Which Are The Common Mistakes People Do In Financial Planning?

Introduction

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.

Latest Interest Rates of Savings Account November 2019

Introduction

In this article you will find the Interest Rates of Savings Account provided by major banks in India. These interest rates are as on last updated by the banks respective websites.

Interest Rates of Savings Account of Major Banks November 2019

IDFC First Bank

IDFC First Bank provides the highest interest rate on savings account as shown in above table. For the balance up to Rs.1 Lac interest rate is 6%. While it is 7% for the balance above Rs.1 Lac and up to Rs.1 Crore.

DBS Bank

After IDFC First Bank, Digi bank by DBS (DBS Bank) offers the competitive higher interest rate on savings account. The interest rates are as follows :-

(Balances up to 1 lakh will get 5.5% interest rates. Any balances over and above 1 lakh & up to 2 lakhs will get 7% on the incremental amount, 2 lakhs & up to 5 lakhs will get 5% on the incremental amount & 4% on the remaining balances.)

The list of banks below offer the following interest rate :-

Some banks offer the following interest rates on their savings account :-

Summary

• We can see that most of the major banks in India offer almost same interest rates. The most basic interest rates offered by the maximum bank ranges around 4%.
• IDFC First Bank and DBS Bank provide the highest interest rates on the balance in your savings account. But, these banks have very limited reach. They are only based in metropolitan cities and some other few cities. It is only beneficial to choose IDFC First Bank or DBS Bank if you have a branch near you. Otherwise, opting for another bank would be better as getting services and other advantages from IDFC First Bank or DBS Bank will be an issue.
• After the above mentioned 2 Banks, RBL Bank (formerly  known as The Ratnakar Bank limited) and Yes bank offer higher interest rates on your balance in savings account.
• Kotak Mahindra Bank as well as Bandhan Bank also provide high and competitive interest rates on their savings account. In comparison with top banks in India, Kotak Mahindra Bank has the widest reach across India. Their branches and ATM’s are spread all over India. It has quite high reachability.

FD Interest Rates of Major Banks (November 2019)

Introduction

In this article you will find the Fixed Deposit interest rates provided by major banks in India. These fixed deposit interest rates are as on last updated by the banks on their respective websites.

Fixed Deposit Interest Rates of Major Banks November 2019

What are Fixed Deposits (FDs)?

• Fixed Deposits (FDs) enable investors to earn higher interest on their extra funds. Interest rate on fixed deposits is guaranteed for the duration of the deposit.
• Interest rates on FDs are fixed when you open the deposit and the rate depends on the tenure that you wish to hold it for. The rate of interest may vary as per amount, period and from bank to bank.

Below you can find the interest rates on fixed deposits for various tenures provided by major banks in India :-

FD Interest Rates for tenure less than 1 year :

FD Interest Rates for tenure from 1 year up to 10 years :

Summary

1. For tenure less than 1 year, Yes bank (Maximum= 7.15%) offers highest interest rate. IndusInd Bank and RBL Bank also offers higher and competitive interest rates (7%).
2. For tenure from 1 year up to 10 years RBL bank (maximum= 7.65%), IndusInd bank, IDFC First bank, Bandhan bank and DBS bank are among the highest interest rates offering banks.

 Note:-

• Senior citizens attract an additional 0.50% on their FD interest rates. All most all the bank provide additional 0.50%.
• A few banks such as RBL bank and IDBI bank provide FD’s with a tenure of 20 years.
• The above tenures are not common to all the banks. Some banks may have different tenures and may be presented in a different manner. Some may also have some extra tenures.
• The above interest rates are for deposits less than Rs. 1 crore and in some cases less than Rs. 5 crores. (as specified by the bank on their website)

Are You Able To Make 30% Savings?

Introduction

Wish you all a very happy World Savings Day!! Amidst recent festive season, what used to strike in the media every day before you? The dominant message was “Spend”. There was almost nothing where the message was “Save”. Lets discuss few important saving thumb rules on the occasion of World Savings Day (31st October).

Happy World Savings Day | 31st October

World Savings Day is celebrated on 31st October all across the world in major developed markets/ developed economies, but in India it is celebrated on 30th October.

Here are 3 key thumb rules of savings :

1. Inculcate Habit of Saving

• People can inculcate the habit of saving and keep them motivated for more savings only when following 3 conditions are fulfilled :
  1. Regular investing, such as through an SIP (Systematic Investment Plan)
  2. An asset class having an upside potential and giving capital appreciation
  3. A sufficiently short lock-in period, whereby a young investor can look forward to actually reaping the rewards of self-denial
• It is the combination of all three that drives people to invest more after they start investing.
• Obviously people will found themselves having a higher awareness about their financial situation when they see their savings / investments growing.
• Because unless and until one start investing, he would spend a lot of money on useless small expenses or materialistic things that could well be avoided.

2. Start Early Saving & Investing

• Many people wait too long to start saving money and thus investing it. A late start for investing means you will spend years effortfully trying to build wealth you would otherwise have easily made. Thus, no strategy can beat the returns which could have been achieved with the early head start.
• The advantages of starting to invest early are exceptional. In most cases, you don’t have anyone depending on your income when you start earning. That is the best time to inculcate the habit of saving.
• You might want to spend the money you earn on products and services. But if you start your investments as early as possible and manage to invest even a small amount to begin with, you’ll see your savings grow substantially. It is only because of the power of compounding.
• Financial discipline and holding period of investment (time) are paramount to you achieving your financial goals.

3. Follow A Process Oriented Approach – Financial Planning

• Among the different types of investment classes, it may appear that the biggest problem is where to invest? But it is actually a secondary problem.
• The biggest problem is that the very large mass of people doesn’t save or doesn’t save enough. Whatever the people do save is without real awareness, without projecting into the future. Thus their investment approach might be without triggering the thought process that would lead them to save more and save better.
• One should allows follow a process oriented investment approach than a product oriented one. Before, going to start investing in random asset classes by referring their historical returns, one should analyze their financial goals, investment horizon, risk appetite etc. One should adopt a proper financial planning approach while starting investing.

50-30-20 Rule – Are You Able To Make 30% Savings?

Explaining 50-30-20 Rule

• 50-30-20 rule of budgeting can be explained as follows :
• 50% – Spending : Your needs or spending which should be limited to just 50% of your net income.
• 30% – Savings for Long-term goals : Your savings & Investments accounting for your Long-term goals, should be at least 30% of the money you earn each month.
• 20% – Wants or Short-term goals should only take up 20% of your budget and spending.

Elaborating 3 Components of 50-30-20 Rule

• 50% Spending :
  • Household Expenses
  • EMI or Rent (EMI should be maximum up to 30-35% of your monthly income)
  • Children Education Expenses
• 30% Savings & Investments for Long-term goals :
  • Retirement
  • Children Graduation and Post Graduation
  • Children Marriage
  • Any Other Need
• 20% Wants or Short-term goals :
  • Vacation
  • Down-payment for Home Loan
  • Car etc.

Important Money Lessons Diwali Teaches Us

Introduction

In this article, we are going to discuss the 4 important money lessons from the festival of Diwali so that you can do your financial planning in a proper way. It will help you fulfill your various financial goals. Every year, we celebrate Diwali with a lot of enthusiasm and elegance. Diwali brings auspiciousness and prosperity in our lives.

4 Money Lessons From Diwali – Festival of Light

There are a number of festivals in our culture which teaches us various moral lessons. However, these festivals are also a great source to learn various financial lessons too.

Lets discuss the 4 important money lessons from ‘Diwali’, popularly known as ‘Festival of Lights’.

1. Time to ‘Clean up’ Your Investment Portfolio

• Before Diwali, we clean our homes, re-assemble things in a better manner and dispose of the stuff which is not required as per the current need. You can apply the same concept when it comes to your investments.
• You should review your Investment portfolio regularly. One should identify the non-performing investment schemes with respect to the timely and anticipated returns and discard them appropriately.
• Non-performing or unsatisfactorily performing assets will adversely affect the performance of your entire investment portfolio. In such case, you need to eliminate them to optimize the performance of the overall portfolio.

2. Get Rid of The Darkness of Financial Ignorance

• Diwali is celebrated with the lightening of lamps, which remove the darkness surrounding us. A lamp signifies knowledge through which darkness is eliminated. Similarly, you can diminish the darkness or ignorance related to finance and investments.
• You should identify your past financial mistakes such as :
  • Choosing a wrong financial product : Going with a product-oriented approach than a process-oriented approach of financial planning
  • Opting a wrong financial scheme or fund which is providing you consistently lower returns than estimated, which will not help you towards achieving your financial goal.
• After identifying the financial mistakes, you need to take the corrective action so that the same financial mistakes will not occur next time in the future.
• You need to follow a proper financial planning approach and set your short-term & long-term goals. You can take the help of a financial planner for the same.

3. Play Safe via Risk Management

• Though we enjoy fireworks, it all requires to take the needed measures to keep us safe. It is crucial to ensure precautionary ways to avoid any accident leading to a significant loss.
• Similarly, the same calculated risk with safety net should be applied in money matters as well. Thus, it is essential to get your life and your assets protected through a financial arrangement which will offer a safety net to your family in case of any unforeseen emergency.
• Under risk management, Life Insurance, Health Insurance, Home Insurance and Vehicle Insurance play an important role.

4. Diversify Your Financial Portfolio

• In diwali, you tend to buy a variety of sweets, fruits, gifts to have a joyous and fun time with your entire family with a variety of options. We create a great variety in diwali decoration, sweets, gifts and rangoli colours.
• In the same way, your financial portfolio should have the same diversification and variety. You can choose a combination of schemes having varying risk & return profile. It will help you to achieve financial balance and stability.

Conclusion

• Diwali is a celebration of lights. This festival teaches various money management lessons, which we can implement in real life. It will help us lead the way towards a strong financial planning.
• The cost of delay in investing or not taking right decisions can be huge. It will impact the future in the long run. Therefore, it is thus advisable to choose investment options that are concurrent with your financial goals.
• It is time to plan your investments and celebrate a safe, sparkling and financially planned Diwali!!