10 financial mistakes you must avoid

Hi Readers,

I am going to high light some of the common errors that are generally committed by youth while planning their financial requirement.

1-Unclear Goals :- Most of the youth generally set no goals with respect to finance. Everyone needs to set a financial goal and accordingly should work to achieve that. Goals could be marriage, purchase of house, child's education etc.

2- Keeping money idle in Saving Bank :- This is very common practice of youth. With hectic work environment and laziness, people tend to accumulate a lot of money in their saving bank account. Suddenly, they realize there is too much money lying idle in their bank account. This leads to impulse buying and affects their financial goals

3- No Clear Investment Objective :- There is no proper method that youth generally adapt and stick to when its about financial goals to achieve. They do it by themselves and mostly not structured well. They do not follow any comprehensive plan and stick to it. You need to map the mutual funds, life insurance and bank deposits when you plan for the future.

4-Getting into unplanned loans and debts :-  Most of the loans can be avoided by postponing purchase. Youth get attracted to EMI and other installment schemes that are provided by the retailer and tend to spend their future income. Whenever the interest rate goes up, the worries associated also goes up. Retaining same EMI and increasing loan tenure aggregates to this process.

5- Improper Risk Management :- Everyone needs to evaluate their risk taking ability. You need align your risk with your financial goals. It is advisable to take more risk when you are young and gradually reduce it with your age as your risk taking ability reduces. However, the general mistake people do is, when young they least bother about financial goals and when they wake up and plan for their goals it is already late. In order to meet their financial goal they take more risk at a later stage in life. This should be avoided strictly. It is essential to judiciously take risk, so that you never have to regret for it in life.

6- Ignoring insurance :- Most of the people in India are not adequately insured. Most people take up insurance policy to save tax and they search for options where return would be more. However, at this time they forget the fundamental of insurance. Insurance is taken for your family, not for you. Insurance is meant to fulfill your family need in absence of you. There is a lot of tools available in market that can provide you with good returns and you need not have to think of the returns when taking up insurance. Instead look for insurance which could meet up the needs of your family and also check the claim settlement ratio while you take up a policy. It is advisable to do some research before taking up any policy and not be influenced by what the agent say. There could be many clauses that agents would not disclose at the time of selling, and which leads to poor claim settlement.

7- Back-up plan :- Everyone should have a backup plan to meet your needs in case of any reduction in pay or retrenchment or business loss.

8- No proper communication with family members regarding money matter :- Traditionally, the male members or the bread earning member never used to discuss the financial difficulties and achievements with their spouse and children. However, in this modern age, your family should know where and how you are planning the finance. This is also upsetting the financial plan since the cash flow will be affected in case of any emergency.

9- Liquidity :- Most of the people tend to keep too much of cash. You should periodically check into this and evaluate your budget and plan accordingly and invest your money.

10- Inflation bites :- Most of the people tend to save and not invest. With less investment, inflation goes high.This affects the people who tend to save more compared to investment.

10 Money management lessons College won't teach

College teach us many things, but rarely do they teach us how to handle money. However, it is essential to have a good understanding of finance, as most of the students have debt or loans even before they start working. You need to understand some basic rules, so that you can take better judgement of your money.

1- Student Loans vs Expected Salary :- It is tough to graduate in any professional course without taking educational loans. However, you need to calculate how much of loan would be too much. Lets take a example, suppose you have loan of 7 Lakh at 12% interest and you have time period of 5 yrs to pay back. The EMI that you incur after 6 months from college would amount to Rs 15600/- approx. So, you need to get through a salary that would give you Rs 25,000/- at least to pay back this loan. Assuming you need only Rs 10,000/- to maintain your life style. So, this would mean you get into something that pays you more in just 2 yrs of your first job.

2- Books and Other fees :- Books taught in any professional course are quite costly. You also have other fees for hostel facility, computers etc. So, when you opt for books look for library options or lending options that could serve your need in cheaper cost. However, do your research before getting into such facilities as they sometimes might be more costlier.Most of the college's collect huge sum for hostel facility. Instead look for something cheaper, rent a flat with some friends. While renting check for additional bills.

3- Having proper Career Plan :- It is better to have a career plan in place , post your graduation. Students, mostly do not know what subjects they would like to pursue and that makes them take up courses that do not help them in future. So, while choosing a professional courses do some research and find out where you would like to plan your future. This could save a lot of your money by not taking up subjects that would be of little help later in your life.

4- Credit Card fees add up :- Do not be lured by the cheap offers. Many banks give credit cards with no processing fee and they lure you by saying it is for free. However, a credit card is like any other personal loan. You need to understand the terms and conditions on these cards before swiping it. It is advisable not to use a credit card when you are in college.

5- Credit vs Debit :- These are two terms that you should know, and understanding the difference is important. A debit card draws from money in your bank account and a credit card is that for which you pay at a later date. A debit card is a better option to keep a check on your spending habits. However, credit cards are beneficial to prove that you can borrow in responsibly that is you are responsible to pay back in correct time. This helps when you apply for any other loan.

6- Budgeting :- Start budgeting all by yourself. This is the time that you stay apart from your family and you do not have your parents to budget for you. Learn to budget well. Keep a check on all the bills that needs to be paid. Remember to pay before due date, and there by stop extra loss on late payment.

7- Nothing comes for free :- When you enter college, the loans may pay extra funds for your books and additional expenditure. But, remember this is loan and you need to pay back. So, use the fund wisely in the stuff that you need.

8- Understanding Bank fees :- In the world of ever-changing bank fees and new regulations, it’s hard to keep up with what banks are starting to charge us to use our own money. Check out what bank fees you will be subject to before opening a new account, and to closely monitor your statements.

Look closely at your statement and read the requirements for your type of account. Keep a check on the fees bank take on using other bank ATM's, on demand drafts, on over drafts etc to name a few.

9- Live Below your Means :-If you take up part time job, then remember just because you start making more money doesn't mean you should run out and buy that new couch you've been eyeing. Live frugally, pay yourself first.People in their 20s tend to think of retirement in abstract terms and as something to deal with far in the future, but although young people are getting better about it, their planning is not always done smartly. Start planning now and choose the right retirement plan for you.

10- Make a habit of saving :- Make a habit to save, be as little as is possible but this would help you in budgeting for your household, planning a emergency fund and investing later in your life.

Start early and achieve maximum benefit.

Most of the young people believe they do not have adequate knowledge about the market to jump in and start investing. However, fear of unknown and misguided belief that retirement planning can wait can cost you big in long run. There are numerous benefits to getting into investing when you are young. The single biggest benefit is time.

When you start investing in your 20's, you get more returns for your money by the power of compounding. Moreover, the more time you have to invest before your retirement, the more time you have to recover from any market losses.

Start now no matter how much money you have :-  When you are not confident of investing in equity, do not just wait, you have large choices of Mutual funds. Investing in mutual funds is much more easier. And when you are planning to invest in for a larger period of time, choose a good large cap fund to invest. Though the return on mutual funds may not exceed the returns in equity, these are better than any debt funds. However, distribute your money in all the possible forms of investment options.

Keep your eye on long term horizon:- When you are investing in  equity, choose companies that you would like to own. You can not let the everyday ups and downs in market scare you. When you try timing the market you can end up loosing money. However, when you have a good long term perspective, the equity market can outperform any other form of investment. So, look for good stocks that pays good dividend. When there is any dip in these stocks buy them. 

Don't forget debt or savings:-  Never forget to keep some money handy for emergency purpose. Keep money in debt funds or Saving bank accounts, that could cover up for your expenses minimum for next 6 to 12 months, in case of any emergency. 

Invest in Precious metal :- Precious metal like gold has given a good return in past 8 years and gold prices never soar. However, choose a right medium to invest in gold. The traditional method to invest in ornaments, may not give you proper returns. Moreover, we have tendencies to develop emotional attachment with ornaments, so now the market has come up with Gold funds and GOLD ETF's. The Gold ETF is most preferred as they give much liquidity and it is easy to purchase and sell them like any other stock.

The noisy Growth vs Inflation debate :- Max looser Indian Saver's

The RBI's stance on rates has provoked the noisy debate of Growth vs Inflation, however, what about the interest of most fixed income savers in India.

Trading, investing in equity is still seen by most as a form of gambling. Hardly 5% of the general mass engage their hard earned funds in equity market. Most people are vivid savers in debt funds such as bank fixed deposit.

In the Inflation vs Growth debate that surrounds RBI's action last week, the interest of Saver's is hardly being talked about. Last week, when RBI did not approve the rate cut, the industry and finance minister himself did not took much time to express their displeasure. The RBI thinks as long as inflation is high, interest rates cannot be lowered and the opposition thinks cut in interest rates will induce growth.

Let us now focus on the rates themselves, lower the rate of interest in deposits, lower the rate of interest on borrowers. Who is the largest borrower? The government itself. Who is the depositor? Its the general mass of India, who put their hard earned money in bank safe deposits. Especially, the ordinary people who use no other financial schemes.

A huge amount of money is borrowed by the government directly by post office schemes to banks. So, if the rates are reduced, certainly the borrower(government) will pay its depositor(general mass) less for its borrowings. This is the direct effect. Whether this will be able to bring down inflation is secondary and might not happen.

If inflation does not react to rate cuts, it is going to be poisonous. The Savers will then be left with fatal combination of high inflation and low interest rates. His real, inflation adjusted deposit will give zero or negative returns.

This issue is deeply tied with retirement benefits in India. Most senior citizen depend upon the returns from their fixed income for their cost of living. Moreover, inflation in health care is comparatively more, which could paralyze these senior citizens in case of emergency. In addition the inflation in fuel and electricity has induced inflation in almost all sectors. Based on this, ensuring a decent return on fixed income is important. Putting this in other word, the poor and the rich have voice, but not the senior citizens of middle class.

Lowering rates when inflation is high is like taking money from these people and putting it into government.

Thank you.