In our bid to build our savings, we often end up making foolish mistakes. Raghvendra Nath, Managing Director, Ladderup Wealth Management Pvt Ltd Points out the most regrettable errors we make and shows us how to avoid them to achieve true fiscal fitness
Who doesn’t want to make more money? It’s not just the middle class or the poor who always dream of becoming rich; the rich also want to get richer. The bug of greed catches most, the only difference being the extent of the lure. On the other hand, the pain of loss is equally severe. How have you felt when you forgot to pick up small change from the vegetable vendor or when you misplaced even a # 100 note? There is a lot of remorse and regret. When it comes to money, there are quite a few mistakes that one can avoid, thereby reducing the stress levels as well as helping increase the total pile. The mistakes could be both while spending and investing. The mistakes made while spending result in lesser money available for investments. Similarly, the mistakes made while investing could either put your money at risk or result in lesser than expected results.
1. Not having a proper budget
Most of us regard ourselves as excellent planners and therefore find it hard to accept a need for a formal budget. On the other hand, there are a few who plan such a tight budget that it fails in the first few months of implementation. Budgeting is an extremely useful exercise that not only allows you to manage your household within the available means, but also allows you to indulge in aspirational spending like buying an expensive dress. A simple exercise that I know a lot of women follow is to create different packets for different needs at the beginning of each month, leaving aside some surplus for contingencies. For instance, there could be packets for monthly rations, school expenses, vehicle and petrol, eating out, utilities, etc. This simple exercise ensures that you spend a fixed amount of sum on each need without compromising on the other needs.
2. Impulsive buying
This is an extension of the lack of budgeting. For a lot of men and women, a large portion of their annual expenses is a result of impulsive buying. This includes buying stuff in sales even when you do not need it. The best way to correct this mistake is to plan what you want to buy and then look around for the sweetest deal.
3. Not planning for bad times in good times
Homemaker Anjana Trivedi never allowed her husband to have a discussion around life insurance. She always wanted to avoid the subject of death. For her, such discussions were a bad omen. Most of our financial decisions are led by our present situation. So if one is in good health, one thinks that buying a life insurance or health insurance is a waste of money. Similarly, people who have enough wealth, always postpone many of their long-term needs like investment decisions towards retirement. “Saving for a rainy day,” is a phrase that came into existence thousands of years back and it is still true as ever.
4. Choosing incorrect investment options
You work hard for your money. Your money should work equally hard for you. The returns from investments in various options can be vastly different. Therefore, it is just not sufficient that you have saved some money aside. It is also important that you invest your savings in appropriate places so that you get good returns on your investments. Every instrument fulfils a specific need and therefore the investment choices should be decided based on the needs. For instance, buying a plot of land for retirement could be an excellent choice. However the same choice may be a mistake if the retirement is only a few years away.
5. Putting all your eggs in one basket
Textile Designer Revati Sharma invested all her money in insurance policies. She always liked the assurance of her money multiplying five or six times over a 20-year period. However, she never realised that she was creating a completely locked-in portfolio of assets for 20 years. Moreover, the actual returns in percentage terms were much less than even fixed deposits (FDs).
It is very important to diversify your investments adequately. So plan FDs in multiple banks, invest in a clutch of mutual funds, have insurance policies from more than one insurer, etc.
6. Getting emotional while investing
Women and emotions go hand in hand. How many times have you cut a cheque just because somebody pleaded fervently? A lot of distributors and relationship managers use emotional ploys like getting sacked, missing the target, etc. to get money out of you. It is extremely important that investment decisions are made objectively and not for emotional reasons.
7. Not being able to assess risk
In the world of investing nothing is risk-free. While a bank deposit may carry the lowest level of risk, an investment in a local chit fund or finance company that assures attractive returns could be highly risky. A lot of women regard investing in equity shares or in real estate as risky, whereas these two asset classes have been known to provide the highest returns historically, if invested for a longer period.
8. Deferring plans to invest
It is a common mistake to focus on the immediate priorities and not plan for future requirements.
It’s the small drops that make an ocean. Investing regularly can help you in creating wealth without impacting your lifestyle.
9. Equating savings with saving cash
There was a time when saving in a cookie jar was considered wise. In today’s high inflation environment where costs are increasing at a rapid pace, it is important that we do not relate to savings as saving cash. For instance, # 1 lakh today, if left uninvested, would decrease in value quickly. In 25 years, it could just be worth # 10,000 of today. An easy way to avoid this mistake is to make a proper investment plan so that monthly savings don’t remain in your savings account for long.
10. Not seeking professional help to invest
When it comes to your expenses, you and your family are the best judge of the lifestyle that you want to lead. However, when it comes to investments, seeking professional help is absolutely necessary rather than trying to be adventurous. Yes, it is important that you have a well qualified advisor. You should ask your friends, colleagues and relatives for recommendations and then evaluate a few advisors before choosing one.
Creating wealth is not very difficult. Even # 10,000 invested every month in a fixed deposit at just eight per cent per annum can grow to # 1.50 crore in 30 years. If you increase the amount saved by just 10 per cent each year, the total wealth could be # 4.50 crore instead. The mantra for living happily is to spend wisely now and invest wisely for later. And most of all, avoid the most obvious mistakes to ensure that your present as well as future stay bright always.
