Every person earns money with a purpose to fulfil their life goals. People use money for purposes as simple as buying their daily household essentials or to buy luxuries for a better life. People can save, accumulate and grow money to accomplish their various financial goals. One aspect which is equally important as saving money is to avoid financial mistakes at young age. Below are the common financial mistakes which can have an impact on an individual's financial well being in the long run. One should individually analyze and try to avoid them at the earliest. As it is said if you find yourself in a hole stop digging it further.
1. Excessive spending
Indian economy is primarily a consumption-driven economy where we are encouraged to spend on buying goods and services. Traditionally Indians were known for their saving habits. The domestic savings rate of Indian households has been declining. With a booming economy and surplus cash in hands of young working population, spending is overtaking saving as a habit. Repeatedly we see people spending excessively than what their budget should permit. Sometimes it is because of our increased standard of living or peer pressure. One should remember that people who live and spend beyond their means often find themselves stuck in a financial black hole.
What's the solution?
Periodically one should make a list of and analyze the expenses which were incurred but could have been avoided. Try to cut off such expenses in subsequent periods. One should remember that a rupee saved is as good as a rupee earned.
2. Getting into debt to buy unproductive items
One of the most common and biggest financial mistake which people make is getting into debt to buy unproductive items. Using credit cards to buy essentials has become somewhat normal. People often make purchases using their credit cards even when they have sufficient cash in their wallets.
What's the solution?
One should abstain from taking loans for unproductive purposes which will lead to saving of the interest expense. Credit cards should be used only in the emergency situation. If an individual have money to pay for the necessary items they should pay in full. If not, then it is better to leave the items at the store.
3. Investing a lot in depreciating assets
A depreciating asset is an asset that has a limited life and expected to rapidly decline in value over the time it is used. Depreciating assets include items such as motor vehicles, electronic items, furniture etc. Even though not a necessity, often we see people buying such trending depreciating assets.
What's the solution?
One should avoid spending a lot on such rapidly depreciating assets. If needed one should settle on something smaller and less expensive. If buying a car is a necessity, one should settle buying a smaller and less expensive car which will help an individual save substantially on road taxes, yearly maintenance, insurance premiums etc. As it is said, if you buy things you do not need, soon you will have to sell things you need.
4. Not starting Investing at an early age
Handling personal investments is boring and is last on the to-do list. By not investing the money one may not be able to sustain the basic standard of living due to inflation.
What's the solution?
One should get their money work for them from an early age in the equity markets or through other income-producing investments in order to have enough wealth when they retire. One should form a goal based habit of investing on regular basis and avoid looking the investment until the goal is achieved for which the investment was made.
5. Not maintaining an emergency fund
Most families rely on their monthly paycheck for survival. In such cases, a disturbance like a medical emergency or loss of job could result in a financial disaster. Consider the current situation of Covid-19 where a wave of salary cuts and large lays off has emerged. God forbid if one gets caught in such turmoil, without an emergency fund one would not have enough money to meet even the basic necessities of their family.
What's the solution?
An individual should maintain an emergency fund to be used at the time of crisis or for meeting unexpected and unplanned financial emergency. The fund should not be used for meeting routine expenses.
6. Not having a financial plan for retirement
Today one would spend hours watching TV or scrolling through their social media feeds, but setting aside two hours per week for their retirement financial planning is out of question. One should remember that failing to plan is planning to fail.
What's the solution?
One should make a priority to spend their time planning and arranging their personal finances. Identifying proper financial goals and planning to achieve them in a systematic way is the heart of financial planning.
The bottom line
While these are some of the common financial mistakes, one must identify their weaknesses and work on them to keep their finances on track. These mistakes can be avoided if we keep in mind our financial goals. As time goes by, one will gain more experience and have more control over their finances. The financial decisions one make today will determine their future financial well being.
Disclaimer:
The author is a chartered accountant and is not a SEBI registered financial advisor. The above write up is compiled from various sources for information and educational purposes only and does not constitute a financial advice. The information contained in this write up, as provided by the author, is to provide a general guidance to the intended user. The information should not be used as a substitute for specific consultations. Author recommends that professional advice is sought before taking any action on specific issues.
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