Financial Mistake

From the desk of Mr.Nirav Lekinwala

Certified financial Planner

Director

M S Multiwealth Advisory Pvt.Ltd

Financial Mistakes

There are many financial mistakes that we all make, which are quite common and perpetuated generation after generation.

Financial mistakes’, which if avoided, can result in financial freedom and wealth creation. We should take a look at some common financial mistakes that can be avoided easily.

We all know that if we want to reach somewhere fast we need to start early. Similarly, if we want to create wealth faster in our life – we need to start creating it early.

Overspending creates hurdle in wealth creation. Unfortunately, most of us postpone our wealth creation process by overspending.

Overspending:

While we seem to think overspending is normal, it is not wise. It can be disastrous. When we are young and start earning, we think that we will continue to earn same income and even more – forever! Excessive spending results into lower savings and rising level of debt. We tend to postpone investment and prepone expenses. In fact, we should be doing exactly the reverse i.e propone investment and postpone expenses. Most of us do not have monthly expense budget. When we go out to shopping mall, almost everything on display seems like a necessity to us. Whenever there is a `SALE’ we tend buy irrespective of the fact whether it is required or not, for immediate consumption. While it is not wrong to buy from `SALE’, we should realize that we end up buying something which may not be required or which can be easily postponed. We also need to return to ground reality and make the crucial decision between a necessity and a luxury. If we want to reduce our debt, save more and achieve financial freedom, it is important to identify the root cause of overspending.

There are few tips to reduce excessive spending:

• Don’t go to a shopping mall without clear objective of what you need to buy. Don’t buy things just because you like them or they look nice rather buy things you ‘need’.
• Draw up your monthly expense budget. Be clear how much you should spend per month and how much you need to save for your retirement plan. If you realize how much you have to spend towards various items, this alone is sufficient to reduce your spending.
• Avoid impulsive spending.
• Don’t spend time at a place where it is easy to spend money. Don’t go to a shopping mall at the weekends to relieve your boredom.
• Ask yourself a simple question – Can you really afford a purchase? Making payment for a purchase and to afford a purchase are two different things.
• Pay with cash or use debit cards instead of paying your bills through credit cards.

It is not your salary or income that makes you wealthy, it is your spending habits that make you rich or otherwise.

We often learn from our mistake, sometime we learn from other’s mistakes. However, it is never too late to learn. Not only common man makes mistake, even seasoned investor end up making financial mistakes, some of them are difficult to rectify. Disaster management is not just the responsibility of civic authorities, but also of families who must take care of their finances. Everyone must put in place a financial plan to deal with unexpected calamities. This could help even in dealing with unexpected emergencies or misfortunes. In our last report, we discussed financial mistake of overspending, we shall look at other financial mistakes.

Delaying or ignoring a Will

Updated nomination and the existence of a will is of crucial importance whether the person is single or married. Even if a person has nominated someone, it does not automatically mean that the concerned persons will get to own that asset. Nomination is the right to receive, not the right to own. For example, if the person has nominated his wife in various assets (bonds, bank deposits, shares, etc), the wife gets the right to receive the asset. But, in case there is no will, any other family member, for example his mother, has the right to take the matter to the court. A written will ensures that the asset goes to the person one desires. A will need not be drafted only with a help of a lawyer. One can draft it in own handwriting and the format / draft is simple and can be easily accessed on the net. A handwritten will, attested by two persons, preferably one of them the person’s doctor, and would ensure that the will would not be challenged. Most parents leave the idea of making a will after their retirement. They feel that nomination or joint holding will serve the purpose. If a person dies intestate, then the possibility of legal disputes and division of assets under succession acts become a reality amongst the family members.

Insurance Follies

Risk management is ensuring that health and life insurance is in place (and adequate too) and that there are no lapses in premium payments. Many of us take more than one insurance policy to provide maximum safeguards against risk. Instead of taking multiple policies, one should go for increasing life cover in the existing policy. We often have adequate life cover, but ignore to take a medical policy, which ultimately force us to shell out hefty sums out of our savings to cover medical expenses. We often forget to take medical policies for the kids or parents, leaving them exposed, in the case of eventuality. During the last couple of years, insurance products like ULIP have gained popularity because of the rising equity markets. However, such products are expensive and provide less life coverage. People end up buying products, which are inappropriate for their requirement.

Investment is not an expense. It is money put away for future use. So, cutting down on investments is not a good idea.

Not creating contingency fund:

One should keep aside contingency fund for rainy days, part in form of cash and part in bank account. Contingency fund is required to take care of medical emergency, loss of income due to job loss etc. This amount should be roughly equivalent to three to five months of living expenses including funds required for emergency. Few people keep such emergency fund.

Putting Off Financial Planning:

Financial planning helps us to make provision for financial needs that will arise in the future. Financial planning involved setting up of financial goals and appropriate asset allocation. Without a proper plan, people often try to maximize returns and take undue risk. There is a danger of not achieving the life goals, if proper asset allocation is not adhered to. For example, if you set aside certain funds (and allocate to equities!) for your daughter’s marriage, which is say one year away. If there is a crash in the equity market, the required funds cannot be made available to take care of marriage expenses. Such funds need to be parked in safe assets for short-term needs without taking any risk. The biggest mistake that people make is to ignore the value of financial planning.

Not starting savings early and not realizing power of compounding:

When we start our career and earn, we want to buy whole world from it. We get married; we buy home, have our family, expenses keep adding up. Our income increases but so does our expenses. When we start earning we don’t think about savings. We tend to forget power of compounding. Because of the power of compounding specially over a long period of time, the difference between starting to invest early versus starting late can have a significant impact on your wealth. Benjamin Franklin described power of compounding as `the eight wonder of the world’. Legendary investor and wealthiest man on earth Warren Buffet made his first investment when he was 11 years old and according to him he started late. Warren Buffest was millionaire by the time he was around 30 years old.