Everyone wishes to manage their money well, but then that occasional splurge can mess with your budget plan. So here is a list of 5 financial mistakes that you must avoid at all costs.
- Having no retirement savings
- Having no emergency fund
- Not having an insurance plan
- Not maintaining a credit score
- Living beyond your means.
#1. No Retirement Savings
Retirement savings prevents dependence on others when you’re old. After retirement, you don’t have an income but expenses continue. In order to pay for your expenses, you must have money saved. You should start retirement planning as early as possible, with your first paycheck. So you have maximum years to save and need to invest only a small part of your income on a regular basis. Those who don’t save are either left out with no money, or are dependent on their children.
Ways to save for retirement:-
- There are high chances of getting a serious disease or chronic disorders. when you are old. Since, medical insurance covers most medical expenses get a good medical insurance plan first.
- Insurance companies provide schemes on which income tax isn’t charged after the maturity of the scheme. Try looking for such schemes while planning for retirement.
- Invest in PPF and EPF (Public and Employee Provident Fund) since they offer compounded interest (‘interest-on-interest’).
#2. No Emergency Fund
Don’t blindly invest all your savings and lock them in places where you can’t access it. They say you should keep some hard cash for a rainy day. This hard cash should be your emergency fund for when your car breaks down or for those dreaded middle-of-the-night hospital visits, or when you’re jobless. The size of this fund should ideally, be 3-6 months of your expenses. So if your monthly expenses are Rs.50,000 your emergency fund would be between Rs.1,50,000- 30,0,000. That’s a huge amount! For beginners, you might not be able to achieve it at the first go. So, start by saving small amounts, every month to reach a smaller goal and if you manage to reach that easily then start saving more every month to reach a higher goal.
#3. No Insurance
Insurance is like a safety net or a backup plan. You need to pay a small sum of money as premiums regularly for insurance and in time of an emergency, the insurance company will help you to get out of it.
You need life insurance if your family is financially dependent on you, and you need medical insurance for medical emergencies that are not anticipated but might occur. Apart from these, you can insure other things in life too like your office, house etc. to prevent them from unexpected losses.
#4. Not Maintaining a Credit Score
A credit score is determined by your ability to pay credit card bills and loan EMIs on time. This score will go down if you repeatedly fail to pay these bills.
While applying for a loan or a credit card, banks check your credit score first. If your score is below 700, then banks put you in a high-risk bracket and your loan might not get approved. This in a way is a message that the banks do not have trust in your ability to pay back. That’s why maintaining a good credit score benefits one a lot financially.
#5. Living Beyond Your Means
One shouldn’t do things without looking at their financial capacity. Older generations followed this to a large extent. The equation then was INCOME – SAVINGS = EXPENSES. Which means from the earnings, some money was first saved. After saving, available money was spent. Now the equation has changed. It has become INCOME – EXPENSES = SAVINGS, which means after spending from your income, if at all there is any leftover, then the money is saved. Savings should be done before expenses as they are for securing your future life. Living beyond means, spending more than what your can afford may give short term pleasures but it may lead to long term difficulties.
Avoid these 5 mistakes and prevent yourself from facing a financial crisis. If you feel we missed on something, let us know and we will add it to this list.