Most Common Financial Mistakes
This article lists with the most common financial mistakes that people always commits. Here you can read what all are those big mistakes and the steps recovering from financial mistakes.
Read through the common types of financial problems. Find the personal finance reference guides with each section to buy and read to get exact ideas.
Most common financial mistakes 1 – No goals
Any financial planning activity including investing without a goal and duration, will get fail time to time. Setting goals thus have high importance in any personal financial planning. Without a goal, every action will be useless. The major stone of a financial plan is the goals that setting by you. This is one of the biggest common financial mistake found frequently.
Here is a beautiful quote, saying “most people don’t plan to fail; they just fail to plan”. This is extremely correct in most of the financial planning failure case. Unbelievably, lots of people even still not aware about the requirement of personal financial planning or how to deal with that?
In a simple sentence, financial planning is a set of disciplined actions to achieve your pre-determined goals over a period of time. Financial planning must laid on strong goals that have set to achieve though disciplined and continuous actions for a determined period of time.
How to avoid this mistake?
A well set goal can be achieved for long term, mid term and short term and this is the basic step of personal financial planning.
Over diversified investment portfolio
“Portfolio over diversification” is a true killer and of course the one among most common financial mistakes group. In most cases, people starts preparing there financial planning without proper goals or guidance. They are frequently relying on advises from unqualified sources or using freely available financial planning software’s.
Remember, most of them does not have ability to advise fail proof financial planning strategies and not able to detect and avoid possible errors.
Recalling the famous quote from legend investor Warren Buffett “Wide diversification is only required when investors do not understand what they are doing”. The unavoidable risk from over diversification clearly exposed in this small quote.
How to avoid this mistake?
A properly diversified portfolio should be built with right mix of various investment instruments in right proportion, purchased though proper study and research, to meet all the determined long term, mid term and short term goals.
Over diversified portfolio is a place for improper allocation of all available investment instruments through careless actions and ignorance and that would not be able to meet any goals later. No doubt, over diversification puts a person in deep trouble. He neither able to control the portfolio nor, going to attain any financial planning goals.
A best example for over diversification is, buying and holding few numbers of stocks of ‘n’ numbers of companies. This is one of another common investment mistake,
Over enthusiasm is a major factor behind this error. Good amount of stocks from quality companies always better than few number of stocks from more companies.
Avoid this error by having adequate knowledge on how to create a good portfolio by adding right investments in right proportion.
No life coverage
One of the biggest financial mistake among the most common financial mistakes group. Not having enough insurance or life cover as per the living standard of the person. An important step to your financial plan, one should consider adequate life cover considering living standard of self and family.
If your living standard is high, then your life cover also should be high for your family to maintain present living standard in case of any incident happening to your life.
Living without life insurance is just like “flying without a parachute”. Having different types of need based insurances have ultimate importance into personal financial planning. Insurance can protect self, family and assets to a great extend and thus defend unnecessary money spending.
A common error found in this area is, people mixing insurance with investments. They generally subscribe traditional life insurance policies such as endowment plans or money back policies to save tax or investment purpose.
Remember, returns from such policies are very less compare with any other investment products such as stocks, mutual funds, gold or real estate etc. Also, returns from insurance policies are not capable to bear inflation.
How to avoid this mistake?
My best advise is, protect yourself first with cheap term policies but huge life cover along with applying for a family floater health insurance for all. The thumb rule for your term life cover is your annual income multiplied by 10.
No investments
Another critical error generally found among youth and young couples. I met lots of people earning well but reluctant to manage and invest money properly. They have lots of reasons behind for the same. Some of them thinking that, start investing require plenty of money. Remember, it is just a myth. You can even start investing with very few bucks.
While others in this group not investing any amount because of the less surplus due to the lack of budgeting, unnecessary fear on lose, huge debt etc…
Remember the thumb rule of financial planning “Start saving and investing as early as possible”. Generally, a person requires to save and invest money from the day of getting his or her first salary. By starting your financial plan at the earliest, you are allowing your money to grow maximum with the power of compounding.
Don’t be over enthusiastic here. Develop a good, regular and disciplined investment strategy to invest regularly with good mix of products. Increase the investment amount time to time upon increasing salary.
Loans and debts
It’s personal finance eliminator! As I said above, some people earning very handsome amount but, not having sufficient balance in hand to invest. Lots of bad debts and loans are the major cause behind this behavior.
Borrow the quote from Sarah Beeny on debt “Don’t stretch yourself too much with a mortgage. Buy within your means.. it’s not worth the sleepless nights”
Creating and sticking on a budget help you to control over unnecessary and unwanted expenses.
Bad debt is always an enemy of perfect financial plan. A person with huge debt is always in poverty. It is very difficult to get out from the grip of debtors. Especially, if you have married with credit cards and having habits of taking personal loans. Both can trap you with its huge interest rates that you required to pay back to the creditor.
As a first step to create a good financial plan, you are required to reduce your loans or pay off all the debts as early as possible. Credit cards are a major source to lose enormous amount. One should have proper grip on the same. Proper use of credit card and paying off all the huge interested personal loans are a must.
Only debt investments
I have found lots of people investing their entire money in bank FDs and endowment plans. As these products do not have the efficiency to beat inflation, they will later come with empty handed. One of the reason behind such guaranteed investments are the fear on risk. Proper investment planning needs to be done by properly diversifying investment to various products to defend risks.
It is good to have Bank FD’s, investments in bonds or traditional insurance policies. However, investing the entire amount only to the debt instruments is a huge mistake!
Is it mandatory to have debt investments?
It is must to have quality debt instruments in a portfolio. But that should have limitation upon age, risk profile and goals of the investor. Debt investment instruments can enhance your portfolio to meet mid term and short term goals because of its capital guarantee.
Adding your entire investment amount into the debt instrument is just like you are getting a bonsai tree instead of a huge teak wood after a period of time. Debt instruments have its limitation because of the limited return yield. Long term debt investments never help you to meet your future requirements considering the inflation adjusted return.
Generally low risk profile people have this habit because of fear on losing capital or ignorance on investing in equity or equity related instruments for long term by knowing it can yield 100 to 500% profit than debt investments.
Thumb of rule to allocate debt and equity in the portfolio is, just minus your age from hundred. Percentage of that result must be gone to equity and rest to debt. For example, if your age is 30, then 70% investment must be in equity and rest would be in debt.
Come out from this big mistake. Having a portfolio with proper investment instruments and in proper proportion is the solution.
No Emergency Fund
Without having an emergency fund is once of the biggest money mistake. Everyone should set money aside as emergency fund for a rainy day purpose. This is highly useful when a critical situation occurs and that required immediate money.
As a thumb of rule, one should have an emergency fund equal to 6 months expenses. However, having an emergency fund equal to 1 or 2 years expense is fantastic. Situations such as job loss, business loss can be defended with such fund.
Emergency fund must be parked in a dedicated account and without touching instead of the real requirement comes.
Additional list of 10 biggest most common financial mistakes
- Spending more than income
- No debt management plan in place
- No credit card usage plan or uncontrollable spending on non-essential items
- Not sharing income and expense with family members
- Not teaching kids about money management and savings
- Inviting penalties by paying bills late
- Not taking time to understand and utilizing the employee benefits
- Living with borrowed money
- Seeking advises from those are not qualified
- Not saving for retirement
Summary
Above are the biggest personal finance mistakes people make over and over again. However, this is not the final.
Collecting and reading best personal finance books and guides would give exact idea on where to start financial planning and major financial pitfalls to avoid.