Saturday, 28 September 2013

Do You Make These 9 Financial Mistakes?

We all make mistakes in our life, we just don't acknowledge it. Let's get straight to the point. Read about common mistakes we make in our financial life.

#9 Spending your money on rubbish.

 Yes, really. And you don't have the slightest idea of doing it. Why??? Because who don't like to spend on buying expensive designer clothes, branded shoes, perfumes and list goes on. Even if you don't buy pricey items, but keep on buying unnecessary things, you don't need, it adds fast. But it doesn't dawn on you until the credit bill arrives. Most of us are guilty of spending money on things we don't need. As the age old saying goes,'Cut your coat according to your cloth.' Chronic overspending and high-interest, revolving credit card debt are your worst enemies when it comes to financial success. Spend like you’re poor and you are much more likely to become rich. As Warren Buffett puts, "If you buy things you don't need, you will soon sell things you need."

Solution: Make a budget and stick to it.

#8 Failing to save for emergencies.

You have heard it hundreds of times: you should have at least six months of income in an emergency fund. But it's easier said than done. Most of us can get hit with major unplanned expense, whether it is a car or home repair, medical bill, accidents or unexpected job loss. When these things happen- and they do- people often get blindsided on what to do and get into immediate panic mode. This situations can really become worse if we don't the financial safety cushion.

Solution: Well, it's pretty easy- make an emergency fund and religiously put money in that. Also you can start savings fund. These simple habits can make a difference.

#7 Living Off Credit

Have you ever wondered, how that credit card in your pocket make you purchase things that don't need at all. have you ever purchased anything impulsively and then regret about it? So, what is the end result because of this habit? Your credit card bill goes on piling up and a time comes when all your savings are spent on paying your credit card bills.

Solution: Prioritise your spending. Whenever you need to purchase, look for the best rates offered and first research about it. Take debt only for important purposes like education, house. As a rule of thumb, try to keep your purchases under 20% of your income.

#6 Paying the minimum repayment on your credit card.

Yes, you know this. Credit card interest rates are the highest. By allowing your credit card debt to mount up, you are mounting up the amount you have to pay and saying 'yes' to years of cash repayment. 

If you have savings and also paying minimum repayment on credit cards, you are probably paying much higher interest rate on your credit than in any of your savings. For example, suppose you have a loan of Rs. 1000 and the same amount of savings. The interest rate on your savings might be 10% but on loan it would be about 14%. The maths part is really easy. On savings you are getting Rs. 100 while on loan you are incurring a loss of Rs. 280; a net loss of Rs. 80. This will impact your future spending power in a big way.

Solution: First of all try to clear your highest interest rates credit. This will help you pay minimum interests overall. Use your savings to pay of your debt. You can save in the long run.
(Read more on How To Get Rid Of Your Debts.) 

#5 Children are kept away from money concepts.

Many children (even teenagers) have a minimum understanding of money. They only view it as a way of getting stuffs. They don't understand the basic value of hard-earned money. They remain unaware of the fact how hard you work to put the food on the table or the electricity or phone bills you pay or the schools fees you have to pay. 

Instead, they get it easily in the form of allowance or 'pocket money'. Add to that some parents make a mistake of doing as per the whims of their children and provide them with whatever unnecessary things they ask for, that too, without even asking a question.

Solution: Try to instill savings habit in your children right from the beginning. Encourage your child to put aside some money in their piggy bank. Or you could provide them some tasks to earn that money, so that, they understand the value of money. 

#4 You don’t have a plan.

When it comes to planning, you don't have any budget or spending limit, particularly on non-essential items. By budget here, I don't mean a hard and fast budget, but to keep track of your spending on frivolous things. 

Many of us simply don't bother to keep a tab on our expenses. We are often shocked by the credit card bill that comes at the month's end. Then we pay it and forget about it. This could make a mess of your finances. By planning prudently, your savings can improve a lot. In this way, with the power of compounding, you can save a lot for your future.

Solution: Prepare a plan on how to spend the money. Keep aside fixed amount of money for essential spending and saving.

#3 Not diversifying your investments portfolio.

Taking too much (or too little) risk. A 30 year old having all his savings in Defensive portfolio(See more on Defensive Portfolio) is playing too safe or a 60 year old putting all his income in aggressive stocks(Read more to learn about Aggressive stocks) is playing with fire. Identify your risk tolerance and spread the risk across different portfolios like stocks, bonds, real estate. 

Solution: If you want to minimize risk, try different portfolios to invest with different proportion to them. A Hybrid portfolio can work best for you.

#2 Turning every investment into a speculative bet.

This is a big one you that you must avoid if you want to become wealthy. The main focus of your investments should be cash flow rather than capital appreciation. If you have cash flows, instead of looking to spend your money on speculations and small cap companies, try to invest it in some other investment opportunity. Taking too much risk can cost you dearly. You should have other options as well.

Solution: Invest around 10% of your assets in Speculative Portfolio and diversify assets in other areas.

#1 Using Your Heart, Not Your Head

Sure, the startup of friend sounds a great business opportunity. But if it fails, do you afford to lose the Rs 10000, you are planning to invest in it. The jewellery bought by your friend surely looks good. Do you need it too? Emotions are powerful forces but when left unchecked they can duly influence you to make decisions not in the best of your financial interest.

Solution: While thinking about major financial investments, consult an expert before taking any actions. Even when spending your money, don't just keep squandering it on unnecessary things. First focus on the utility and its requirement.

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