Effective financial planning is more than just accumulating money; It is about building your wealth gradually and consistently and protecting it from any unexpected obstacles that may arise in the future. Here below are some common financial planning mistakes.
- POOR FINANCIAL PLANNING
Many people are more interested in their next holiday than they are in the state of their finances. They only have vague goals and don’t know if they’re on track to achieve them. A lack of financial planning will leave you with no sense of direction towards maximizing the potential of the money you accumulate. Poor financial planning can have a long term irreversible negative impact on your retirement pool.
2. INEFFECTIVE COMMUNICATION
When it comes to working couples, they have the advantage of combining their incomes and allocating them appropriately for expenses. If they can navigate through their finances properly, they can save more, spend more and accumulate a healthy corpus for retirement and future contingencies. Failure to communicate and discuss their differences before making decisions may lead to conflict. This communication should extend beyond partners because even if adult children inherited the family wealth, they will still have an active role during later life care or settling estates after death.
3. MISMANAGEMENT OF FUNDS AND LACK OF SECURITY
We often assume that bad things won’t happen to us and think the same regarding our financial security. However, one must always anticipate the rise of an uncalled emergency by setting aside some savings into an emergency fund. A failure to do so leaves many high and dry when jobs are lost, and there is no inflow of money–a good rule-of-thumb is having three months’ living expenses readily available as cash deposits.
There is an increased responsibility for many earning members as the average life expectancy continues to grow. Now, not only young children but also elderly family members are depending on their financial support, and loved ones must consider how they would cope if a person were to suffer from an incapacitating illness or in the event of an untimely death. There are a couple of ways to keep your loved ones financially secure, such as getting covered by life insurance and medical insurance, drafting a Will, appointing nominees, making a list of assets and investments, ensuring cleared loans, etc.
4. DELAY IN FINANCIAL PLANNING
The ideal time to get started with one’s finances would be as soon as one starts earning an income. As proven, the sooner someone starts their financial planning process, the more time they will have for investing and building up wealth-generating assets like stocks, bonds, and real estate. This is referred to as the power of compounding. Unfortunately, many people make the mistake of waiting till they have responsibilities such as family and loans before they begin their financial planning resulting in a reduction of economic yield.
5. SAVING AND MANAGING EXPENDITURES
One of the best known effective ways to save is by reducing your frivolous expenditures, allowing you to use the remaining resources to their highest potential. Unfortunately, Indian investors make the mistake of assuming that investments alone can take care of all financial needs; this may not be true if they continue borrowing more and relying on high-interest loans or an unnecessarily extravagant lifestyle. As a result, financial planning fails because you’re not saving to your full potential.
6. LACK OF KNOWLEDGE REGARDING USING INSURANCE TO SAVE TAX
Insurance can be a great way to reap tax benefits. However, it is crucial to make the right choice of investments. Having a thorough knowledge of insurance policies is a prerequisite before investing in them. You can do so by seeking assistance and advice from a professional financial advisor to help you navigate your options.
7. STRIKING A BALANCE WHILE INVESTING
It is a misconception that people in their 20s to 40s should invest aggressively. Although this advice makes sense, one cannot be blind towards risk and must be logical and reasonable. Exposure to more risk may pose a threat to your goals, and you may end up losing too much. As a result, you may be discouraged from making future investments. Hence, being too aggressive may not be advisable.
On the other hand, being too conservative has its flipside too. It can lead to a loss in the value of your money when investing. If one stocks up cash in your savings account, it will eventually decrease its value over time. The value of Rs.100 today would fall and be worth half its value in less than a decade if it stays stagnant in your bank account due to inflation and low bank interest rates.
Maintaining balance and investing across investment options with varying degrees of risk is essential to make your money grow consistently at an increasing rate.
8. INABILITY TO THINK OF FINANCIAL PLANNING BEYOND INVESTING
Investing is just one segment of an ideal financial plan that you must make to achieve your long-term goals. It’s essential to place a lot of emphasis on day-to-day budgeting, appropriate insurance coverage, as well as intelligent tax decisions for your long-term financial plans.
9. NEGLECTING INFLATION
The time value of money can be a challenging concept to grasp. The amount you think you have available today will lose its buying power over time if you do not utilize it and invest wisely. In addition, our currency is worth less than before, thanks to inflation, so you need to consider any savings or investments.
If you’re over-invested in “safe” options that offer low returns, your portfolio will grow at a rate below the inflation. In other words, at times making risky investments can be beneficial in saving for retirement.
10. NOT REVIEWING AND MONITORING YOUR FINANCIAL PLANNING
Life can be unpredictable. You may plan today for a future goal. However, due to unforeseen circumstances, one may be unable to achieve their goals as planned. In addition, your priorities fluctuate at every stage of life; tax legislation gets reformed, and so on. Therefore, it is crucial to regularly review your objectives once in a while by reevaluating them; it provides peace of mind, making us more likely to stick with our plans instead of quitting midway through!
11. CHOOSING THE OPTIMAL AGE FOR RETIREMENT
Opting when to retire is one of the most challenging decisions to make in life. Unfortunately, people often settle on an arbitrary age for retirement without really considering their financial readiness for such a significant change. Retirement planning can give you repose and insight into how much money will last and what steps one might take should there be any shortfalls along the way.
12. UNDERESTIMATING THE NEED FOR A FINANCIAL PLANNER
Financial planning can be an excellent means of helping you save time and make the most of your money. However, staying on top of finances can be overwhelming, especially as life becomes more complicated. Financial planners like us will take care of all that for you while motivating you to stay disciplined about your strategies, so it’s easier than ever before!
13. NOT KEEPING WILLS AND BENEFICIARIES UPDATED
As a person’s life progresses, so do their needs. Therefore, around the time you experience significant life-altering events, you should review your Will to ensure it is up-to-date and reflects what you want regarding who inherits your assets when death occurs.
Financial planning is a lot more than just managing your money and quite tricky. Not understanding what you’re doing can make things difficult. The biggest mistake in financial planning is failing to identify and recognize that you are committing errors in financial planning. Following these simple steps will help avoid the common pitfalls!