As promised, we will cover the steps mentioned in the beginner’s personal finance checklist in detail.
If you are new here, you can check the checklist here.
So, in this blog, we will discuss the first step of the checklist, which is to avoid common financial mistakes.
Estimated read time: 3 minutes and 38 seconds
Hint: It isn’t as easy as sticking tape to a leaking water bottle.
Buckle up, here we go!
Have you heard about Charlie Munger? He is the business partner of Warren Buffett and is famous for his knowledge of mental models. One of my favourite quote of his is –
It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligentCharlie Munger
In short, avoiding stupidity is easier than seeking brilliance.
Now, taking some context from that quote, we have found some common financial mistakes that, if avoided early on, can lead you to the next level in your personal finance journey.
Common financial mistakes to avoid:
1. Living Paycheck to Paycheck:
A report by Finology stated that on average 34% of Indians have said their salary doesn’t even last for 15 days. Do you fall under this category? Then you need to change a lot of things.
Check if you are earning enough to meet basic needs. If not, ask for a raise, upskill yourself or add more income sources. If your income is alright, then check your expenses. Are you becoming a victim of lifestyle inflation? Coming to our next mistake.
2. Impulsive Spending:
Moving from 2bhk to 3bhk just because you have got a good hike, upgrading your car because you got a bonus and spending impulsively are some examples of lifestyle inflation destroying financial lives. You need to avoid this.
To avoid impulsive spending, you can follow the 1-week rule. This rule states that you have to wait for one week before buying anything expensive. This time can make you realise whether you have a genuine need for it or not, whether it makes sense to buy at this moment or not. The best is to live within your means.
3. Not having a plan:
It’s important to have some kind of plan for your expenses and savings. You can start with a simple plan and update it as needed. Don’t avoid taking action in the name of making a perfect plan.
4. Not tracking the cash flow:
This is simple tracking. You need to know from where and how much money is coming in and going out. This will help you save on unnecessary expenses like unsubscribing unused subscriptions or any other auto-renewals.
5. Idle cash:
You would have heard about inflation. How it reduces the value of your money. So, check for your cash balances. Start investing the excess cash.
6. Not communicating with your partner or family:
It is crucial to communicate your plans and discuss financials with your partner and family. Without proper communication, it will be hard to execute your plans.
7. High EMI:
If you or your family have taken loans for some reason, make sure your EMI payments don’t exceed 40% of your post-tax income. EMI payments beyond the 40% limit can destabilize your finances.
8. Improper Utilization of Credit Cards:
If you own a credit card, start paying your full bills on time. Never miss the payments or pay the minimum due. Credit card dues have high-interest rates of up to 40% per annum. Also, don’t spend more than 30% of your credit limit. Overutilization can affect your credit score.
Mistakes to avoid if you have started investing:
1. Stop aiming to time the market:
In the history of investing, no one has been able to time the market perfectly, and many have lost their money trying to do so. Don’t be that person. Be smart. Start SIP in index funds, mutual funds or individual stocks based on your knowledge and risk appetite.
2. Concentrating on Tax savings:
Oftentimes in the pursuit to save tax, individuals invest in financial instruments that don’t provide good returns. You need to decide whether you want to build wealth or save tax. Factor in return on investment, lock-in period, amount of tax being saved and the opportunity cost before investing in any instruments.
3. Overexposure to one financial asset:
Are you bored hearing how important diversification is? Even after hearing it so many times, people are not able to follow this simple rule.
We Indians either buy too much gold or invest heavily in real estate, equity, and crypto. Debt instruments are important too. So repeating it again, diversification is important and never overexpose your portfolio with one particular asset.
4. Investing in Regular Mutual funds:
The difference between regular and direct mutual funds is the expense ratio. In regular funds, the middleman gets a commission from the mutual fund house (AMC). Therefore, the expense ratio is high
Spend some time researching and investing in direct mutual funds. Over time, you can save a lot of money. Also, you can easily convert your regular funds into direct funds. Check this site.
It’s okay to make mistakes; that’s how we learn. It’s always better to learn from the mistakes of others, though. I hope this list helps you avoid the common errors so you can financially thrive!
In our next blog, we will discuss on emergency fund.
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