We all make mistakes. But, where your money is concerned, they can cost you dearly (literally).
Here we bring you the six most common money mistakes. Avoid these to ensure that your finances are on track.
Mistake 1
Waiting for tomorrow
The ancient adage is true: Time is money. Because you need time on your side to allow your money to multiply.
Let's say you had an amount of Rs 10,000 to invest at 9% per annum.
|
If you invested for |
You would have got |
|
10 years |
Rs 23,673 |
|
8 years |
Rs 19,925 |
|
6 years |
Rs 16,771 |
|
4 years |
Rs 14,115 |
A six-year delay (between four years and 10 years) would cost you Rs 9,558.
The more time on your side, the more the effect of compounding. Don't wait for the day when you have a fat bank balance. Start now, however small the amount.
Mistake 2
Saving only on special occasions
Don't wait for your bonus to save. Or for Diwali, Christmas or birthday gifts. Saving should be a habit. You may not be able to save huge amounts every single month so start small.
Let's talk about the Rs 10,000 again. Now, if you invest it at 9% per annum for 10 years, you will get Rs 23,673.
But, if you are just a little more consistent and decide to add an additional Rs 500 every month to this kitty, you will finally end up with Rs 1,18,532. This little monthly contribution surely did not pinch your pocket and look how you got rewarded in the end!
Be consistent. It hurts less and the rewards are better.
Mistake 3
Investing before clearing your debt
If you are in debt, that should be a priority. Not investing.
On an average, the interest on personal loans and credit card loans amounts to around 18% to 30% per annum.
Let's say the interest on your credit card is 2.5% per month. This amounts to 30% per annum.
So, if you want to invest (instead of settling the bill), you should be investing in an instrument that will give you more than 30% per annum after tax. Which, incidentally, is virtually impossible -- unless you are a stock market wizard. But, that too is not guaranteed.
Mistake 4
Playing it safe
If you are in your 20s, please don't look solely at the Public Provident Fund, National Savings Certificate and bank fixed deposits. You must consider investing at least some amount of your money in the stock market.
For a number of reasons. You have time on your side. A stock market investor must always think long term. Being young, you have the time to ride the ups and downs of the market.
What's more, the stock market will still give you the best return compared to other investments.
If you don't like the idea of buying shares, maybe you could invest in a diversified equity mutual fund. Here a fund manager will invest in shares of various companies in various industries. Read How to invest in mutual funds.
If that still scares you, then you can try a balanced fund. Here, part of the money is invested in the stock market and part of the money in fixed return instruments.
Mistake 5
Not doing smart tax planning
Don't let the tax-man take your money. Use all the provisions to save on tax. Take a good look at Section 80C.
You can invest up to Rs 1,00,000 in the investments mentioned in this section and you will get that much deducted from your income when tax is being calculated.
So look at the Public Provident Fund and National Savings Certificate. Both give you 8% per annum. Read PPF vs NSC.
Also check out Equity Linked Savings Schemes. These are diversified equity mutual funds with a difference. The difference being that you have to lock-in your money for at least three years and you get the tax benefit under Section 80C.
If you are an employee, the contribution to your Employees Provident Fund also gets added to this Rs 1,00,000 amount. Read PPF vs EPF.
Mistake 6
Not looking at insurance
Look at protecting your savings and augmenting them.
If your company does not cover you and your dependents for medical insurance, take out a Mediclaim policy. A sickness can wipe out your bank balance. Read All about Mediclaim.
Talking about dependents, if you have any, then you must take out a life insurance term policy. In case you die, then your beneficiaries will get the amount that you are insured for. Because your savings will not be adequate to tide them over. So you must provide for them financially.
Let's say you are a 25-year old male and you take a term insurance for Rs 10 lakh (Rs 1 million) for 15 years. Should you die during this period, your beneficiary will get Rs 10 lakh. The annual premium that you will be just Rs 2,890.
So there you are, six money mistakes. If you are guilty of any of them, start shaping up. It's not difficult to get back on track.