Most of you have been reading my articles for quite a long time. I have written a lot on how you can organize your financial life. Now this time I want to tell you what you should not do. Successful Financial life can be achieved by avoiding mistakes and adopting a disciplined approach towards your financial affairs. Following 5 money actions will definitely affect your financial life negatively so I request you to avoid these mistakes:
1.Investing without clear Goals: We are very clear on other aspects of our life but when it comes to investing we are always very casual and not clear on objectives that we want to achieve or destinations that we want to reach. We keep on investing without defining why are we investing? This is as good as you leave your house to reach somewhere but you don’t know where you want to reach so you will be moving here and there without any clear direction. This is the biggest mistake that investors normally make because when you are investing without clarity of your goals you don’t even define your investment horizon so you can not set a proper asset allocation and you can’t select a proper investment product for yourself. Suppose you want to invest Rs. 10 lakh and you are investing this money for purchase of house after one year then you should invest all your money in debt (Fixed income instruments) based instruments like Debt Mutual funds and not equity mutual funds because your investment horizon is too short but suppose you are investing this money for accumulation of Higher Education of your daughter which is 15 years from now then you should invest more in Equity and less in Bonds .First step to investing is knowing clearly about your goals and becoming clear about what you want from money? So never invest without clarity of goals.
2.Buying Life Insurance for Investment and Tax Planning: This is also one of the biggest mistakes that people make. Normally investors prefer to buy life insurance policies which are investment oriented and will return back sum assured with accumulated bonus or fund value at the time of maturity. There are other types of life insurance policies which will provide you only life insurance during the policy period but won’t give you back anything once policy period is over and policy holder is alive. Apparently it seems a wise act to buy policies which will return you back something but it is not because these policies have lots of charges and don’t give you sufficient returns. Also there is commitment of significant premium amount for few years. Against this policies which provide you only life cover are called term plan and are relatively very cheap. One should buy term plan for insurance and manage his investments separately. I would recommend you to keep insurance and investments separate. I have written an article on my blog for detailed analysis of different policies which you can refer here is the link Which type of Life Insurance one should buy? I request all of you to go through this.Most of the life insurance policies are bought in the months of Jan, Feb and March. I don’t understand why? People buy life insurance to save taxes which is a disastrous.
3.Avoid Writing Will: Most of the people live their lives with a mindset that life is going to continue like this forever and they are not going to die. When we suggest our clients to write their will their first reaction is “Am I that old that I should write my Will now?” or ” I am quite ok, so will do this some times later.” They believe that only old people dies and death is predictable. This is a wrong psychological belief.
In India if one dies without writing a valid will he is said to have died In tested and in that case his wealth will be distributed as per the succession law applicable to him. I have written an article on this topic on my blog which you can refer for the details. Here is the link “What happens if one dies without writing a will?” Will is a simple and effective tool for succession planning which simplifies your wealth distribution process as per your wish after your death. So I would recommend all of you to write your will at the earliest. For this read my article on “How to write your will?”.
4.Spending more than what you Earn : Generally this problem is more severe in Western world . People in developed countries like US and UK are big time consumers and some of them consume more than what they earn and later on face financial crisis. But with the changing socio-economic structure in India we find youngsters spending a lot and the savings to income ratio is falling which is a serious issue. I recommend all of you to make your budgets and keep an eye on your spending. Give priority to your important financial goals like retirement planning and education fund of your children over luxuries like changing cars to frequently or travelling during vacations to save more at early stage of the life.
5.Market Timing: This is most simple thing that you can do to destroy your wealth at the earliest. Market timing means trying to predict whether market will go up or down from a particular point and accordingly changing your investment positions. Suppose due to some news or prediction you believe that next few months Equity markets are going to go up you invest all or most of your money to Equity and vice versa. This looks simple but is not possible and so don’t try to do this because when you try to predict movement of markets you are trying to predict movement of macro economic factors which is not possible. So keep yourself away from market timing and adopt Strategic Asset Allocation. For detailed understanding on Strategic Asset Allocation read my article on this Strategic Asset Allocation: Backbone of your Portfolio.
Conclusion: To conclude with I would say if you want to live a successful financial life and create wealth in a smooth manner avoid all above mistakes. If you have any doubts you can post me on lohana_prakash@ascentsolutions.in