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Money doesn’t grow on tress! But same take it literally. We came across this  video from,Birla Sun Life Mutual Fund,which showcases how a person grows money plants and believe that our money will grow! Though we liked his approach for having a separate money plan for separate objective. It made us think what are the financial mistakes that we may be making or have made and how to correct them!

Financial Mistakes We Make

Basics, Fundamentals simply do not change. Personal finance might be a numbers game, but how we think about money dictates how well we play it.   A new year is a good time to reflect on these principles/ In answer to the question “What’s the biggest mistake we make when it comes to money?” Warren Buffett, the great investor, told the Dan Patrick Show Ref “Well, I think the biggest mistake is not learning the habits of saving properly early. Because saving is a habit.  And then, trying to get rich quick. It’s pretty easy to get well-to-do slowly. But it’s not easy to get rich quick.”

Spending Money on Stuff Made People Perceive Me Better

Most evaluate their status in society in terms of what they earn and what they own or what they can pay for. To drive in a fancy car, to own a large home, to wear expensive clothes, jewels and accessories, to have fine dining habits and to holiday at exotic locations are all seen as social indicators of wealth. Sadly, all these reflect spending habits Wealth is what we keep, not what we earn or spend. Consider how you want to live your life and what is actually important to you. You might realize that you would be quite happy with a modest 2 bedroom home. Driving a cheaper car may allow you to travel. What we earn can be distributed in three ways to the goods and service providers (spending), to others that may need help (charity), and to ourselves (savings). The New Year is good time to decide how the pie splits.

I Bought Very Expensive Things with a Credit Card 

Treat credit cards with caution. It is always important to remember that when we use credit cards we are borrowing money and we need to repay it. Credit card tempts one to spend money(and we know how well we can resist temptation). Consumers get trapped in the minimum payment mode and continuously roll over a balance for several months. When you default on credit card payments, you are charged with late fees and interest, increasing your debt load. It also affects your credit score. Use credit cards judiciously and always pay the balance each month. If it ever gets to the point where you can only afford to pay the minimum monthly payment on a credit card, you are in financial trouble and should re-evaluate your circumstances. If you are not able to pay off your cards every month, any extra money you have over the minimum payment should paid to the highest interest rate card first. Our article Credit Card Debt, explains about  how one can fall in credit card debt.

Don’t Have an Emergency Fund

How can you cope with a situation where your regular income stops or you incur sudden heavy expenses?  In today’s uncertain job market, a lay-off or illness or disability due to accident can can hamper one’s ability to earn for a prolonged period.  You also need to take into account EMIs and insurance premiums that need to be serviced. Households that are paying huge EMIs experience financial stress when income reduces. When life throws nasty financial surprises your way, have a Plan B ready- The Emergency fund.

An adequate emergency fund can help you tide over the crisis. Credit cards can be used to tide over the emergency. But credit cards should not be seen as a replacement for setting up an emergency fund. It is suggested to keep aside six month worth of expenses for emergencies. However, this thumb rule varies according to individual circumstances. If you have health insurance, you won’t need a contingency fund during a medical emergency but one needs to be prepared for situations where you or a family member might not need hospitalisation, but will need cash for doctor visits, tests and medicines. The size of the contingency fund will also depend on how secure your job is and how many earning members are there in a family.

So how to save for Emergency? Here Returns are not important but one should be able to access money easily accessible at short notice. You should have at least 25% of the emergency fund in a savings bank account. You can withdraw it 24×7. Ensure you have a debit card with adequate cash withdrawal limit. Many people remain unaware of their debit card’s daily cash withdrawal limit till the time they attempt to withdraw huge amounts of cash during an emergency.

Savings bank accounts give very low interest of 4-6%. You can go for a sweep-in account where excess funds are automatically transferred into a fixed deposit and earn higher returns of 7-8%. When you withdraw, the money is paid by breaking the fixed deposit.You can put the money in a fixed deposit that can be broken anytime or park your cash in liquid funds . The money will earn a decent return and can be withdrawn at any time. Liquid funds have returned 8.24% over the last one year and ultra-shortterm funds have returned 8.52% during the same period. Redemption takes a day

Not having proper Insurance

Protecting your most important assets is very very important. Insurance is a way of managing risks. Make sure that you are properly insured: You should always plan for unexpected events in your life: a car accident, a fire or theft in your home, a disability, or death. Insurance is an essential part of maintaining a secure financial future.  When you buy insurance, you transfer the cost of a potential loss to the insurance company in exchange for a fee, known as the premium. Insurance companies invest the funds securely, so it can grow, and pay out when there’s a claim. Insurance helps you:

  • Car/Motor Cycle Insurance if you Drive vehicle, because few people could afford the repairs, health care costs and legal expenses associated with collisions and injuries without coverage
  • Health Insurance covers health care costs like medicines dental care, vision care and other health-related items
  • Life Insurance Provides for your family in the event of a death
  • Home Loan Insurance when you are paying home loan.
  • Travel Insurance when you Take vacations without worrying about flight cancellations or other potential issues

Starting Investing Late

“Early investing is very much like growing a tree…if you can take good care of it at the start, it will take care of itself later.  In India we are blessed for having parents whose life is spent on taking care of kids (till their marriage at least) and seeing their children doing well is their desire.  Youngsters believe that they have a lot of time to think about the future. But by saving and investing early, they can harness the power of compound interest.

But I want to enjoy life! You need not save every rupee you require in the future, if you give your investment the time to grow in value. As you set money aside and keep investing, it grows in value, compounding with time. Use Divide and Conquer! The thought of say having Rs 1 crore for your child by the time she is ready for higher education in say 15 years, can make you worried. But you can achieve that goal by saving Rs 2.5 lakh a year, at 14% compounded return over that 15­year time frame. What is important to note is that you would have actually put aside less than 40% of that Rs1 crore; the balance 60% contribution comes from the appreciation in the value of your investment over that time

Postponing making Financial Decisions or Procastination

We push out work that seems too boring compared to something else we could do. One more episode of the serial on TV won’t harm, and we postpone going to bed. We set up  the alarm clock with great resolve, but we hit the snooze button when it rings. Well, we are wired to procrastinate and sometimes we pay. There are dire consequences to not keeping deadlines, especially where it involves matters of the law. If the consequence is immediate, we are driven by fear and anxiety, as it happens when we are faced with the prospect of missing a flight if we procrastinate. But the consequences of a missed IT return, an inert bank account, a wrong address in a mutual fund, or the lack of an email address in the insurance policy, do not hurt us immediately. Thus we end up being procrastinators. Most of the investment decisions are either taken because of some compulsion or urgency or postponed because of compulsion or urgency in some other area of life. We can classify the costs of financial procrastination in following main areas:

  1. Putting off financial decisions
  2. Delays in investing
  3. Tardiness in organizing personal finances
  4. Late filing of taxes

We complicate our life like Calvin, from comic strip Calvin and Hobbes, on how he goes postponing  about collecting leaves.

Calvin and Hobbes and Procrastination for leaf collection

Calvin and Hobbes and Procrastination for collecting leaves

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What financial mistakes have you made? How have you corrected them?

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