Which Are The Common Mistakes People Do In Financial Planning?
Many of us do not work on financial plan and if we do, we make some obvious mistakes which impacts the plan. This article talks about the 10 mistakes to avoid in financial planning, in order to create a great financial plan.
Why It is Important To Be Aware of our Financial Mistakes?
- When it comes to money, everyone makes mistakes. However, the number and extent of these mistakes decide our success.
- A good financial plan can reduce the occurrence of these mistakes significantly. So creating a financial plan requires good care and awareness of what mistakes one can make. So, in this article we will talk about the mistakes to avoid in financial planning
- Financial Planning is very important, but regrettably often overlooked by most investors. A proper financial plan consists of a comprehensive evaluation of your current and future, financial state.
- At the most basic, your financial plan should use current known variables to predict future income, asset values and ensure your money outlives you. Many of us do not work on financial plan, if we do, we make some obvious mistakes which impacts the plan.
Here are the 10 common mistakes to avoid in financial planning :
1. Not Starting Early :
- Many individuals start planning only when they reach their 40’s, as it finally dawns on them that they are not too far from retiring. At this stage, since they have little time to create a corpus that should take care of them for at least 2 decades of retirement plus their kids education, etc. and therefore they need to make big investments regularly. This is usually difficult, due to the financial responsibilities people generally have in their 40s, like paying off a home loan, current education expenses, etc.
- Remember, the earlier you start planning, the more time you give to your investments to grow. Consequentially, the more corpus you would be able to accumulate.
- For Example: For a 35-year old, Rs. 1.5 crores retirement corpus would require an SIP of Rs. 8,000 per month with annual returns of 12% on the investment, till the age of 60 years, whereas for a 25 years old planning to retire at 60 years, for Rs. 1.5 crores corpus would require an SIP of just Rs. 2,300 per month in SIP, with 12% annual return. Therefore, starting early isn’t a choice, it’s a must. We have explained this better in our article – ‘Cost of Delay in Investing’.
2. Ignoring Inflation :
- We have heard many people saying statements such as ‘If I will have Rs. 1 Crore, I will retire or I need Rs. 20 Lakhs for my kid’s education, etc.’
- Most of the times we calculate our money targets on the basis of current prices and income. Inflation gradually increases the cost of living, as it reduces the value of your money over the years.
- Not considering the inflation rate leads to insufficient goal corpus. Hence, always take into consideration the current and expected rate of inflation, while calculating your goal corpus. We have explained this better in our article – ‘Impact of Inflation’.
3. Insufficient Health Coverage or Health Corpus :
- Medical Expenses tend to gradually increase as a person grows old. With the ever-increasing medical costs, it becomes vital to ensure that you have enough health cover or health corpus that can take care of various unexpected medical expenses from time to time.
- The Medical Inflation in India is likely to rise at double the Inflation rate. A report by Mercer Marsh Benefits, said forecasted medical inflation rate will be 10% in India, while actual inflation will be at 5%, elsewhere.
4. Acquiring High Debt :
- Persons in the age group of 30-60 years have multiple loans. Personal loan, home loan or car loan and credit card debts must be kept to a minimum by middle age group.
- A person cannot make any progress towards achieving goals for the parents as well as children, if he is simultaneously paying 15-30% interest on his debts while earning 12-15% on his investment portfolio.
- Budgeting is the best way to get out of this habit. For the detailed exaplaination regarding ‘What is Budgeting’, Refer : https://finplanyadnya.in/
5. Exiting from Equities on panic :
- Investors panic seeing equity investment portfolio drop 10% or more. When market falls, suddenly all factors become negative, all communication become negative and there is a sense of doom but things improve quickly as well.
- Don’t make the mistake that many did in 2009 or 2011 or in Oct 2018 by selling stocks from portfolio due to fear and then missing out on the recovery. Volatility is part and parcel of markets and must be taken as opportunity to invest rather than an opportunity to exit.
6. Investing in One Asset Class (Real Estate) :
- Most investors simply construct their portfolio’s by having all their investments in one asset class, especially real estate which is a bad idea. Diversification of portfolio is a key to success while investment planning.
- Calculated risks and diversifying portfolio into stocks and debts is more likely to produce consistent returns over the time rather than investing in a single asset. It is impossible for one asset to keep on increasing consistently and we have seen that in real estate or gold markets in last 3-4 years, where upside has been almost negligible.
7. Mixing Insurance with Investments :
- As soon as there is a dependent within the family (non-working spouse, elderly dependent parents or a child), the individual must ensure that he has adequate Life Insurance.
- One should buy a term insurance policy to meet his life insurance needs and avoid insurance-cum-investment products like ULIP’s, Endowment plans, etc. where, despite paying a high premium every year, the life cover may not be adequate.
- Refer : https://finplanyadnya.in/ , Here, we have explained this concept better in our article – ‘Types of Life Insurance in India’.
8. Investing in Complex Financial Products :
- Many of us love exotic financial products based on crazy algorithms. Products such as International funds, fund of funds, derivatives, penny stock investing, exotic PMS etc.
- We believe, these type of investments are good for your surplus money (after your goals are taken care of) but better not to invest in them, for your financial plan related investments.
- Choose simple products like a diversified equity fund or some good bluechip stocks, etc. which give good & consistent returns.
9. Concentrating on Tax Saving :
- Instead of concentrating on wealth expansion, many of us concentrate more on tax saving. In a bid to save maximum taxes, we invest in instruments that do not give much returns and put in big lock-ins.
- So where we could gain good returns, we do not earn much by investing solely for the purpose of tax saving and then locking the money for very long term.
10. Not Reviewing your financial plan periodically :
- Formation of a financial plan isn’t of any use, if we don’t implement and review it properly. We should not take it as a onetime activity as it requires periodic reviews. Since financial plans are long-term plans, sticking to one single strategy would result in a faltered output.
- Any event in life which affects your finances and savings pattern will require an alteration in your investment strategy. Make sure you re-examine your plan periodically so that the market changes, your lifestyle changes, etc. are also taken into account.
- We have explained this better in our article – ‘Importance of Financial Plan Review’. Refer : https://finplanyadnya.in/
Following Vedios will also explain what are the mistakes to avoid in financial planning.