7 Common Money Mistakes People Make
Amar is a CFA Charterholder and CFP, having over 20 years of experience in IT and Financial Services. He is very passionate about spreading financial literacy and has authored four bestselling books on Personal Finance.
30 Oct, 2017
Financial independence is something a lot of people strive to achieve. Despite the high percentage of people looking to achieve this status, very few actually manage to. However, it isn’t impossible. The best way to achieve it is to understand how to manage money efficiently and make it work in your favour.
Indians are among the best in the world in most professions and are held in high respect within the global community. When it comes to money management though, the same people are guilty of committing several mistakes.
- Lack of goal-setting and planning
- No written financial plan
- Investments done in an ad-hoc manner, due to time constraints
- Too many expenses and loans
- Inadequate insurance against risks of death, disability, professional liability and loss of income
- Over-concentration in real estate
- Myopic view of tax planning
Nothing meaningful in life can be achieved without setting goals and planning. There might be instances when course corrections might be needed but there also exist certainties such as death, retirement that will take place. The idea is to set goals and plan for all eventualities from the start to avoid any problem later.
Due to a lack of formal financial education, most people do not understand nuances of financial goal setting, cash flow and debt management, insurance planning and related activities. This limited knowledge leads to costly mistakes. Reactive responses to the lack of a plan can be avoided by adopting a holistic view of one’s financial situation.
Work constraints are increasingly forcing people to cut back on family time. Hence, financial planning takes a back-seat when it comes to using the little time that remains. As a result, people base their decisions on the advice of those around them; CA, colleagues, family, friends, banks, etc. Thus, the finances of most people are a hodge-podge of products accumulated over time.
Due to a mentality of borrowing money to achieve goals but also often defaulting on loans, banking and recovery agencies are booming businesses. Historically in India, the savings rate has been high but over time, has witnessed a considerable dip. Despite having a moderately high and stable income, people’s expenses and loans, nullify their earnings.
To most, insurance is an investment tool or a tax saving option. As most people do not look at tax saving prior to January, insurance becomes an easy option to latch on to. Ad-hoc advice from friends and family members is another reason why people end up with a plethora of irrelevant policies.
Often, despite paying high premiums, most people end up with inadequate insurance covers. There is negligible assessment of the actual financial risk a family might face. Most liabilities, critical illness cover, disability cover, no income protection or social benefits are other parameters that go uncovered.
As stereotypical as it sounds, people do tend to hoard real estate, believing it to be a great investment avenue. There’s also the belief that in addition to being insulated from market oddities, real estate also provides huge returns and tax benefits. So, many borrow to invest in real estate and end up leveraged. This is a highly dangerous strategy to adopt. Especially during real estate crashes, the illiquid nature of real estate makes it a lethal investment option.
Most believe tax planning to be a tool for minimizing taxes. They indulge in tricks like showing a limited income or weak balance sheet to fool the tax man. This can be avoided by understanding that the right goal of tax planning is to maximize post tax income.
A basic solution to avoid these mistakes is to create a savings, rather than an expenditure budget. Initially, especially if you aren’t in the habit of doing so, you might find it very difficult to construct a budget that works for you. But persevering and creating a savings budget is imperative to one’s financial health.