There are many stereotypes about Indians and their equation with money. Some of these stereotypes are not entirely wrong. One such stereotype is that we Indians like to keep our money closed and protected. We generally stack our money in certain avenues which may not necessarily grow our wealth. We don’t realise that despite our efforts, we are actually losing money, or at least the opportunity of creating and growing our wealth because of certain mistakes we commonly make. Avoid making these errors and you are half done.
- Not maintaining an emergency fund
It is vital to have a cash buffer at all times to tide you over any unforeseen financial crisis like losing your job or paying for emergency medical expenses. Caught unprepared, people are forced to take a personal loan which can be very expensive with interest rates going up to 30%. You need to consciously set aside a specific amount regularly to create a cash fund that is equivalent to 6-7 months of income. You should make sure that contributing to this fund is non-negotiable and that you do not dip into it for any other non-vital expenses.
- Neglecting insurance/retirement planning
Most young people think insurance and retirement planning are mid-career financial goals, to be considered only once they have a larger income. Some don’t even consider insurance and retirement plans as being important aspects of financial planning. Buying a term life insurance is a relatively cheap way of buying not only financial security for your loved ones, but also buying priceless peace of mind.
Of those who realize the need to buy insurance, many fail to realize that insurance becomes significantly more expensive once you turn 40 and it is cheapest to buy a policy when you are young and healthy.
There are similar advantages to investing in a retirement fund early on in your life. Retirement might seem a long way away when there are so many more immediate pressing expenses to take care of. It seems like one item that can be dealt with later in life. However, you need to plan now for the day when you no longer have a steady and sizeable monthly income.
- Delaying investments until later in life
There are many expenses to be taken care of when you are in the early stages of your career and many find it difficult to spare any money for investments. “Essential” spending on holidays or entertainment in your 20s is replaced by spending on a child’s education and EMIs in your 30s and beyond. Saving from the early years of your professional life gives you greater growth than investing a larger amount for a smaller number of years later in life.
Despite the small size of your saving, the advantage of compounding coupled with the increased number of years will lead to a sizeable amount when you need it. The longer you wait to start building your investment portfolio, the smaller your final corpus will be.
- Relying on conservative investments
Fixed deposits and small savings schemes are still the most beloved form of investment for millions of Indians. While they are safe investment instruments, they are not particularly lucrative and might merely keep up with inflation, leaving you at the same place financially as you were when you first opened the FD. Investing in ULIPs can gain you an income that grows faster than inflation. You need to change the investment approach of your 30s (in perhaps FDs) to match your greater income and greater needs of your 40s and beyond.
- Not building a credit profile
It is important for your long-term loan-eligibility to build up a credit portfolio that demonstrates that you are a responsible borrower. Taking loans and credit cards and making timely repayments helps you build a solid credit profile. This will enable you to qualify for loans easily as well as make you eligible for attractive terms and conditions.
It doesn’t require financial wizardry to avoid the mistakes above. A little bit of commitment, self-discipline and awareness goes a long way to enjoy a lifetime of financial security.