“I am planning to buy a new mobile phone,”Rannvijay said to Raghu.
Raghu replied, “I am also thinking the same but its 25 of the month and I have no money left with me.”
Rannvijay then said, “But Raghu you are working as a senior software engineer and earning Rs 1 lakh per month and now you are claiming that you have nothing left?”
Raghu replied, “Yes that’s true Ranvijay. My father taught me to live life king size. I have never compromised with my dreams. I did what I want and that is my way of living life and when it comes to savings, I already have some money in Fixed Deposits”
Rannvijay then interrupted, “But this is not good for your financial health Raghu.”
Raghu replied patiently, “Can you explain? What you are trying to tell me?”
“We often end up adopting the characteristic traits of our parents knowingly or unknowingly and this includes their financial habits as well. While some of these habits might be good, some might need watching out for.
Financial management was a lot more difficult for our previous generations due to a lack of information and guidance. You must learn your lessons from their mistakes and refrain from repeating them in your life. Here are some personal finance mistakes you might want to be careful of.
Saving through time-tested, safe instruments such as Fixed Deposits was favoured by our previous generations. Often, the post-tax returns from such “safe” instruments are low and sometimes don’t even beat the average rate of inflation. In essence, these instruments are not “safe” since locking your money in them means taking heavy inflation risks which limit your ability to create wealth.
It’s important that you invest in assets with different return potential and different risk exposure. This would allow you to build wealth aggressively while having your money hedged against risk. For example, Unit Linked Insurance plans in India can help you beat inflation and give you long-term returns.
Delay in Investing
Many investors start out late and regret it later. Time is as essential to wealth creation as is the rate of return on an investment. If you delay investing for a later stage in life, your compounded returns would be lower and you may have to take higher risks to achieve a target (such as creating a retirement corpus) that could have been created with limited risk. No matter how small the contribution, investment over a longer period of time provides better-compounded returns, which helps you achieve bigger investment targets.
Being Uninsured or Underinsured
People from the generations gone by often didn’t realize the value of life insurance, they assumed it to be an avoidable expense or just a tax-saving investment avenue. With the growing costs of hospitalisation, a term plan with a critical illness rider is mandatory for every person. And if an individual has financial dependents, they must absolutely buy a term plan.
Concentrating On Tax Savings
While saving taxes is a necessity, your investment plan can’t be completely driven by it. Many members of previous generations often invested for tax-saving purposes, considering wealth creation secondary. Tax-saving should be only one of the objectives you should look to fulfill while picking an investment option. Wealth creation should also be high among your objectives.
No Retirement Planning
It’s not uncommon to see the elderly mix up their various investments for example, they may break their PF (which is meant to provide them an income in retirement) to fund a child’s marriage or to buy property. Retirement planning is an important goal in managing personal finance and it requires ample time. So it’s recommended that one starts early. You must invest in a long-term fund to create a corpus for life post-retirement.
Above all, keep a tab on the changing economy. Review your investment portfolio from time to time to make necessary amends based on the macroeconomic environment and your changing priorities.
It is true that our parents have much more experience of life but somewhere we have to match our steps with the present scenario to reap up the maximum benefits when it comes to investments and building a healthy financial portfolio.