25 Financial Mistakes to Avoid
Most of the newbie earners save the money for the future, but most of them lose it at some point in time due to the financial mistake, which they don’t understand as a mistake.
Building a corpus of Money is not everything, but multiplying and safeguarding the hard-earned money for the current and future needs is important. Money is necessary to meet the family expenditure, children’s education, health care, travel, and basic family entertainment. More than saving money, safeguard the saved money is an important factor to achieve life’s goals and supports the basic necessity of life.
25 common financial mistakes that need to avoid, which destroy the earnings of newbie earners are listed below.
1. No track of Cash In-flow & outflow.
- Cash inflow is the money coming into the account in the form of salary or commission and cash outflow, is the money which spends for daily life activities.
- A person is considered financially healthy if cash inflow is greater than outflow. Unwariness about the cash inflow and outflow is one of the prime financial mistakes need to avoid in your 20’s.
- Keeping proper personal accounting and monitoring of cash inflow and outflow regularly helps to control and manage personal finance very well. Newbie earners can use online Apps or accounting books to keep track of it.
2. No Financial Plan and Goals.
- It is important to set up short-term and long-term financial goals, which help newbie earners to keep track of the progress and work for it.
- Long-term financial goals like, when you want to get retired and how much money need to get financial freedom at the time of retirement, which helps to control our expenditure and motivates us to continue regular investments to achieve it.
- If you don’t have a proper financial plan, you’re likely to spend more than you should for some specific needs of life.
3. Lack of diversification.
- By diversification of the investment, newbie earners can reduce risk and yield a higher return.
- Diversification is the process of allocating investments across various financial instruments like bonds, mutual funds, Fixed deposits, and other categories.
- Diversification is considered safe because each investment will react differently to changes in market conditions and some financial instrument or sector will support us to meet the financial goals if some fail in the portfolio.
- Developing the knowledge and skill to invest in multiple unrelated industries and re-balancing the investments to a comfortable level of risk-free is the important factor of life to achieve the financial goals.
4. Lack of patience.
- Two important factors to achieve the financial goals are Patience and self-discipline with adequate time.
- Even if you make complex financial plans, without self-discipline and patience, it will be difficult to achieve short and long-term financial goals.
- Visualizing the execution of the financial goals and check-in in progress weekly or monthly with patience is the only way to streamline the success.
5. Lack of discipline investment.
- Financial discipline refers to the process of saving and investing a set amount every month or with a particular time period.
- Disciplined investment help to control the unnecessary spending habit, which in turn helps to achieve monetary goals.
- The thumb rule is, first invest a specific percentage of earnings and then spend the remaining money for the regular expenditure and stay focused on the financial goals.
6. No Emergency Funds.
- The backbone of strong personal financial plans is to have Emergency funds that can meet at least three to six months’ worth of expenses.
- The size of your emergency fund depends on your lifestyle and monthly expense. Not having an emergency fund leads to money traps that need to avoid in your 30s.
- It is ideal to keep the emergency fund in a separate account which can only be accessed at the time of emergencies or sudden expenditure without warning.
7. Not discussing money matters with the family.
- Money talks with kids are the best thing every parent can do for the future of the kids as they get educated in the financial matters, which in turn help them to manage personal finance once they start earning.
- Parents are often reluctant to talk about money to their children, this is the worst financial mistake which in turn leads to undergo financial pressure on the parents, once kids start demanding more money for their needs without understanding the real financial situation.
- Disclosing the details of the investments, insurance, asset, liabilities and saving with the partner or with the kids, help them to handle it, even in our absents.
8. No Medical Insurance.
- No one likes to get sick but at some point, most people need medical care and it will be expensive, a proper medical insurance covers these medical emergency costs and help in such tough situations.
- Medical insurance premiums also help newbie earners to save tax under section 80D.
- If you don’t have proper medical insurance, you may end up spending more money, which you could not afford, and it may lead to another financial mistake during retirement
9. Investment decisions Procrastination.
- Procrastination of retirement plans, not paying bills on time, last-minute ticket booking, and shopping are the few things that lead to unsuccessful financial goals.
- If you start saving and investing at an early age of your earning, you will have a large impact on your asset creation in the long term.
- Timely keeping of the important documents in organized and easy access manner help to track the progress of the achievement of financial goals.
10. Depending on others for investment decisions.
- It is advisable to talk to trusted friends and family members who have knowledge in financial matters before investing, but it is ideal to sit down and take an honest look at your financial situation, risk and goals and make a decision based on your analysis.
- If you intend to invest in stocks, bonds, or mutual funds, it’s important that you should spend a little time understanding each financial instrument before you take an investment decision.
- Avoid circumstances that can lead to financial fraud influence.
11. Buying an insurance policy for investment purposes.
- Insurance policies are designed to meet life assurance during the time of unforeseen eventuality not for achieving the financial goals.
- Investors can buy insurance policies to save tax and safeguard the life not for the investment purpose because it can offer fewer returns compared to other financial instruments.
- Newbie earners can buy an endowment policy that helps in developing a regular saving habit and offer life assurance and also at the end of a set period, it provides a lump sum payout.
12. Unable to understand the credit card misty.
- Credit cards are like a two-sided sword, if you use them properly you will get rewards like let payback points, good credit scores, etc but if you don’t pay within due date, you’ll be penalized with late payments fees, and interest, etc.
- Interest charges will be much higher than a personal loan interest and interest start calculate from the day one of the borrowed money
- Having a credit card without understanding the misty of it is one of the financial mistakes of the middle class and newbie earners.
13. Unable to understand the power of compounding.
- Compounding is like a snowball, as it moves longer period, the original investment and earned income from those investments grow together.
- Investing in financial instruments like Mutual funds, Equity, gives the returns with a Compounding effect, I.e. amount gets reinvested with the same rate of return and it constantly grows, year after year with principle and interest.
- Compound interest helps to grow the money faster because interest is calculated on the accumulated interest and original principal.
14. Trading in the stock market based on the tips.
- There are hundreds of stock advisory companies around us, who provide paid and free Intraday stock tips, stock recommendations for investing and trading, before taking their service It is essential to identify the credibility of them, otherwise we will get cheated.
- Even though there are many SEBI registered Intraday tips providers, it is ideal to do our own research and effort before entering and start making money in stock markets.
- Newbie earners need to choose the right stocks and do research on the target company thoroughly and freeze the entry and exit price before entering. In addition, always set a stop-loss and close all open positions, moreover do not challenge the market.
15. Becoming a victim of Lifestyle inflection.
- Lifestyle inflation is the situation where the spending habit increases corresponding to the increases in income and gives emphasis on the acquisition of objects in order to achieve happiness.
- Spending too much money for the Textile and Apparel to meet the social lifestyle leads to drain-out of the earnings and it is the biggest financial mistakes millennial makes.
- Newbie earners need to create a lifestyle that matches the personal finances and meeting the social life as possible without peer pressure.
- Balancing between work and leisure is based on the smart choices of the newbie earners
16. Buying things at discount.
- Most of the time, non-essential items will be listed in discount, however, as it is on discount many newbie earners have a tendency to buy it.
- Spending money on the non-essential items leads to the compromise on the saving.
- Buying things at discount will be a very good option if you can manage it without compromise on saving.
17. Unaffordable Showoff lifestyle and Spending money on fancy stuff.
- Sometimes people spent money on Showoff lifestyle and fancy stuff for the experiences rather than need, one way it is good as it offers happiness, but it becomes expensive once it starts taking for granted.
- Most of the time, newbie earners spend money for a showoff lifestyle by compromising the essential things, in turn, they need to compromise the investments.
18. Spending on the weekend party.
- Life can never be boring if you learn to explore all the party events & activities. Now the weekend party is designed for enjoyment and relaxation, life becomes more exciting, but frequent parties can be harmful to both your body and leads to financial burnout.
- It is especially important to spend time for the part with family and friends, however, it should be with limited spending, say 5% of the monthly earning.
19. Spending money on children’s marriage.
- Parents spend so much money on marriages of the children considering the fact of social status.
- Most of the parents spend the entire money for a single day event, without thinking about the future need.
- Some parents also spend a lot of lend out money and become a part of the financial trap.
20. Buying gold ornaments as an investment.
- Gold is always considered a safe investment, but Diamonds and Jewelry are a horrible waste of money as we need to pay a large portion of money for the design and making changes.
- Investing in gold coins and gold bonds is a good option but ornaments are not a smart investment.
- If gold is in the form of ornament, we need to pay a huge amount for refashion to make new pieces, for some functions like marriage, it will be an additional cost.
21. Conservative investment like FD and keeping money in Saving account.
- Many newbie earners have a tendency to keep the money in a conservative investment like FD as it gives a safe guaranteed return, but most of the time return earned will be lesser than the inflection rate.
- It is ideal for keeping one portion of earnings in FD and saving account as it provides a regular income and easy to liquidate at the time of emergency. Also, tax-efficient FD investment can offer tax exemption under 80C.
- For the investment purpose, it is ideal to select high return investments like equity, Mutual funds, etc.
22. Unable to understand the difference between nominal and real return.
- A Nominal Return is the actual annual percentage return realized on the investment, whereas a Real Rate of Return is the return after strip out taxes and inflation on the invested amount.
- Real ratereturn = Nominal return – (Taxes and Inflation)
- A nominal interest rate refers to the interest rate offered by the investment instrument before taking inflation and tax into account.
- In general, most of the investment agencies declare the nominal return to attract the investors, but when considering the real return earned on investment will be much lower than the figure they promote as returns.
23. Unable to understand the difference between Asset and Liability.
- Assets are the items that can provide future economic benefit to the owner and Liabilities are items that take money out.
- In short, any item can be an asset or liability, based on how it performs, I.e. if it put money in your pocket, it is an asset and if it takes money from your pocket, it will be a liability.
- Newbie earners should concentrate to accumulate more assets than liabilities.
24. Getting too greedy with investment.
- Many newbie earners are getting too greedy and without considering the risk factor they put a lot of money into the high-risk investment and trades, with the hope of getting more money in return in a short time.
- As they forget to manage risk, they may end up losing all the hard-earned money in the short run. These will be the biggest financial mistakes in their history.
- It is advisable to diversify the investment among the low-risk and high-risk investments.
25. Buying stock on peak and selling at loss.
- When the market moves up, many newbie earners start investing in it without understanding the market movement pattern, once they see the market is moving down they become worried and start selling all the holdings in loss, without waiting for the further upward movement.
- It is ideal to set the entry and exit value before entering into the market and also the floor price if it falls below a certain level, they should sell the units with a minimum profit. Investors need to set an upper limit that triggers sales, with outgoing greed.
- These wrong entry decisions may lead to financial loss depression and many different types of financial problems and financial mistakes.
These 25 simple financial mistakes may lead to a big financial crisis, hence it is advisable to take care of each of these financial mistakes and diversify the investment to achieve the financial goals. Choosing the right investment option which meets our financial goal is the essential talent of every investor. Recovering from financial mistakes is easy, if ready to understand and resolve financial setbacks by choosing the best decision for moving forward.
Nothing wrong to take the help of financial advisers in investment matters, if you are not confident in making decisions, however, It is ideal to make the decision based on your understanding and confidence.
Thanks & Regards.