Financial planning is a long-term process. Additionally, many factors such as earning capacity, market conditions, family situations, mental framework play a key role in the financial plan and its execution.
Therefore, there is a chance that we make mistakes along the way. Let us look at some common but terrible mistakes and how to avoid them –
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Common Financial Planning Mistakes
1) Meet every financial demand of the family
As the main income earner, it is difficult to refuse the financial needs of all family members – spouse, kids, parents. It seems rude to turn away a good friend’s request for a loan to set up their business or hospitalization. But you have to be practical. You have to keep your emotions at bay and evaluate how the expenditure or loan affects your financial plan. Even the little splurges on different needs of different family members on a regular basis amounts to a considerable sum.
Prioritize your financial goals and align your savings and expenses accordingly.
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2) Procrastinate Financial Planning
Financial planning is not the most exciting task for most people. We try to wriggle out of it with reasons such as –
- I have recently started earning.
- I do not have much money. There is not much planning possible.
- I have the plan in my head.
But the earlier you plan your finances, the better your financial life will be. It is imperative that you write down your financial plan. You will be able to estimate your expenditure and savings better. You will gear up to decide on your financial goals and also get an idea of how much money you need to achieve your financial goals. You will be prepared with steps to act upon to achieve your goals.
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3) Mix insurance and investment
Insurance is risk management. Investments are made to earn income and generate wealth. It is not smart to include premiums paid for health insurance and life insurance as part of your investments. Insurance policies support you financially during emergencies but do not add to your wealth. When you plan to buy insurance, the coverage and its applicability to you are more important than any other parameters insurers use to sell the product.
Moreover, it is unwise to skip on insurance and use that money for investments. For example, if you do not purchase health insurance but are hospitalized for some illness, you have to fork out a lot of money for medical treatment that will upset your finances. Remember to keep insurance and investment separate.
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4) Invest Without Planning
Many of us make ad hoc investments. We notice an advertisement in the newspaper or see colleagues investing in some instrument and go ahead and invest some money. It is not rational! It can cause losses or less than optimum returns.
We have to determine where to invest based on our needs, our risk capacity, and risk tolerance. We have to invest as per our asset allocation plan, as per returns expected and our investment timeline. Invest for your financial security as per the plan which has to be reviewed systematically.
5) Imitate Lifestyles of Others
Different people, different strokes! Some people lead extravagant life. Others save a lot of money. Your neighbor has the latest UHD TV. Your friend went on a luxury cruise. You are tempted to do the same. Ask yourself these questions
- Do you need it?
- Do you need to spend money just because of FOMO (Fear Of Missing Out)?
- What do you truly want to be content?
Once you have answered these questions, you can decide if you want to spend money. Social pressure should not cause you to stretch your budget. Ensure that you have money conversations with your family, and you decide where to spend money as an integrated unit.
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6) Place Excessive Trust in Financial Experts
Financial experts know about planning finances, investment products, and market conditions. It is good to follow them to be aware of what is happening in the market.
It is great to have a financial planner to manage your finances and guide you towards financial freedom. But it is not prudent to follow experts blindly. Even if you have invested in the services of a financial planner, you should keep a track of your financial plan and engage in conversations with your financial planner so that you are aware of the plan and how your money is working for you.
Furthermore, the financial expert will also know about changes in your life and updates to your goals. He can use the information to plan your finances better.
7) Ignore Retirement Needs
People underestimate the amount needed for retirement or ignore the importance of planning for retirement. They think they have a lot of time to manage money for their retirement. They end up spending money on other goals and delay planning finances for retirement. But do remember that when you retire, you may not have a regular source of income but your expenses will relatively be the same. You will have to create a balance between today’s needs and your future requirements. For example, check out if a student loan makes sense for your child’s higher education rather than paying the fees upfront.
Moreover, the earlier you save and invest, the more you earn. The more you save and invest the more you earn. Do ensure to work towards a proper retirement plan so that your sunset years are enjoyable and comfortable.
Mistakes are a part of life. We learn a lot from mistakes but too many big financial missteps can jeopardize our financial life. Avoid these mistakes to get closer to achieving financial independence.