Investment and personal finance is important in wealth creation. The simple rule of investment is that it should beat inflation. Today one liter milk is 50 rupees and it would be 100 rupees in 2030. Your 50 rupees investment should provide 100 rupees as return after paying tax. That is called investment. Insurance, fixed deposit and post office return will not provide 100 rupees as return for the 50 rupees. So that is not an investment, just saving and saving never make you rich.
1. Mixing Life Insurance with Investment :
This has to be listed as the biggest and the most common mistake that many people commit. The role of investing is to grow wealth while the role of insurance is to protect it. Mixing the two will lead to lot of disappointment. Traditional plans like Endowment, Money back and Whole-life policies are the best examples for this. These plans come with a combination of investment and insurance. Don’t get into liquidity trap to save a little on tax . Life insurance is a long term commitment. Many of us do not try to understand about the Salary structure and also about the basics of income tax.
Not only insurance, ELSS mutual fund investment can be declared in 80C investment
2. Buying a Property at a young age through home loan :
In India, the decision to buy gold or to invest in a property is more to do with sentiments rather than the actual requirements. I have been observing that as soon as an youngster gets married the first financial decision he/she makes is to ‘own a home.’ This can be a demand from his/her family members (or) due to peer-pressure (or) ‘why pay rent when I can own’ syndrome. Considering the prevailing property market prices, most of us can buy a property through a home loan only. Once you acquire a home loan, around 30% to 40% of your net monthly income goes towards your Home loan EMIs. This may put lot of strain on your Finances. Another important point is that this makes you to postpone the planning for other important Financial goals like, your RETIREMENT PLAN. Your retirement plan is the first thing that you should really care about. (Remember this point – Do not consider your primary home (residence) as an Asset, irrespective of the appreciation of the value of your property)
Your home loan should be less than 60% on home value and EMI should be maximum 30% of your monthly income
3. Not maintaining an Emergency Fund :
I have seen people who earn even a ‘five figure’ salary asking for financial help during unforeseen medical emergencies or unfortunate events. They earn well but they do not save. So, what do they do to fund these emergencies? They go and acquire personal loans or take loans on credit cards. This puts them in a viscous circle. They take years together to come out of these loans and have to pay heavy interest amount too. We can also consider the above point (‘mistake-2’) here. I have also observed that people withdraw all their cash reserves, PPF (Provident Fund), EPF etc to fund the down payment while purchasing properties. Do not do that. Have sufficient cash or bank balance, may be 6 months of your monthly (fixed+variable) expenses as an Emergency Fund. If you do not have such fund, start saving in a Recurring Deposit or buy gold for your emergency needs.
Accumulate your wealth in Gold for emergency fund. You should buy 200 grams gold for your emergency needs
4. Not having sufficient Health Insurance coverage :
When I ask a salaried individual about his/her medical insurance plan, I get to hear this answer ” My employer provides health insurance cover.” With rising medical costs and unhealthy lifestyles, do you think that the coverage provided by your employer alone is sufficient? You may ask yourself few of these questions. What happens to my health coverage if i quit or lose my job? Can I afford to buy or get a new medical insurance plan when I retire at 58? What if suddenly my employer changes the terms & conditions of Employees Mediclaim policy? Aren’t you putting your whole family at risk? Have a standalone Medical insurance policy. Have an health insurance plan for all your dependents.
Have an health insurance plan for all your dependents.
5. Investing heavily in Fixed Income Securities :
Fixed income securities like Bank Deposits, Recurring deposits or Post office small savings schemes generate returns of around 8% to 9%. We all are very much aware about the rise in living expenses (inflation) over the last few years and I am sure that this will be the case in future too. If you make 8% profit on your fixed deposits and inflation is 6% then Real Rate of Return is around 2%. You still have to adjust this 2% for the taxes you pay. That means your wealth/investments are not growing, infact your wealth is getting eroded. Take charge of your finances, you have to invest in equity related instruments to generate long term wealth. Invest at least a portion of your savings in right Equity and Equity related mutual funds.
Not investing on high returns investment creates high risk in your financial needs
6. Not setting any Financial Goals :
“How much I will get?”, “Can I get 15% guaranteed returns?”, “Is there any investment which can generate 20% returns without taking any risk?, “Share market is at all time high, is this the right time to enter?, “Is this the right time to buy property or gold”…. 🙂 . These are the common queries that I receive on a daily basis. There is only one answer for all these questions. Instead of trying to time the financial markets, we will be better off if we first identify and set financial goals. This will enable you to have clarity about your investment requirements. Take your financial planning seriously and do not postpone investing for your financial goals.
Money for planned expenses and require within 6 months, keep it in fixed deposits or saving account.
7. Not investing on Equity market :
Understanding equity market would take hardly 15 days. Equity investment such as stocks, mutual funds and corporate bonds provide more than 15% returns annually in long term. They are wealth investment plans and everyone start investing on Stocks, Index mutual funds. To begin the equity investment, start with Nifty index funds with monthly 2000 rupees for your retirement. If you start in your 30, you would get 1.5 crores at the age of 60. Long term investment and power of compounding makes you safe and happy at your retirement stage.
Making Investments Based on Word of Mouth or Market Rumors
8. Short Term Trading & Intra-day trading
Investor invests for long term to create wealth. Trader invests for short term and intra day trading. In India, most of us are investor and not traders. Trader mindset is different and their skills are different to make money. Most of us play trader role with investor knowledge. So we lose money in the equity market. Don’t do such mistake. Start your investment in equity market for long term and continue for more than 10 years to create wealth. Do not hear the market news or your friends suggestion on investment. You get knowledge about market and invest it. Do not follow the bad advice from social media.
You are long term investor. Don’t timing the Market and Don’t Constantly watching the markets.
9. Last Minute Investments in Tax Saving Instruments:
Come last week of March and the tax saving rush begins. Financial institutions too cash in on this rush by aggressively marketing their tax saving products. And the end result, of course you save up some tax, but you may also probably end up with a financial product which may not actually suit your need. What one must ideally do is to start tax planning from the beginning of the financial year to ensure you don’t invest for the sake of investing, as you don’t have time left at hand. Start your monthly mutual fund SIP and invest for long term.
Start your mutual funds SIP from April for tax saving
10. Lent money to a Friend:
A friend in need is a friend indeed. We generally approach our friends or close family members when we are in need of any financial help. In 2015, one of my school friend in my native had requested me to lend him money. He had told me that he requires money to buy a piece of land and borrowed Rs 3,00,000 from me. I had given him without any interest. He borrowed money from others financiers for interest. So he started closing the financiar’s loan first and he yet to return back my money. He is delaying as there is no interest needs to be paid for that money. He shown his intelligence and I have been waiting for the money.
The learning is lent money with minimal interest in case your friends or relatives requires it. Means that monthly 1% interest would give us nominal return in case he does not return immediately and he would be reminded every month to return it. Do not feel for 1% interest and it would be lowest in the market. I can see people borrowing money for 5% monthly interest in case of emergency. 1% interest would be great help to them and you can force that.
Lent money for 1% monthly interest and it would remind him to return it every month.
11. Never invest the business which you do not understand:
Many people want to start the business. Since as a working professionals, we do not have time start their own business. You want to join as partner in the existing business along with your friends. Do not invest in any business without knowing it nature. You should know from whom it buy, to whom it sells and uniqueness of the business. Your friends can exaggerate about business without hands-on experience on that business. Do not invest by the words, it would make you lose the money. In case you are interest to invest in business, start your favorite stocks in the market and invest it for long term. It would give you 15% invest in long term in case you select right company to invest it. Investing in business without understanding will disturb your sleep.
You should invest in the business and the one should not disturb your sleep. Otherwise you do not invest in that business.
You can follow anyone them to make you stupid in financial wealth creation. Be sure you are aware of personal finance and investing in right financial instrument.
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