Common Errors In Personal Finance :

Since we Indians mostly have follow the mob mentality we make the same mistakes in financial planning as done by others. In this blog we are trying to list down some common mistakes committed with respect to Personal Finance

1.    Same Solution To All Problems ( One Shoe To Fit All ):

Most of us rely on Insurance Agents, Bank Agents, Friends as our financial advisor. Needless to mention that these agents have their own goal and hence try to give one common solution to everyone. This approach is entirely wrong. As the financial situation of each individual is unique, the same needs to be analyzed and a plan needs to be formulated accordingly. One Shoe Will Not Fit All.

2.    Mixing Insurance With Investment :

We have been treating Insurance as a Tax Saving and Investment medium for ages as there was no other option available. This has lead to lot of miss-selling of endowment policies, money back policies etc in the name of risk covering and investment where neither they cover the risk properly nor they are very good investment product giving only 6% - 8% return. And then came ULIPs which is another incorrect option to mix investment and insurance together. We need to understand very clearly that the purpose of Investment is "To Grow"  and that of Insurance is "To Protect". Hence both cannot go together. Now we have much better options for Insurance in form of Term Insurance and proven methods of Investments like Equities, Mutual Fund SIPs etc. Related read Term Insurance A Waste Of Money?

3.    Inadequate Health Insurance Cover :

"Health Is Wealth" – but so often we tend to forget it and pay zero attention in securing a healthy and prosperous future by having adequate health insurance. Most of Salaried Individuals are very happy and content with the Group Health Insurance provided by their employer. They forget to plan about the days when they will retire and the health cover will no more be there. What if they quit or lose job or the employer suddenly take away the plan specially for private sector employees? Getting adequate health cover at higher age is difficult and costly. Another mistake done by people who do go for health insurance is having too low insurance coverage value. They think about today's medical costs while deciding on  the coverage value rather than the future cost when most likely they will need the coverage.

4.    Building Asset Creating Contingency Fund :

We tend to forget that life is full of uncertainties and contingencies and we need to plan for them. While we can cover for some them via adequate insurance but still there will be situations where you will need assets and contingency fund. So from an early age once a person starts earning he or she should also focus on saving to build asset and contingency fund.

5.    Paying Rent & Not Paying EMIs :

Another common mistake that we see in some cases is that people are content in paying rent which is a total waste of money, but not ready to buy own house and pay EMIs. While we agree that Home Loan should be taken at such a time when paying EMI does not cause any strain on one's finances and savings, but at the same time it should not be delayed for too long. If one can go for a self owned property even at a suburbs location where his or her current rent paid amount could cover most of the EMI amount for the home loan, then one should plan for the same immediately. That way asset will be built and there will be no monitory loss in form of rent. There will some pain with respect to commute and other amenities by staying in suburbs rather than more preferred location of a rented home, but remember Today's Pain Is Tomorrow's Gain.

6.    Not Taking Risk At The Right Time  :

We have seen that people are reluctant to take risk at the right time. Generally one should invest in high risk return investments like equities, equity mutual funds etc at an younger age as there is time to recover in case of setbacks. But what we have seen that being misguided and afraid people tend to focus on more low risk or zero risk low return potential fixed income options ( Bank FD, RD etc ) and later when they are aged and realize the mistake they go for high risk investments. This should be avoided. Take risk at early age and give time to get the returns, Strike The Iron When It Is Hot.