To Err is Human & at times it might take ages for us to make up for the errs. When it comes to finances too, sometimes small mistakes can have serious consequences. Most of us commit financial blunders unknowingly & end up paying a big price for them which we don’t even realize.
These mistakes can be both by commission i.e., by doing something, or by omission i.e., by not doing anything. This article concentrates on making investors familiar with the potential mistakes they can commit. To make it easier for you to correlate, we have separated the mistakes across the life stages of a person.
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The Exciting 20s, 20s is the time when we all are enthused, energetic, and excited. However, it is also a time when people make the most mistakes in life. Many of us start the investment process early well before turning 25. But while the time may be on our hands, wisdom often isn’t. And hence investors in their 20s are highly prone to committing some common financial mistakes like
Overspending, no savings:
With your own money now in your hands, you feel empowered and deserving to spend it. We now wish to fulfill all our college dreams, and savings is the last thing on our minds. While you may be well deserved to spend as per needs, splurging extravagantly isn’t desired. We often splurge on things like watches, cars, entertainment, clothes, and especially gadgets like mobiles, changing them to buy the latest edition. But remember that every rupee saved and invested at this time has the potential to create the maximum compounded wealth over time. Time is the biggest resource you have during these years. Starting a SIP at age 25 can help you create enough wealth to help in the purchase of a house or say starting your own business later by age 35/40.
Not learning about investments:
Lack of financial literacy is often witnessed among young investors. Somehow, the inclination towards savings, investing and management of finances are just not there. There are big dreams but the path to be followed to actualize them is often missing. This is the time when you can experiment and learn and still have time to recover from any hiccups in the process. It would be a waste of valuable time if we do not get out of our 20’s without enough knowledge and some experience in investments.
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The Settling 30’s
30s is the time when we would be settling into our jobs, home, relationships, and also as a person. This is the stage when the investor has attained some degree of maturity in all aspects of his life, including finances. This is a crucial period as you would be expected to make critical financial decisions that will have life long impact on your finances. The common investing mistakes that a 30’s investor should be careful of are:
Towering EMI burden: The most prevalent financial problem among the 30’s investors is they overburden themselves with EMIs. EMIs for homes, cars, and other sophisticated electronics, all running at the same time. The reason probably is the easy availability of loans, however, an investor should not be taking loans more than he can afford to repay. As a simple rule, your EMIs should not exceed 50% of your net monthly cash inflow. EMIs on depreciating assets (like a car, or electronics) are worse than appreciating assets like property. There should be a substantial gap between a person’s income and the sum of his EMI. Excessive EMIs leave the investor with little or no room for saving and investing for other important life goals like kids
No planning for long-term goals: 30s is the time when an investor must have a financial plan for the rest of his life prepared. This is the apt time when the initial steps towards long-term goals like kids’ education, marriage, and retirement should be taken. But for some, long-term goals are nowhere on the list, their life is revolving around near-term goals like home, car, vacations, etc., and what they don’t realize is, the time to realize it is now or else it’ll be too late. Proper planning not done now will force one to compromise later in life.
Inadequate insurance: Another major problem in a 30’s investor financial plan is inadequate insurance. People often treat insurance as an expense and try to keep the premium payments as low as possible. While insurance is an asset that is going to protect you and your family during difficult times, therefore you need to be adequately covered at all times. If your parents are dependent on you, it is critical that you start health insurance for them too as early as possible before it is too late as they may be nearing old age. If not done, health emergencies in your family can potentially sabotage your financial worth at any point in time.
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Responsible 40’s
This decade puts many financial responsibilities on your shoulders. You are in the middle of your career, you have to take care of your kids’ education, your loans, and your parents’ expenses, and at the same time, you and your spouse may want to live your dreams, as you are still in the young category. This is a very crucial time for managing your finances right and some common mistakes that a 40’s investor often commits are:
Preferring traditional products: The biggest blunder of 40’s investors is their bias towards fixed-income investments or traditional products like PPF, gold, property, etc. There are many reasons for this, like a lack of awareness about non-traditional products, bad experiences, unwillingness to learn and change, and so on. While no traditional product is negative per se, an investor has to holistically look at his entire portfolio and make the right asset allocation decision. Often we see that investors lose track of their asset allocation during these times.
Losing track of financial goals: Another lapse in our finances as we progress is, we sway away from our financial plans and goals. This may be due to a lack of regular revisions in your financial plans or losing touch with your financial advisor. This is perhaps the last phase when you can still invest in equities for goals that are yet far away. The risk you then carry is falling short of your goals and compromising on them or diluting your financial net worth. Retirement should now become a critical goal for you to plan and if you haven’t yet started, it must be at the top of your list.
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The Maturing 50s
50s is the time when you would see a lot of events and changes taking place in your personal life. This stage is the last decagon of our working life, not to be underestimated as you have the highest earning capacity. Some of the common money mistakes of a 50’s investor are:
Compromising on your Retirement Kitty: The greatest financial mistake you may be forced to do is to compromise on your retirement by withdrawing from its corpus to fulfill your other responsibilities towards your children like marriage, education, business support, etc. Lack of adequate planning in earlier life stages has got you in this position today and all the efforts directed towards living a financially independent and peaceful life post-retirement take a big hit. The 50’s investor should remember that retirement years are approaching, there will be no inflow of money soon, but there will be outflows, and he/she should take due care and have enough money to fill in the blank. Retirement planning should be the top focus here and you should do all that is possible to reach adequate numbers.
Lack of Estate Planning: While many investors may still be in the pink of their health, the 50s does bring in some uncertainty in our lives on the health front.
It is a stage when you have adequate wealth accumulated and invested in various avenues, including property. Be it you or your spouse, it is also the time that you start thinking about estate planning or at least creating a proper will for wealth distribution. Estate planning would be crucial if you still have someone close to you who would need special care & attention in your absence. Keeping all documents in one place and getting proper estate planning / will writing done, will save a lot of hassles and confusion on part of your children in your absence while also ensuring that your spouse is not left at the mercy of others.
