Top 10 financial planning mistakes to avoid

Inadequate financial management can often lead to over stepping the budgetary Laxman Rekha and inviting unnecessary debt. Planning well ahead for significant long-term expenses is a given. It is substantially more rewarding and wiser to save for meeting your long-term goals (like buying a car or owning a house) than to give in to the momentary pleasures and instant gratifications, ending up overspending on the short-term goals.

It is always good to plan for the future. Let us learn about the most common mistakes people make regarding financial planning.

1. Failing to rebalance your portfolio

Rebalancing a diversified portfolio can increase overall returns and reduce risk. Rebalancing is the act of making adjustments in your investment portfolio with an aim to reassess and minimize risks. Annual rebalancing offers a disciplined investor the probability of higher long-term investment returns. As no one can predict the market returns perfectly, rebalancing your portfolio from time to time will help you stay on track with your investment strategy.

2. Neglecting to maintain a contingency fund

An emergency fund of minimum 3-6 months of expenses is essential for financial wellbeing. The best action is to create an “emergency fund” at the earliest. This fund can be invested in low-risk, yet highly liquifiable assets such as debt funds so that you can readily and easily convert them into cash during contingencies.

3. Lack of or insufficient insurance coverage

Life Insurance doesn’t mean the value we get after a particular period. It means ensuring financial security to our loved ones, peace of mind, and happiness to self and family. Taking risk into consideration is essential not only to have a safe life but also to dream big.

4. Waiting too long to pursue your financial goals

When we start earning, we tend to postpone our dreams and plans for the future. We forget that “we are enjoying today because of our yesterday.” So, the best time to start your financial planning is yesterday, meaning when you are young and as soon as you start earning. If you have missed that train, the second-best time is today, but definitely not someday!

5. Not looking beyond traditional investment options

It is a common mistake to not look beyond traditional savings tools such as bank FDs (fixed deposits) or life insurance. In doing so, the real value of our money continues to erode over time. Explore new-age investment options that are tax-efficient and can offer inflation-adjusted returns. For instance, mutual fund SIPs are an excellent way to open your mind to a more efficient savings tools.

6. Buying investment products from friends or relatives on emotional grounds

We often buy policies just because our friend or a relative is an agent or sells a product, or because a friend has bought it and it is working well for them. Not only is this bad for your financial health, but it also might lead to loss of money and worse – the relationship!

7. Confusing insurance with investment

Insurance is not an investment and both serve different purposes. In India, insurance policies have been viewed as “practical savings tools” to meet financial goals. But any policy that demands more than the cost of covering a risk is a packaged investment. So, be wise before you mix insurance and investment together. Go for a life insurance policy that provides proper coverage and go for an investment strategy with pure investing tools separately.

8. Not factoring in inflation while planning for retirement

Retirement planning is more complex than just taking our annual expenses today and multiplying them by 20 or 25 times! You must factor in inflation, potential lifestyle adjustments, post-retirement expenses, medical care, and leisure costs. The support and guidance of a qualified Financial Planner is essential in this regard.

9. Not choosing the right frequency while paying insurance premium

Suppose you buy a ULIP policy and make yearly payments instead of monthly, then you are losing units, affecting your average rupee growth. Paying the insurance premium amount every month on a fixed date will help reduce the impact of market volatility no matter the market is up or down.

10. Paying the loan at the end of the month

A bank loan, say for 20 years, can cost you many extra months of EMIs if you pay it at the end of each month rather than at the beginning of each month. This is a common mistake while paying back loans.

Conclusion

You can tackle monetary problems much more successfully if you use financial planning. It can better equip you to handle situations where you may need emergency or immediate financial support. With the help of a proper financial planning, you can better comprehend your goals, including why you must reach them and how they will affect other areas of your life, whether you are managing a family or a business.

(By Narendra KS, Leader Financial Wellness, AscentHR)