Five money mistakes that will take you down

Have you ever been frustrated with your financial situation? Or envied your colleague who despite earning as much as you seems relatively better off? Maybe you have explained such feelings off by thinking that you don’t earn enough. The reality, however, may be that you aren’t managing your money well. Here are five oft repeated money mistakes that you will regret. Worse, these mistakes will set you back by many years.

Cash flow indiscipline

This is perhaps the easiest mistake to avoid, and yet many don’t pay heed. Tracking your cash flow is as important as investing your money in the right products. It is only after you are able to map your expenses can you plug unnecessary spends and get a fair idea of how much you can put away in savings and investments. “Not tracking your cash flow gives you a misplaced sense of your financial status. The biggest fallout is that people are led to believe that they are doing well going by what is in the bank. This could be untrue because what is in the bank also needs to go towards savings and investments for future goals. So, in the larger context, most people will find they are living beyond their means,” said Suresh Sadagopan, founder, Ladder7 Financial Advisories, a financial planning firm. The ideal way of going about tracking your cash flow would be to jot down all your expenses and income so that you can work up a budget. “But if tracking expenses minutely feels cumbersome, then the simplest way is to allocate money towards an emergency fund and investments and move the rest to a spending account,” said Sadagopan. Keeping tabs on cash flow not only brings you face to face with your actual financial position, but could also teach you to spend within your means.

No focus on goals

If you have ever bought a life insurance policy in a last minute scampering to save on tax, you have illustrated what it is to invest without any goals in sight. There is a good chance you realize by now that you bought an insurance-cum-investment plan, which not only offers very little insurance, but has exorbitant surrender costs. This is usually the case with traditional plans, which are popular currently. Investing in products aimlessly is a common mistake. Having clear goals not only instils the discipline to save towards achieving those goals, they also act as a window to asset allocation and to gauge your risk appetite. “When you define your goals, you also set a time horizon for them. This, in turn, helps you with asset allocation. For instance, for a short-term goal, like buying a car, you would focus more on fixed returns, whereas for long-term ones, such as retirement, you would lean towards equity,” said Sadagopan. Financial goals give you the same sense of purpose as a ‘to-do’ list does, and the same sense of accomplishment as when you strike off all the chores. “By investing with no goals, you tend to invest in wrong products that don’t suit your risk profile,” said Manikaran Singal, founder, Good Moneying Financial Solutions, a financial planning firm. Say, you want to take a vacation, but your equity heavy portfolio—which you were planning to use to fund the vacation—just turned sour due to a market dip. You will either have to cancel the trip or bankroll your trip, both of which are painful decisions.

Living on loans

 Debt is no longer a bad word. In fact, many individuals take home loans to buy a house, but what hurts is if you overstretch or take debt for consumption instead of asset building. “Some people are paying monthly instalments that go up to 60% of their monthly income leaving very little to save or invest elsewhere. Most people want to buy a house, even if it means overstretching, because real estate is seen as an asset that will always give phenomenal returns. This is a fallacy,” said Manish A. Shah, co-founder and chief executive officer, BigDecisions.in, a portal that aids financial decisions through financial tools. “The past five years haven’t exactly been good for real estate, so it’s important to compare the rate of interest on the home loan and potential returns from the property,” he added. Not only should you not over-leverage, you should avoid loading on unproductive debt. “Taking loans to fulfil needs such as buying a vehicle and other consumer durables can increase burden without any significant benefit,” said Anil Rego, chief executive officer and founder, Right Horizons, a financial planning firm. Living off credit cards, which impose high interest of 22-44% annually, or taking personal loans may boost your lifestyle in the short term, but can bring you very close to a debt trap. “Before taking any debt, evaluate the capacity to repay it; else, that particular debt is best postponed,” said Rego. Another crucial step towards avoiding unnecessary debt is to build an emergency fund that will help you tide over a temporary cash crunch that a medical emergency or job loss may bring. In fact, an emergency fund is among the first things that you should work towards. It is right up there with buying adequate insurance.

Wrong insurance

Even if you have a bouquet of policies, there is a good chance that you are still underinsured. That’s because what you end up buying in the name of insurance are usually investment plans with a sliver of insurance. “Underinsurance is a persistent problem, even at high income levels. In fact, people with high income need more insurance. But it’s found that the amount of existing insurance cover grows at a much slower pace than income growth,” said Shah, based on a study conducted by BigDecisons on its users. This study also found that while the premiums are likely to increase with increase in income, a large part of that premium was directed towards savings products instead of pure insurance plans. This again is a mistake: buying very small insurance. There are two simple rules to follow: stick to the most basic form of insurance, and adequately insure important assets such as life, health, house and vehicles. This is the minimum that you need.

Taking unqualified advice

 Caution against unqualified, uncertified financial advice can’t be stressed enough. “Taking such advice may prove to be lethal for your money matters. Go to a registered investment adviser who is an expert in personal finance issues. Selecting the right person for advice is a major battle won,” said Singal. Engage with the whole process of taking advice: take interest in your finances, go to your adviser with all your concerns just as you would with a doctor, and stick to the products that you are able to understand. You don’t need pot loads of money; what you need is money managed well