Common Mistakes in Personal Financial Planning
Common Mistakes in Personal Financial Planning
Administrator 01-09-2017 01-12-2017
"Common Mistakes in Personal Financial Planning"
Personal financial planning is about building your wealth in a consistent manner. It involves setting goals, saving on a regular basis, investing your savings and protecting your assets. However, there are certain common financial planning mistakes that one must keep in mind before making any finance relating decision.
- Ignoring the effect of inflation: When you decide to plan your finances, always make sure that the inflation is taken into consideration, by considering inflation
- one gets an idea about how much the money is losing its value overtime. Over dependency on safe investments such as Bank FDs, saving accounts, government bonds etc. can lead to a decrease in the return of the portfolio in relation to the inflation rate prevailing in the market. Inflation must be considered by every investor as this can even lead to the eroding of your savings overtime.
- Financial Planning is unimportant: When financial planning comes into picture, we generally start talking about our investments that we have done for different financial goals in life. Is investment planning and financial planning same? The answer to this question is no, Financial Planning should not be confused with Investment Planning as financial planning is far more broader concept, as it includes every financial goal of your life like retirement, vacation, education, marriage etc. and not just the investment.
People should understand the importance of Financial Planning and must make efforts in creating a good financial plan.
- Studying your current financial position is unnecessary: If you are unaware of your current financial scenario then how can you create a plan for your future needs? Before the creation of Financial Plan, one must study their present financial situation, this can include calculation of tax returns, looking out for the expenditures that you incur on a monthly basis, studying your current investments, what liabilities you owe etc. Studying your current financial scenario will make you confident and ready in putting together your financial plan.
- Not defining goals: Another financial planning mistake that people generally do is that do not define their goals into monetary terms. Goals must be defined into monetary term as this will an idea to the investor as to how much amount does he need in the future for each goal and this will in turn help the investor to create a roadmap for the achievement of these goals in an efficient manner. The key to this can be “the sooner you begin the better it is”.
- Risk is a not a relevant factor: risk and returns go hand in hand. One must consider risks while planning their finances. There are certain risks that should be considered as this can hamper your financial planning in the long run
Inflation risk have an impact on the purchasing power of your money and this can eat away all of your savings that you might have thought of diverting towards your investments.
Interest rate risk have a major impact on the results of your investment as this risk occurs when there is decrease or increase in the value of the asset as a result of change in the interest rates.
Economic conditions can adversely affect your portfolio value as economic does not have a similar impact on each industry.
Specific Risks are difficult to predict. Government regulation and change in technology are examples of specific risk.
Market risk are highly unpredictable and beyond the control of an individual as these cannot be diversified. Changes in the tax laws and regulations with our foreign neighbors can be an example of market risk.
- Low protection to the assets: Too many people invest in the equity market without even thinking about the assets they own and end up getting in trouble. To get rid of such a situation, allocate your money into different asset classes which will ensure that your risk is distributed and your assets are protected from liquidation. Always make sure that you have adequate amount of life and health insurance, protection from disabilities, car insurance, home insurance, umbrella policies to cover yourself against liability loss. Diversification of your portfolio is important because this will provide a safety advantage and will lower your risk.
- Delaying saving: The initial years or the work years of your life should be dedicated towards your savings. The rate of savings in this time must be always more than the returns. Investments can be managed properly only when you are saving gradually for your goals. Always remember, the sooner you begin the better it is because your money will be compounded for bigger time horizon. Savings should be done with a proper management plan by considering personal expenditures and most importantly the taxes.
- Considering Insurance as a Tax saving Tool: The biggest mistake that one can do is to consider your insurance as a tax saving tool. Insurance is not an investment avenue, one must take insurance only when one needs it. Diverting your finances in buying insurance policies just to save tax is a waste of money. Thinking about the utility of the product is important than the tax saving benefits.
- Neglecting to get a professional advice: Though you are aware of your financial situation best, but it is not possible for every individual to have knowledge about every product available in the market. To protect yourself from future troubles one must seek professional advice (CFPs, advisors etc.) as these people can assist you better in your circumstances because they are more aware about the happenings in the market.
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