Everybody makes mistakes. The repercussions of a mistake could be trivial or grave. Financial mistakes are one such blunder that can create big problems if they are not resolved immediately. Suppose Mr. X has planned for retirement at 60, and by mistake he forgets to consider the erosion of money value due to inflation. What would be the outcome at the time of his retirement? The retirement corpus would be peanuts. So let's discuss important financial mistakes we should avoid:
- Borrowing without need: Banks and financial institutions are very eager to lend money. They look for somebody to borrow it and pay them some interest. Nowadays, many financial borrowing instruments are launched to trap the customer and make them habitual of such tools. Zero-interest credit cards, low-interest soft loans, interest-free car loans and free insurance with debit/credit cards are some of the confusing and unnecessary financial products which are cutting the pockets of an investor. People go to a bank for opening a savings account, and their sales person attaches an offer of free credit card with the new account. Usually, people accept these offers in excitement and then find the associated charges to be very high. Such offers should be firmly rejected.
- Not having an emergency fund: Creating an emergency fund is like providing insurance to sudden financial setbacks. In the absence of an emergency fund, a person would feel handicapped in time of emergency monetary requirement. It may happen that one receives salary cheque late due to unavoidable reason, and then he/she can easily handle such a situation by using the emergency fund. One should keep aside at least 20 per cent of the annual salary separate as an emergency fund. Plan for it.
- Underestimating the time value of money: Financial planning and saving for the future are a common process, and their importance is understood by most of the investors. While setting a financial goal, it is very important to adjust the target with the time value of money. Inflation erodes the value of money over a period of time. One who sets the financial goal on the basis of current requirements and present value of money is sure to face steep monetary crunch in time of actual need in the future. So it is important to keep updating the investment with value erosion due to inflation and review future plan as per updated status. It is always better to project the future needs after adjusting the inflation regularly.
- Living in debt: Spending more than what you earn is a very dangerous proposition. An extra amount spent over what is earned would lead you to a debt trap. A debt trap is a situation where one creates new loan to pay the old one. It goes on continuously until one becomes a defaulter and finally an insolvent. So, debt in time of need is not a bad thing, but a habit of living in debt is very risky.
- Living under-insured: Underinsurance is a situation when the total insurance claim receivable by a person is not sufficient to pay out the losses incurred. It can also be defined as a condition when a lesser insurance claim is received compared to what was required. Once the item is lost then one cannot go back in the past and make good the mistake for increasing the insured amount. Therefore, it is very important to review the insurance value from time to time. The asset value and earning capacity keeps on growing over a period of time and a gap in insured value to the current market value of an asset is very certain if it's not reviewed timely. Additional insurance should be purchased to cover the complete value of the asset whenever it's required.
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