Money management is not an easy task. For the inexperienced, and often for experienced ones too, it is not difficult to spend money. It is saving and investing – things that form backbone of good money management, that is difficult. Invariably, lot of people make some common money management mistakes. Over a period of time, few learn the lessons, some don’t and many don’t even realize that anything is amiss.
Here are 7 money management mistakes which several beginners make.
- Not saving money – The fist rule of managing your personal finances well is spending less than you earn. Many of us forget this while spending. More so with the new found freedom that comes with earning your own daily bread! Saving money is an absolute must if you are looking to meet some financial goals in short or long term. Unless you are already rich or know that you will be rich without saving and investing!
- Accumulating unnecessary debt – Not just not saving money, accumulating unnecessary debt is another common money management mistake. Credit card debt, consumer loans, personal loans and vehicle loans are some of the more common ones, butt here can be more! To top it up, it is not uncommon to graduate with the burden of student loan repayment. If uncontrolled, debt can soon become a vicious cycle, which can eat into your future earnings as well.
- Buying random insurance plans – Insurance is not investment. It is a risk management tool. You can get much better returns from other investments, in many cases even with simple bank fixed deposits! Yet, it is not uncommon for people to buy endowment plans, money back plans or ULIPs and get into long term commitment for investing in these plans. I, like many others wold suggest that start with getting a term life insurance and a health insurance. Don’t mix insurance with investments. Use insurance to manage financial risk due to unforeseen circumstances. That’s it.
- Investing in real estate – Real estate always appreciates – it is a good selling pitch. But it may or may not always be true. But investing in real estate does require a long term financial commitment. It can tie you down in case you want to start something on your own, or worse, lose your job. At the same time, do consider the real cost of owning a real estate for investment, especially while you are taking a home loan.
- Keeping money idle in savings account – Some young earners while do well on saving front, keep the money lying idle in savings bank account. Beyond some amount of cash in your bank account (typically for day to day expenses and/ or emergencies), it doesn’t add much value. Even a simple fixed deposit or liquid fund can give better returns! You can explore other options which can potentially give better returns.
- Not considering investing in equities – Over long run equities have given better returns than most asset classes. This has been true for most of the markets in the world. While there is a risk, the potential returns are also good. And when you are young, you usually have a better risk profile and a longer time horizon. And both these factors make more case for investing in equities! You can invest in equities directly or via mutual funds. If you son’t understand or follow equities, mutual funds might be the best route. You can do lump sum investment or invest vis SIP (systematic investment plans).
- Not having emergency fund – Emergency fund is needed by all. Even if you are sufficiently insured or have credit card with a good credit limit. Emergencies (health, sudden travel, unplanned purchases etc.) can strike anytime, and it’s good to be prepared. (Related – What are some financial emergencies you should be prepared for?)
While it is true that many people make few of these common money management mistakes early on in life. Some learn front them, some don’t. I made few of these mistakes, and I would like to believe that I have learnt my lessons!
Have anything else in mind?
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