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:
#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 pay check. Because then you have maximum years for saving by planning to put aside 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. Medical insurance covers most medical expenses. That’s why get a good medical insurance.
- Insurance companies provide schemes on which income tax isn’t charged after maturity of the scheme. Try looking for such schemes while planning for retirment.
- Public and Employee Provident Fund (PPF and EPF) in which Government invests your money without charging income tax upon maturity. It has a cumulative interest (‘interest-on-interest’) scheme which is the best part of it. If your premium in the scheme in the first year is Rs.1000 which is raised to Rs.1080 in the second year, then the interest will be given on Rs.1080 and not the initial Rs.1000 and so on. The money will multiply every year. EPF is started by a company for its employees in which company keeps aside a part of every month’s salary and gives it to the employee after retirement. Whereas PPF can be started by an individual himself.
#2. No Emergency Fund
Emergency fund means keeping aside a portion of your money for a rainy day. Now this doesn’t entirely mean keeping it in hard cash in your wardrobe. You can put it aside in a place which is easily accessible when you need it.
For e.g. Putting it in a savings account from where you can remove your cash whenever an emergency arises.
One thing to remember here is that ‘Putting money in a bank account is NOT AN INVESTMENT, it is just a saving. The reason why it cannot be called an investment is because you are not earning any returns from it. Whatever returns you do get are also minimal. That’s why bank deposits should be considered for parking and saving money only.
#3. No Insurance
Insurance is like a safety net or a back up 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 our 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
Credit score is determined by your ability to pay credit card bills and loan premiums 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 his own 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 income, if at all there is any leftover, then the money is saved which is very wrong. Savings should be done before expenses as they are for securing your future life. Living beyond means, spending more than what one could 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.