Executive Summary: We will be in the new year soon. Let us look at some of the mistakes to avoid in personal finance so that 2018 is Happy and Prosperous. The mistakes to avoid include wasteful spending, less savings and inappropriate investments, no emergency fund, not paying debt and assuming we will always have enough money.
The year 2017 has flown past us. 2018 is just looming in the corner. 2018 gives us a chance to begin afresh in our financial life. Let us look at some of the mistakes that we can avoid to have an improved financial status in 2018 –
1) Wasteful Spending
It is easy to spend money – coffee with friends, replacing cars often, online shopping. Such things make us feel good but leave a big dent in our pockets and we often realise it too late. When you are retired, do not spend more than the rate of growth of investments. You will run out of money. In 2018, pledge to spend less and save more. Set up a budget to follow in 2018.
2) Under Saving and Under Investing
It is never to early to save or invest. Start saving from the day you start earning. You must save at least 10%-15% of your income every month and increase it whenever possible. The earlier you save and invest, the more the money works for you. The power of compounding can make your money grow. In 2018, get a realistic view of your risk capability. When you are young and have no liabilities, you can invest in riskier products, be flexible with investments than investing everything in PPF.
You can automate your investments. You can ask your employer to deduct maximum allocation for EPF. You can start SIPs in mutual funds so that your investments are regular and a sizeable amount gets invested. Contribute money towards your retirement funds so that you are self-reliant in your old age.
3) Having No Emergency Fund
An emergency fund is a must. It bails you out of money problems – hospitalization, loss of job or home improvements. It is important to have some money readily available to take care of expenses during emergencies. In 2018, make sure that you have about 3-6 months of living expenses saved up that can be used immediately if required.
4) Not Paying Off Debt
Being in debt is costly. If you have credit card dues or high interest personal loans, pay them off. The interest you pay on them is higher that what you are earning on cash in savings accounts or FDs. In 2018, resolve to pay off debts and try not to take up more debt.
Ignoring the Will – Have you made your will? If not, do it now. If it is made, please review it to see if it includes all that you wish to put in it and update it if any changes are to be made in terms of beneficiaries or allocations.
5) Not Diversifying The Investment Portfolio
It is important to save and invest. But if investing means putting money in bank accounts and Government bonds to you, then you are not going to create a lot of wealth. You have to diversify your investment portfolio across different assets and review your investments periodically so that it is in line with your current financial situation and your financial goals. Do not invest in tax-inefficient instruments. Do not put all your money in instruments that earn less than the rate of inflation. Ensure that you have a diversified portfolio that has the potential to give you optimum returns with minimum risk in 2018.
6) Assuming you will have enough money in the future
It is great to have a positive outlook in life but it is important to prepare for the worst. You should invest your money so that you earn optimum returns. In 2018, do not invest in products with risk quotient that you cannot bear. Save up money for a rainy day and do not spend it all thinking you are anyways going to earn in the future. Live below your means. Save for your retirement and then spend what is left. Life is unpredictable and a financial cushion is helpful in case of difficulties or unexpected events.
1) Wasteful Spending
It is easy to spend money – coffee with friends, replacing cars often, online shopping. Such things make us feel good but leave a big dent in our pockets and we often realise it too late. When you are retired, do not spend more than the rate of growth of investments. You will run out of money. In 2018, pledge to spend less and save more. Set up a budget to follow in 2018.
2) Under Saving and Under Investing
It is never to early to save or invest. Start saving from the day you start earning. You must save at least 10%-15% of your income every month and increase it whenever possible. The earlier you save and invest, the more the money works for you. The power of compounding can make your money grow. In 2018, get a realistic view of your risk capability. When you are young and have no liabilities, you can invest in riskier products, be flexible with investments than investing everything in PPF.
You can automate your investments. You can ask your employer to deduct maximum allocation for EPF. You can start SIPs in mutual funds so that your investments are regular and a sizeable amount gets invested. Contribute money towards your retirement funds so that you are self-reliant in your old age.
3) Having No Emergency Fund
An emergency fund is a must. It bails you out of money problems – hospitalization, loss of job or home improvements. It is important to have some money readily available to take care of expenses during emergencies. In 2018, make sure that you have about 3-6 months of living expenses saved up that can be used immediately if required.
4) Not Paying Off Debt
Being in debt is costly. If you have credit card dues or high interest personal loans, pay them off. The interest you pay on them is higher that what you are earning on cash in savings accounts or FDs. In 2018, resolve to pay off debts and try not to take up more debt.
Ignoring the Will – Have you made your will? If not, do it now. If it is made, please review it to see if it includes all that you wish to put in it and update it if any changes are to be made in terms of beneficiaries or allocations.
5) Not Diversifying The Investment Portfolio
It is important to save and invest. But if investing means putting money in bank accounts and Government bonds to you, then you are not going to create a lot of wealth. You have to diversify your investment portfolio across different assets and review your investments periodically so that it is in line with your current financial situation and your financial goals. Do not invest in tax-inefficient instruments. Do not put all your money in instruments that earn less than the rate of inflation. Ensure that you have a diversified portfolio that has the potential to give you optimum returns with minimum risk in 2018.
6) Assuming you will have enough money in the future
It is great to have a positive outlook in life but it is important to prepare for the worst. You should invest your money so that you earn optimum returns. In 2018, do not invest in products with risk quotient that you cannot bear. Save up money for a rainy day and do not spend it all thinking you are anyways going to earn in the future. Live below your means. Save for your retirement and then spend what is left. Life is unpredictable and a financial cushion is helpful in case of difficulties or unexpected events.
A new year gives you a new beginning. Use it to to improve your financial status in 2018
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