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5 Money Mistakes to avoid

By the Paise Sherpa


 Lack of goals

This is pretty basic. You need to have a clear idea of your destination in order to set a path to reach it. Similarly, we need to set SMART (specific, measurable, achievable, relevant and time-bound) goals in our financial journey. Lack of proper goal setting means we are only shooting in the dark. Without goals, there will be no visibility of the future. Only when the goals are clear, can one start to save, invest and work towards achieving the required financial objectives. 

The financial goals will be different for every person and vary on the basis of various factors - family size, age, incomes, liabilities, future capital requirements for milestone events like marriage, home purchase, education, etc. 

Ad hog investments

Picture this - it is mid March and you are trying to "complete your investments for the year". Does this happen to you? Do you believe that investments start and end at the Rs. 1.5 Lac contribution towards 80C and have to be done before end of March. We all know someone like this (or maybe you are one yourself). The purpose of investments in not to save taxes. This misconception needs to be wiped out of our collective minds. We invest so that our money can grow over time. 

Sometimes we invest in instruments that are suggested by our friends, colleagues and other sources. Today your Ola or Uber driver is also trading stocks and options in the spare time. This does not mean you should take tips from them and start F&O trading. Sometimes our investments are completely based on rumors. Why would you risk loosing your hard earned money on such ill-informed, word of mouth tips? 

Also, are such ad hog investments really helping to achieve your financial goals? If you are not knowledgeable, best leave it to experts - in this case financial planners, portfolio managers or your CA.

Investment in Real Estate

This is a subjective topic; however, we believe that the a large investment allocation in real estate is not a sound investment (here we mean real estate bought not for own use but for leasing/ rental purpose). 

Rental yields in India are extremely low ranging from 3% in tier 2-3 towns down to less than 1% in case of metros. 

Also the capital appreciation of real estate is lower compared to equity instruments. 

Investment distribution should ideally be about 50% in equity instruments, around 15% in debt instruments, 20-25% in real estate (for own consumption) and the rest in gold/ silver. 

Inadequate Risk Cover

If you are one who believes that insurance is a tax saving or "money back" tool, please think again. Investment and insurance are two very necessary but separate things. You should never mix the two. Always pick term insurance over other life insurance policies. 
Also know that insurance, like investment, is not done for saving taxes. The sole purpose of any insurance - life, medical, vehicle, fire, travel, etc - is to cover the financial risk in case of an unfortunate event. Selecting any insurance needs a good amount of study. 

In India the penetration of insurance is low. Add to that, the cover taken is often inadequate.               eg) consider you take a term insurance of Rs. 40 Lac in your 20s thinking it is sufficient amount of money. In case of an unfortunate event 25 years from now, will Rs. 40 lac be adequate to take care of your family's needs? Definitely not. 

We must list out the risks that we have to take cover for and take appropriate, personalized insurance that suits our requirements (which often does not match what is being sold to you). Comparative study of various policies, the clauses need to be done before making an informed choice. 

Too many expenses 

We are living in times of premiumization when borrowing is at an all time high, savings are reducing. Add to this the higher incomes and higher temptations thrown at us. Lifestyle creep is on to us without us realizing it. 

One must keep in mind that to meet our financial goals (which we started this blog with) we need to invest consistently and patiently and that these investments need savings. Remember Warren Buffett - "If you buy things you do not need, soon you will have to sell things you need." So hold off on buying the latest feature phone. 
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