In general, Financial planning is looked as a roadmap to achieve future financial goals which includes identifying the goals, prioritizing it and then investing for it. But before planning for the future, one needs to look into their present and make necessary corrections. Sometimes, we take some financial decisions which is believed to be correct. We don’t acknowledge some of these decisions are mistakes and hence continue taking the same decisions.
An ideal plan is only successful when a discipline is followed. The assumptions and the numbers used in a financial plan is based on an understanding of willingness to initiate as soon as possible and to be disciplined with the plan. However, if one cannot be disciplined enough to correct the past financial mistake, then the success of the plan might be in jeopardy.
Below are some of the mistakes one commits and what should be done with it –
1) High Non-committed Expenses
We work hard enough to earn a comfortable life and provide family with their present and future needs. A part of our earnings are also spent on leisure because one also needs to enjoy life to its fullest. But the amount spent on leisure may sometimes exceed the expenses on the necessary parts of our lives. It does not mean that one should not go to eat outside with family, have vacations or spend money in malls but it does mean that there is a necessity to set how much is required to be spent under these expenses.
Solution: Your non committed expenses should not exceed 20% of total expenses made in a year. This will help curb down expenses and hence result in better savings.
2) HIGH COST OF LOANS
It is true that regular savings may not enable you to buy a dream house or a car. Some even stretch to a personal loan which are offered at a high rate of interest to make the down payment for such dreams. We commit to these obligation and make them a part of our cash flows but often fail to realize that they have been eating up a large part of our savings and hence leaving just a paltry sum to plan for future life. Some even speculate income raise in future to cover up the extra cost.
Solution: Remember that the loan payments (EMI) should not exceed 40% of total monthly income irrespective of the fact the income will increase in future. On the other hand one should also keep an eye on the prevailing interest rates to compare the cost of loan with the market and negotiate with the lender to reduce the rates if required or else refinance with another loan provider who offers at lower interest rates.
3) High Cost-Low Cover Insurances
Our choices of investments have been influenced by outdated ideologies and have been passed on for generations. An investment option which was relevant 15-20 years ago may not be so appealing in the current scenario where the markets have more to offer and inflation is growing every year. But we have been investing in insurance cum Investment Plan which neither gives sufficient coverage not has proper returns in them but still we persist on investing in them. Some do realize their mistakes but are too reluctant to move back and make necessary corrections. In most of the situations, fear of entering the financial markets is making us still pay for such plans.
Solution: Strictly avoid purchasing such plans. If already purchase then consider the last payment made to be a sunk cost. If the plan is been paid for more than 3-5 years then you are entitled to receive an amount which generally is less than the paid amount. But through investing in markets you still have a chance to recover all what is lost and even earn more than what these plan could give. Buy a simple term cover which should cost only 20-30% of such insurances.
4) Incorrect choice of investment tools
Just like insurance we also have been using old and obsolete methods in term of savings and investments. Fixed income savings schemes (PPF, FD, RD etc) are often considered as an investment option and has been used as a tool to achieve Financial Goals since ages. Some even use Fixed Deposits for long term goals. A lack of trust in market based investments and the safety of principal in these instruments leads one to perceive them as a one stop shop for all future needs. One has to understand the relevance of such tools in light of their goals and make right decision. These tools in current situation are not good enough to even beat inflation effectively.
Solution: Prefer debt funds over FD,RD for short term savings/investments. Identify how much you need by next 3-15 months and use Money markets as an investment of such goals. The remaining amount should be invested in long term investments which includes equities and other asset classes.]