When it comes to financial planning, everyone has their two cents to contribute, but often the advice can be misleading or end up doing more harm than good. Mint has been covering the stories of families who went from making financial mistakes to seeking professional advice and correcting them, in a segment called My Plan. Since 2009, we have covered hundreds of families and from their stories, a pattern has emerged. Most people tend to make the same money mistakes. We tell you what these mistakes are so that you can steer clear of them and what you can do to prevent yourself from falling into the same trap.
FAILING TO MAKE A BUDGET: The first and most obvious mistake is to not adhere to a budget. Given the consumption-driven environment we live in, it’s easy to fall into the trap of wanting more than you can afford, whether it is a luxury car or the latest smartphone. This is one of the main problems Deepali Sen, a certified financial planner and founder partner of Srujan Financial Advisers LLP encounters when dealing with clients. “They lack a good grip on the amount they spend per month. Most of the money seems to slip through the cracks. Discipline is sorely lacking and there are no budgets drawn and therefore no ‘expense limit’ adhered to," she said. Not having a budget can mean lifestyle expenses eating away your potential savings without you even realizing it. So keep a tab on where your money is going and cap discretionary spending. The COVID-19-induced lockdown taught many of us how to spend just on our needs and not indulge wants all the time.
MAKING INSURANCE BLUNDERS: Most families we have interviewed over time have had one common problem area: insurance planning. Whether it is looking at life insurance more like a savings and investment product or relying on the employer for health insurance, people tend to get insurance planning horribly wrong. “Nearly everyone has had a unit-linked insurance plan (Ulip), endowment, or cash-back plan at some point in time. The high expenses and long tenure of these make them unsuitable," said Sen. Clients treating life insurance as an investment is a problem most planners encounter. According to Suresh Sadagopan, founder, Ladder7 Financial Advisories, “People tend to look at how much returns an insurance product can give rather than focusing on how much protection it is offering and at what price. People also do not realize that insurance is a long-term contract and decisions they take now will affect them for a long time," he said. Both Sen and Sadagopan said that many people do not have the necessary amount of life cover. When it comes to life insurance, it’s best to keep things simple and opt for a term plan with adequate cover.
NOT READY FOR EMERGENCIES: Another area that concerns financial planners is that people tend to ignore the importance of having a large enough emergency fund in place, and this can land them in serious trouble. “Not having an emergency fund has hit people especially hard because of the COVID-19 crisis, which has resulted in job losses," said Amit Kukreja, Sebi-registered investment adviser and founder, amitkukreja.com. Even those who have a fund might be managing it wrong, said Sen. “They use it for monthly cost overruns when their budgeted expenses go haywire. Most have amounts equal to two months’ expenses. Not having adequate emergency funds leads them to borrow at high rates or break investments meant for long-term goals during times of need," she added. Planners advise having at least six months’ expenses stashed away in safe and easily accessible instruments like liquid funds and fixed deposits. But given the COVID-induced situation, experts now advise having 12 to 24 months of expenses.
INVESTING ISSUES: While most Indians are good savers, investing is another story altogether. Waiting too long to start investing is a problem almost every financial planner has encountered. Many only look into financial planning and investing when they’re in their 30s or even 40s, but the earlier you start, the more you can benefit from the power of compounding. Another issue is not tying financial goals to investments. “Most people do not work on a plan when it comes to their finances. Investments are made randomly based on tips or for tax saving, and are not properly thought out, which is a major problem," said Sadagopan. This can have huge repercussions, said Shilpi Johri, a certified financial planner and founder of Arthashastra Consulting. “They end up making mistakes like buying a property as an investment when they require the money only a year later," she said. Start by deciding what your short- and long-term goals are and then choose investment products accordingly. For instance, if you have a short-term goal, it makes sense to steer clear of equity.
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