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Yogi Zone

Useful articles for your finance management by our team of experts

Top 7 Financial Mistakes

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It is natural to make mistakes and all of us do that. However it’s very important to learn from them and take lessons. Here are 7 most common mistakes made by investors.

1. Lack of goals

Financial Mistakes

Most people don’t plan to fail; they just fail to plan”. A good percentage of people are still not aware of what is financial planning and how to go about it. In simple words, financial planning is taking a disciplined approach to achieving your pre-determined financial goals. A good financial plan is based on strong goals.

Well-articulated goals with a detailed break-up into long term, mid term and short term, specific steps on how to achieve them and checking the progress periodically are basic ingredients of financial planning. As you can see it all starts with a GOAL.

2. Lack of life cover

Living without life insurance is just like “flying without a net“. A financial plan is incomplete without adequate life cover. One major goal of a financial plan is to maintain the life style of your family whether you are with them or not.

A common mistake we make is buying life insurance policies such as endowment plans or money back to save tax, also hoping to reap returns. Remember, returns from such policies are much less compared to traditional investment products such as stocks, mutual funds, gold or real estate. So why not separate investment and insurance completely? Most salesmen will not give you this advice because the commission in plain vanilla term policies is the lowest.

Protect yourself with an inexpensive term policy providing sufficient life cover. The thumb rule for your life cover is your annual income multiplied by 10. You can add family floater mediclaim or health insurance policies for self and family members. It’s a way of making sure that your family will continue to enjoy the current life standard.

3. Lack of investments

Start saving as early as possible. Generally, a person should start saving and investing money from the day of getting first salary. By starting your financial plan at the earliest, you are allowing your money to grow by the sheer power of compounding.

Don’t be over-enthusiastic about it either. Develop a regular and disciplined investment approach. Select a few good equity funds and do a SIP (Systematic Investment Plan). Increase the investment amount as your income increases. Don’t wait for a lump sum amount to be accumulated to invest and don’t try to time the market.

4. Too much of loans and debt

“Don’t stretch yourself too much with a mortgage. Buy within your means. It’s not worth the sleepless nights”. It’s always advisable to resist the temptation and control unnecessary expenses. It includes loans, mortgages and credit card expenditure.

House loan and car loan may be necessary but do some analysis about how much you really need and what can you comfortably be able to pay back. Keep a tight leash on personal loans and credit card debt. They can be a drain on your finances as the interest rates are much higher. You must have a plan to reduce the loan and pay off the debt gradually.

5. Only debt/fixed income instruments

Putting your entire investment amount into the debt instrument is like settling for a bonsai instead of a huge teak wood tree which you could have. It’s good to be safe but too much of safety will not make your money grow. There are many among us who keep their money in FDs, PPF, insurance policies, National saving certificates etc. It’s good to have them but they should not have all your money. You must have a healthy mix of equity and debt in your portfolio. Equity gives you growth and debt gives safety with peace of mind.

6. Over-indulgence in stocks

By watching too much of business news channel and reading business journals we start believing that we know all about stocks and the way companies work. Listening to equity analysts gives us more encouragement. We think we can beat the market. But the truth is most people fail to make money at the stock market and end up wasting their precious time and wealth. Sit with a certified Financial Planner and chalk out a long term plan for yourself. Remember “slow and steady wins the race”.

7. Owning too many products

“Wide diversification is only required when investors do not understand what they are doing”. The unavoidable risk from over diversification clearly articulated in this powerful quote by Warren Buffett.

The right portfolio should be built by optimum allocation into different asset classes. A good financial planner should be able to tell you the right proportion as per your profile. Within a particular asset class it’s better to do thorough research and put your money in a few select products. For example if you are investing in Mutual funds then buying too many of them is not advisable. Similarly if you are an investor in stock market it’s advisable to pick the right stocks and stick with them.

We keep adding more products to the portfolio because we fall for what the salesmen and advertisements tell us. Do your own research or consult a certified financial planner for such decisions. It’s important to own the right ones and not too many.

Article sourced from InvestmentYogi

  • Mallampalli Ruthvik

    Really a Good Article.Great Stuff and i am Happy to find them in a Good Presented Manner

    • Yogi Cfp

      Thank you.

  • rajiv ahuja

    Really good article.

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