Financial Planning is a process that helps an individual to find out the shortest route between where you are and where you want to go financially.
Can you reach your destination with a good road but a wrong map?
Have you ever asked yourself ‘What financial planning mistake did I make despite doing everything right?’
What is the X-factor that pulls you back from achieving your financial goals in your investment journey?
During this journey towards your financial destiny, there are some common mistakes that can off-track you.
Avoiding these common financial planning mistakes will make the journey smoother and safer without any pitfalls.
In this article, we are going to decode the common financial planning mistakes that keep you away from achieving your expected returns.
Let’s get started!
Table of Contents:
1.)Financial Knowledge Vs Action
2.)Avoid HR Dept /Tax consultants decide your financial destiny
3.)Avoid Prepayment of the home loan if the post-tax interest rate is low
4.)Avoid Diversifying In One Asset Class Alone
5.)Be a committed investor, not just an interested investor
1. Financial Knowledge Vs Action
“Learn well what should be learned, and then
Live your learning.” (kural:391)
The much-celebrated Tamil Poet Thiruvalluvar explains the importance of implementing whatever we have learned in the above Thirukkural.
When applying this ‘Thirukural’ to investment planning means that we need to educate and empower ourselves, apply the knowledge, and act in consonance with our learning.
Being aware is only of little help until you strategically plan and implement the awareness and knowledge into achievable financial goals. Strengthen and expand your action domain.
The action list needs to be drawn up based on individual goals and risk appetite. Ensure completion of the action items.
Planning and enlisting is the first step and what follows is the effort towards the completion of the tasks. Make a list every month and ensure adherence
Wealth comes only when you take massive action and what is the first step towards this goal? To avoid money management mistakes!
And what makes you avoid Money Management Mistakes?
2. Avoid HR Dept /Tax consultants decide your financial destiny
You are the best judge of your finances and responsible for avoiding Financial Planning Mistakes. Each person has different requirements and there is no one financial plan that suits all.
Even if these professionals are well-versed in their respective fields, you cannot expect them to give the right advice on a subject that is not their domain.
A professional financial planner can carefully guide a beginner with financial planning tips that can help him/her take the path with less risk and provide the confidence to pursue higher investment goals.
This is why you should take the help of professional financial planners!
Being independent in handling your finances does not mean ‘don’t listen to the advice of anyone’. To avoid financial planning mistakes you need to take all bits of advice that come your way and finally decide what your heart feels right!
In this way even if you don’t win you can always avoid the regret of not following your heart!
a) Invest regularly
Don’t wait for the HR department or tax consultant to remind you of the tax season to start saving. As markets fluctuate, the best way to invest is through making regular installments.
This strategy of an astute investor helps in avoiding impulsive decisions that may later cause regret.
And what is the advantage of regular investments? You can invest small amounts systematically which in turn protects you against uncertainty in the market.
Also starting investing early in your 20s is one of the important factors which provide the market with the much-needed time to show its benefits.
It also helps you to avoid the common financial planning mistake of pushing yourself to take big risks when you need money, decisions taken hastily will surely affect the progress of your investments.
There is another term for this way of investing called “Pound-cost averaging or Dollar-cost averaging”.
b) Do not restrict to Tax Savings only
The primary objective of investing is to make returns, and hence don’t remain invested only to save tax.
Many investment options like PPF give you exemptions under Section 80C of the Income Tax Act. Don’t limit your investments just for tax-saving purposes.
Beyond tax saving, invest in good investment schemes to meet your life financial goals.
This is a common financial planning mistake that needs to be avoided!
So if you have clarity on the financial goals that you want to invest for, then you can avoid investing for Tax Savings alone!
3. Avoid Prepayment of the home loan if the Post-Tax Interest Rate is low
Prepaying your home loans is a good idea. However, deciding when to prepay your home loan will help you save as well. Did you know you can also save consistently by deciding not to prepay your home loan? Read on.
- The interest paid on a home loan qualifies for a tax deduction of ₹ 150,000 from income tax. If you take a home loan at 10.5% interest and pay tax at the 30% bracket, your actual loan interest is only 7.35%.
- On prepayment, the tax benefit under section 80C of the Income Tax Act, for the principal amount of the housing loan cannot be utilized.
- Most of the interest is paid out in the early part of the loan tenure. If you have completed 75% of the loan term, then the interest component will be less and the principal component will be more.
- And also, you can make your Home Loan Interest-Free by investing in SIP. Discover! How To Pay Home Loan without Interest?
Since interest up to Rs.150000 is exempt, you don’t benefit financially as the entire amount of the available exemption is not utilized.
4. Avoid Diversifying In One Asset Class Alone
The right investment strategy is one that reduces financial risk. As goes the popular saying, “Don’t put all eggs in one basket.”
Click Here to understand why you should avoid the Financial Planning Mistake of diversifying in one asset class alone.
Some of the popular asset classes are equities, debt, bonds, cash (money market), and property. As each asset class tends to behave differently during changes in the economy, a balanced portfolio that diversifies risks across categories is more desirable.
Asset allocation will not always be the same because as the performance of different asset classes changes, the correlation between the two asset classes will be different. Diversifying your asset class and long-term investing is more important than market timing.
“The real fortunes in this country have been made by people who have been right about the business they invested in, and not right about the timing of the stock market.”— Warren Buffett
a) Do not overdo investments in Direct Equity
Equities carry high risk and promise high returns. Trading in equity requires knowledge about the market and the ability to make informed decisions on time, every time.
So, please avoid the financial planning mistake of overdoing investments in direct equity without proper guidance and knowledge. Mutual Funds are a better option if you are averse to risks and you are yet to become a market expert.
It requires a lot of knowledge to invest in direct equity so it is wise to get the help of professional financial planners to avoid mistakes.
b) Invest in Direct Equity only after building a corpus
If you are highly tolerant of risk and prefer investing in equities directly, ensure that you have already invested in equities through the Mutual Fund route for a few years. This brings a basic understanding of the market and market cycles.
c) Allocate more resources towards Liquid Funds, Ultra-Short-Term Funds
Try and build liquidity of 5 to 6 months’ expenses in liquid funds.
These funds come in handy during emergencies and unplanned cash outflows. Some of the liquid funds provide a debit card facility.
Liquid funds mostly don’t have an exit load and it is less risky even though the returns are not guaranteed.
For people who invest in Bank FDs, Liquid Funds are better alternatives.
Click here to understand why liquid funds are a better investment option with the same level of risk and better returns compared to Fixed Deposits.
d) Invest in Debt and SIP
Have you wondered Why this is named ‘Debt’ Funds in the first place? Because the returns are generated by lending your money to various establishments.
Debt investments provide to a certain extent the safety of principal and are less risky than direct equity.
Another boon to investors is SIP! It allows you to invest a small amount regularly which makes you unsusceptible to stock market volatility.
To reap the benefits of both return and safety, diversify the portfolio and invest in Gold SIP and Debt SIP.
Even though the returns are less compared to equity, it still gives you better returns than bank FDs. This will bring you stability in your portfolio. There are a wide variety of options to choose from in Debt Funds in the market. Avoid the common financial planning mistake of jumping into an investment with amateur advice.
Are you hesitant to invest in Debt Funds after 1st April 2023, New Taxation? Click Here to clear your doubts!
It is also better to get professional help to invest in Mutual Funds and to come out of your Past Financial Planning Mistakes and equip yourselves better for the future.
5. Be a committed investor, not just an interested investor
There’s a difference between interest and commitment. When you’re interested in doing something, you do it only when it’s convenient. When you’re committed to something you accept no excuses – only results.
You can see several videos, articles, and WhatsApp messages with the line ‘How to get rich quick’. Now, let’s see how to get rich quickly!
Yes! This is the hard truth. If you are looking for a hack to get rich without acquiring the required knowledge and being a committed investor, most probably you are on the path of destruction of your own hard-earned money!
Ken Blanchard’s Advice
To avoid Financial Planning Mistakes, more than merely showing interest in various investment modes, be committed to the strategies that you follow.
- The money chase isn’t about just being interested in investments, it is about being committed to planning finances and striving toward them.
- Being committed helps to understand your position and also aids in targeting the financial goals and flexing plans accordingly.
- Mere interest would make you say ‘I don’t have the time” but commitment will make you say “ I can make the time”.
What makes someone reach excellence in any field?
“Give me six hours to chop down a tree, and I will spend the first four sharpening the axe.”– Abraham Lincoln
It is always knowledge along with practice. The level of difference between two runners in an Olympic 100-metre is just below 1 sec!
But what is the value of that 1 sec? It is 10000 hours of practice and knowledge comprised into 1 sec!
You can’t play a beautiful melody on the piano with a single key. In the same way, by accessing and playing all the right keys in your financial decisions, you will produce a beautiful melody called Financial Harmony.
Being a successful investor requires planning, prudence, and patience. All these work concurrently, only if you have the money and confidence to make and stand by your financial decisions.
Plan wisely – educate and empower yourself. With the right investment strategies and guidelines in place, you’ll find the path to win the money race by avoiding Financial Planning Mistakes.
We hope that the above insights will help you protect yourself from common Financial Planning Mistakes in the future.
If you have any comments or questions, write them in the comment box below.
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