. With credit cards available for free these days, the temptation to spend is irresistible. But watch your wallet. Don't spend beyond your means. If you are a spend thrift and yet must have plastic money, think about a debit card. Credit card is one of the first steps to a debt trap. So stay clear of it and keep it for emergencies.
7.Not making the most of your tax saving tools
Make the best of your tax saving investments like PPF, NSC and the like.While it is true that tax saving instruments must not be your only investments, make sure that you don't end up paying taxes when you could have actually saved them by making fruitful investments. Even investing in a pension policy or an insurance policy can save you tax, but make sure you don't do that just to save on tax.
8.Not buying enough insurance
This is something most of us are guilty of. We buy insurance to save tax and combine it with an investment option. After making all other tax saving investments, a 35 year old is willing to invest up to Rs 25,000 in an insurance policy. He opts for endowment insurance and thinks he has saved the best tax possible as well as got himself insurance and investment. But for that kind of premium, the maximum sum insured on an endowment policy that he will get will be around Rs 5 lakh. That by no standard would be enough to protect his family of 2 kids.
We are also almost always guilty of not buying enough medical insurance.This is a very very important cover and its best to buy it at a young age.
Disclaimer:This article is for academic purposes and the readers are requested not consider this as an investment advice and asked to consult an investment advisor before doing any investments.
1.Delaying investment till later
The principal rule of investing is to 'start early'. And you should do that to get he benefit of compounding. To explain with an example. Person A started investing Rs 10,000 per year at the age of 30. Person B started investing the same amount every year at the age of 35. When they attained the age of 60 respectively, person A had built a corpus of Rs 12.23 lakh while person B's corpus was Rs 7.89 lakh, assuming a return of 8% every year. So the difference of Rs 50,000 in amount invested made a difference of more than Rs 4 lakh to their end corpus. That difference is due to the effect of compounding. The longer the compounding period, the better for you.
2.Ignoring the impact of inflation
Inflation is a devil that can stab you in the back. If you invest in an instrument like a bank fixed deposit, on the face of it, your money is safe. But what you won't know is that the value of that money is actually depreciating with time. For example, if you have invested Rs 10,000 in a bank fixed deposit for a period of 3 years at an interest rate of 5.5%, you will be assured of a maturity amount of Rs 11,742. Suppose during this period of 3 years, average inflation was at 6%, the real value of your maturity amount would be Rs 9,859. In simple terms, if the rate of inflation is more than the rate of return, the real value of your investment is negative.
3.Being careless in market investments
The only way to beat inflation in the long run is to invest a part of your total portfolio in equity markets. But you can't go overboard. A common mistake that people make is to invest too much in equity markets without diversifying risks. Equities give the much-needed kick to your portfolio in the long run, but too much of equity can cause harm. Depending on your profile you must allocate a right proportion in debt and equity. Another common mistake is to try and time the market. Only the likes of Warren Buffet have successfully timed the markets. Most others end up burning their fingers in trying to do so. Instead, adopt a method that will give you returns in equity without the need to time the market. Mutual fund systematic investment plan (SIP) is one such option.
4.Neglecting your retirement planning
Using your retirement funds to pay for your child's school fees is the worst mistake you can make. Your retirement funds are meant to provide for your life after retirement. By cashing that to pay for your child's fee is a disaster. Look for other means to pay for fees. There are loans aplenty. Create a separate corpus and name it 'Child education fund', if need be. But do not liquidate your retirement fund. You will never be able to build enough corpus if you do not let the money accumulate.
5.Cashing out your EPF when you switch jobs
This is another invitation to disaster. And laziness is the root cause. When you switch jobs, it's easier to encash your Employee's Provident Fund rather than go through the hassle of transferring it. But this doesn't make sense because that money is like a windfall and you will end up spending it to meet ends that are not your needs.
6.Going overboard on your credit card
This is no new advice. With credit cards available for free these days, the temptation to spend is irresistible. But watch your wallet. Don't spend beyond your means. If you are a spend thrift and yet must have plastic money, think about a debit card. Credit card is one of the first steps to a debt trap. So stay clear of it and keep it for emergencies.
7.Not making the most of your tax saving tools
Make the best of your tax saving investments like PPF, NSC and the like.While it is true that tax saving instruments must not be your only investments, make sure that you don't end up paying taxes when you could have actually saved them by making fruitful investments. Even investing in a pension policy or an insurance policy can save you tax, but make sure you don't do that just to save on tax.
8.Not buying enough insurance
This is something most of us are guilty of. We buy insurance to save tax and combine it with an investment option. After making all other tax saving investments, a 35 year old is willing to invest up to Rs 25,000 in an insurance policy. He opts for endowment insurance and thinks he has saved the best tax possible as well as got himself insurance and investment. But for that kind of premium, the maximum sum insured on an endowment policy that he will get will be around Rs 5 lakh. That by no standard would be enough to protect his family of 2 kids.
We are also almost always guilty of not buying enough medical insurance.This is a very very important cover and its best to buy it at a young age.
Disclaimer:This article is for academic purposes and the readers are requested not consider this as an investment advice and asked to consult an investment advisor before doing any investments.
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