I have been practicing Financial counseling for the last 5 years. In this journey, I am lucky enough to meet lot of investors, my clients, friends, well-wishers and relatives. I have observed that each individual’s/family’s financial situations, financial behavior and attitude towards investments risk are very unique and different to each other. May be this is the reason why I have always believed that there is no ‘‘one-size-fits-all” financial plan/investment plan. That is why it is called as PERSONAL Finance. It is your finances.
But, I have observed (observing too) one common thing from all these meetings i.e. most of the investors are committing same and common PERSONAL FINANCE Mistakes.
In this post I have tried to list down the top 6 most common and biggest Personal Financial Planning mistakes that many of us commit. These are purely based on my work experience and observations. You are free to share your comments on my views.
Mixing Life Insurance with Investment– This has to be listed as the biggest and the most common mistake that many people commit. The role of investing is to grow wealth while the role of insurance is to protect it. Mixing the two will lead to lot of disappointment.Traditional plans like Endowment, Money back and Whole-life policies are the best examples for this. These plans come with a combination of investment and insurance. I have seen many investors buying these kind of life insurance plans without even trying to understand the plan features, tenure and benefits. In India, Life insurance is sold and not bought in most of the cases. If at all investors buy it, they do so for tax planning purpose only (when they have to submit their tax planning investment proofs ). Don’t get into liquidity trap to save a little on tax . Life insurance is a long term commitment. (Read my post on “Is Term insurance a waste of your money?“)
Buying a Property at a young age through home loan – In India, the decision to buy gold or to invest in a property is more to do with sentiments rather than the actual requirements. I have been observing that as soon as an youngster gets married the first financial decision he/she makes is to ‘own a home.’ This can be a demand from his/her family members (or) due to peer-pressure (or) ‘why pay rent when I can own’ syndrome. Considering the prevailing property market prices, most of us can buy a property through a home loan only. Once you acquire a home loan, around 30% to 40% of your net monthly income goes towards your Home loan EMIs. This may put lot of strain on your Finances. Another important point is that this makes you to postpone the planning for other important Financial goals like, your RETIREMENT PLAN. Your retirement plan is the first thing that you should really care about. (Remember this point – Do not consider your primary home (residence) as an Asset, irrespective of the appreciation of the value of your property)
Not maintaining a Contingency or an Emergency Fund– I have seen people who earn even a ‘five figure’ salary asking for financial help during unforeseen medical emergencies or unfortunate events. They earn well but they do not save. So, what do they do to fund these emergencies? They go and acquire personal loans or take loans on credit cards. This puts them in a viscous circle. They take years together to come out of these loans and have to pay heavy interest amount too. We can also consider the above point (‘mistake-2’) here. I have also observed that people withdraw all their cash reserves, PPF (Provident Fund), EPF etc to fund the down payment while purchasing properties. Do not do that. Have sufficient cash or bank balance, may be 6 months of your monthly (fixed+variable) expenses as an Emergency Fund. If you do not have such fund, start saving in a Recurring Deposit or use your Sweep-in account to create your contingency fund.
Not having sufficient Health Insurance coverage – When I ask a salaried individual about his/her medical insurance plan, I get to hear this answer ” My employer provides health insurance cover.” With rising medical costs and unhealthy lifestyles, do you think that the coverage provided by your employer alone is sufficient? You may ask yourself few of these questions. What happens to my health coverage if i quit or lose my job? Can I afford to buy or get a new medical insurance plan when I retire at 58? What if suddenly my employer changes the terms & conditions of Employees Mediclaim policy? Aren’t you putting your whole family at risk? Have a standalone Medical insurance policy. Have an health insurance plan for all your dependents.
Investing heavily in Fixed Income Securities – Recently, one of my good friends discussed about his personal finances with me. I was shocked to know that monies to the tune of Rs 12 Lakh (30% of net-worth) were in Fixed Deposits and this person is just 30 years old. This person does not have any dependents and no financial commitments. We need to understand the importance of REAL RATE OF RETURN here. Fixed income securities like Bank Deposits, Recurring deposits or Post office small savings schemes generate returns of around 8% to 9%. We all are very much aware about the rise in living expenses (inflation) over the last few years and I am sure that this will be the case in future too. If you make 8% profit on your fixed deposits and inflation is 6% then Real Rate of Return is around 2%. You still have to adjust this 2% for the taxes you pay. That means your wealth/investments are not growing, infact your wealth is getting eroded. Take charge of your finances, you have to invest in equity related instruments to generate long term wealth. Invest atleast a portion of your savings in right Equity and Equity related mutual funds. Invest in and diversify across various asset classes. But, kindly understand the risks associated with each asset class before investing.“Gold, real estate,stocks wont make you rich. How much you know about them will make you rich. Financial literacy is important.( Read my post on “RBI’s data on Financial Savings of the Households.“)
Not setting any Financial Goals– “How much I will get?”, “Can I get 15% guaranteed returns?”, “Is there any investment which can generate 20% returns without taking any risk?, “Share market is at all time high, is this the right time to enter?, “Is this the right time to buy property or gold”…. 🙂 . These are the common queries that I receive on a daily basis. There is only one answer for all these questions. Instead of trying to time the financial markets, we will be better off if we first identify and set financial goals. This will enable you to have clarity about your investment requirements. Take your financial planning seriously and do not postpone investing for your financial goals. (Read my article on “How to create a solid Investment Plan?“)
Few more common mistakes that investors commit are –
Having mob-mentality (Do not rush to follow the crowd, it might be a funeral procession – Robin Sharma). As I mentioned, each financial plan is unique. Your financial situation might be different from your friend’s. Plan your finances based on your risk profile and your own requirements.
Many of us under-estimate the importance of having a written WILL. Do not postpone writing a WILL. Do share details about your investments with your nominees or family members. (Read my post on “How to write a WILL?“)
Many of us do not try to understand about the Salary structure and also about the basics of income tax.
I also get to hear this common sentence frequently – ” Sreekanth, I do not know where my money/income is going..” These days, major purchases (Smart phone, LED TV etc) are financed by debt, not by advance saving, and are often bought impulsively without research. Suggest you to prepare a monthly budget and stick to it. Plan and save for fixed as well as variable expenses.
The Secret of a Financially Happy Living is to Plan for all the Known Events in your life and to Make Provisions for all the Unknown events in your life!!! Personal Finance lessons are often learned through experience. If needed, do take corrective measures right now…better late than never 🙂
(Image courtesy of Chris Sharp & Stuart Miles at FreeDigitalPhotos.net)
This post was last modified on September 27, 2023 3:30 pm
Sreekanth Reddy
Sreekanth is the Man behind ReLakhs.com. He is an Independent Certified Financial Planner (CFP), engaged in blogging & property consultancy for the last 14 years through his firm ReLakhs Financial Services . He is not associated with any Financial product / service provider. The main aim of his blog is to "help investors take informed financial decisions." "Please note that the views given in this Blog/Comments Section/Forum are clarifications meant for reference and guidance of the readers to explore further on the topics/queries raised and take informed decisions. The information provided, therefore, should not be viewed as financial, legal, accounting, tax or investment advice."
Hi Sreekanth,
good day!!!
Above article is an eye opener for the people like me. this is Awesome. keep posting such educative and informative articles to help people.
i have a brother who is42 years old. he is suffering from BP & diabetes. could you please advise which health policy would cover him and his whole family (wife & 3 kids). kindly advise with some good providers names with premiums (if possible) according to his illness.
Thank you
Dear Abdul,
Your brother can take an independent policy and his family (spouse + kids) can take another policy which can be a Family Floater policy.
Check out this one : http://www.starhealth.in/diabetessafe.php.
Hi,
This is WOW WOW Article. All the points are very valid especially buying house..Still i too bought the house at young age and swiped off all the deposits and paid the down payment. some how i woke up now..
Good article..Keep going..
Thank you Ashok :) Keep visiting!
Hi Sree,
You are doing a nice thing in waking the people up for investments/Insurance. I really like your comments/suggestions/posts.
But i really don't agree with points mentioned under "Buying a Property at a young age through home loan", i think this will demotivate some of youngsters who are thinking of buying a property here or there which itself i suggest is a great investment(even better than Market investments if chosen wisely).
for eg. If one is paying House rent of 20K and an emi of 40K can own him a house(obviuosly with some downpayment), there is no better alternate for this.So, i request you to please delete or rephrase that point.
Atlast, thanks for all your suggestions/posts.
Dear Prashant,
Thanks for your appreciation!
It is not the case of motivation or demotivation. It's the fact. I have also mentioned that, this decision of buying property (for self-occupation) at young age and that too with a loan, can make you to postpone the other important goals.
I have also observed that, as soon as one acquires a home loan, he/she is in a hurray to repay it. Uses bonus amounts, gifts etc.,
My view is not to discourage investing in property, but to encourage to prioritize the fin goals. If one can allocate monies to fin goals like retirement etc., and still can afford to pay Home loan EMIs then ..Go ahead!
Do share your views!
Agreed about all he points in your posts, but cant agree with your views on "Buying a Property at a young age through home loan". Sorry !!
:)
Hi,
Would like to know your opinion above NSP for retirement. Do you think it is sufficient ( of course it depends how much you are contributing and what one needs after retirement ), But is it sufficient to relay on one instrument. I believe it works in similar manner to MF.
your expertise please.
Dear Bikash,
If an individual (employee) had to compulsorily make contributions to NPS then we can't do much about it (Contribution is mandatory for all government employees).
Else, it is better to avoid. I prefer financial products which are simple, easy to understand, products which offer control/flexibility and tax efficient.
I believe NPS does not satisfy most of the said requirements.
MFs are more liquid, offer flexibility /control and are tax efficient ones.
Hi Sree,
It very usefull for me as well those who are planning for their future investments. i'm trying convince my close friends to understand the insurance is not a investment it's to safeguard our loved one but they are saying "term insuracne" not give return. anyway i will succeed soon. my friend to get understand what is insuracne soon.
Thanks for your valuable information, becuase i'm developoing my self by reading your posts about financial goals & others goals(advising them to prepare proper investment).
Thanks
Rajesh
Dear Rajesh,
Some people do get convinced if we show them the numbers (calculations). Try sharing this article with your friends - "Is Term Insurance a waste of your money?"
Thank you for your appreciation and keep visiting!.
Yes Sree,
I will show your article “Is Term Insurance a waste of your money".
Thanks
Dear Rajesh,
Please do that. You are doing a great help to your friends by educating them about the importance of TERM INSURANCE. All the best!
Very well said Shree. I think the first point is the biggest worry people. The day people learn to keep insurance and investment separate, I think they will achieve 50% of their personal finance goal.
Dear Santanu,
Thank you.People should also first start asking right questions, understand the basic features and then invest in right insurance plan ( on any given day, i would suggest term insurance only).
Insurance is sold aggressively in India and not bought. Unfortunately unwanted & bad insurance is sold aggressively.
Hi Sree,
About the point on buying homes, there is whole bunch of people doing this in India and it makes me to believe that buying a home for living is an important thing to do ! Why do you say that buying a home with loan is not the right approach... most of these young guys start the housing loan may be in their late 20's and complete the loan by late 30's , so they anyways still have 20-25 yrs left in their productive age .
Dear Krishna,
My point is - Buying a home with loan can be a right approach after allocating sufficient savings towards Retirement and other important goals. I have seen many individuals (in early 30s) who struggle to pay Home loan EMIs, manage Kid's Primary education expenses and meet rising living expenses.
Late 20's is the time to invest as much as possible in risk-oriented investment options and leave them for long term wealth creation.
Off-late, I have met few clients who lost their jobs (IT industry) but have home loan EMIs and other financial commitments too.
So, if someone takes a home loan (which is within his/her limits, not over-leveraged) and still allocate savings towards important financial goals then it is absolutely fine.
Actually there is nothing right or wrong solution here. As long as you are comfortable and do not experience any strain with your finances, its all ok.
Your Reply has a disclaimer which should have been in Point 2 of the article itself.
Dear Pradeep Sir,
I did not get you.
You mean to say that I should have mentioned in the article itself about - 'nothing wrong in buying a property with home loan as long as an individual saves and invests money for other goals too.??
Well Said .. Nice Post Sree - Keep Post such wonderful Concepts- i am a big fan too :)
Dear Srinivasa,
Thank you. Do share the post with your friends. Keep visiting!
View Comments
Hi Sreekanth,
good day!!!
Above article is an eye opener for the people like me. this is Awesome. keep posting such educative and informative articles to help people.
i have a brother who is42 years old. he is suffering from BP & diabetes. could you please advise which health policy would cover him and his whole family (wife & 3 kids). kindly advise with some good providers names with premiums (if possible) according to his illness.
Thank you
Dear Abdul,
Your brother can take an independent policy and his family (spouse + kids) can take another policy which can be a Family Floater policy.
Check out this one : http://www.starhealth.in/diabetessafe.php.
Hi,
This is WOW WOW Article. All the points are very valid especially buying house..Still i too bought the house at young age and swiped off all the deposits and paid the down payment. some how i woke up now..
Good article..Keep going..
Thank you Ashok :) Keep visiting!
Hi Sree,
You are doing a nice thing in waking the people up for investments/Insurance. I really like your comments/suggestions/posts.
But i really don't agree with points mentioned under "Buying a Property at a young age through home loan", i think this will demotivate some of youngsters who are thinking of buying a property here or there which itself i suggest is a great investment(even better than Market investments if chosen wisely).
for eg. If one is paying House rent of 20K and an emi of 40K can own him a house(obviuosly with some downpayment), there is no better alternate for this.So, i request you to please delete or rephrase that point.
Atlast, thanks for all your suggestions/posts.
Dear Prashant,
Thanks for your appreciation!
It is not the case of motivation or demotivation. It's the fact. I have also mentioned that, this decision of buying property (for self-occupation) at young age and that too with a loan, can make you to postpone the other important goals.
I have also observed that, as soon as one acquires a home loan, he/she is in a hurray to repay it. Uses bonus amounts, gifts etc.,
My view is not to discourage investing in property, but to encourage to prioritize the fin goals. If one can allocate monies to fin goals like retirement etc., and still can afford to pay Home loan EMIs then ..Go ahead!
Do share your views!
Agreed about all he points in your posts, but cant agree with your views on "Buying a Property at a young age through home loan". Sorry !!
:)
Hi,
Would like to know your opinion above NSP for retirement. Do you think it is sufficient ( of course it depends how much you are contributing and what one needs after retirement ), But is it sufficient to relay on one instrument. I believe it works in similar manner to MF.
your expertise please.
Dear Bikash,
If an individual (employee) had to compulsorily make contributions to NPS then we can't do much about it (Contribution is mandatory for all government employees).
Else, it is better to avoid. I prefer financial products which are simple, easy to understand, products which offer control/flexibility and tax efficient.
I believe NPS does not satisfy most of the said requirements.
MFs are more liquid, offer flexibility /control and are tax efficient ones.
Hi Sree,
It very usefull for me as well those who are planning for their future investments. i'm trying convince my close friends to understand the insurance is not a investment it's to safeguard our loved one but they are saying "term insuracne" not give return. anyway i will succeed soon. my friend to get understand what is insuracne soon.
Thanks for your valuable information, becuase i'm developoing my self by reading your posts about financial goals & others goals(advising them to prepare proper investment).
Thanks
Rajesh
Dear Rajesh,
Some people do get convinced if we show them the numbers (calculations). Try sharing this article with your friends - "Is Term Insurance a waste of your money?"
Thank you for your appreciation and keep visiting!.
Yes Sree,
I will show your article “Is Term Insurance a waste of your money".
Thanks
Dear Rajesh,
Please do that. You are doing a great help to your friends by educating them about the importance of TERM INSURANCE. All the best!
Very well said Shree. I think the first point is the biggest worry people. The day people learn to keep insurance and investment separate, I think they will achieve 50% of their personal finance goal.
Dear Santanu,
Thank you.People should also first start asking right questions, understand the basic features and then invest in right insurance plan ( on any given day, i would suggest term insurance only).
Insurance is sold aggressively in India and not bought. Unfortunately unwanted & bad insurance is sold aggressively.
Hi Sree,
About the point on buying homes, there is whole bunch of people doing this in India and it makes me to believe that buying a home for living is an important thing to do ! Why do you say that buying a home with loan is not the right approach... most of these young guys start the housing loan may be in their late 20's and complete the loan by late 30's , so they anyways still have 20-25 yrs left in their productive age .
Dear Krishna,
My point is - Buying a home with loan can be a right approach after allocating sufficient savings towards Retirement and other important goals. I have seen many individuals (in early 30s) who struggle to pay Home loan EMIs, manage Kid's Primary education expenses and meet rising living expenses.
Late 20's is the time to invest as much as possible in risk-oriented investment options and leave them for long term wealth creation.
Off-late, I have met few clients who lost their jobs (IT industry) but have home loan EMIs and other financial commitments too.
So, if someone takes a home loan (which is within his/her limits, not over-leveraged) and still allocate savings towards important financial goals then it is absolutely fine.
Actually there is nothing right or wrong solution here. As long as you are comfortable and do not experience any strain with your finances, its all ok.
Your Reply has a disclaimer which should have been in Point 2 of the article itself.
Dear Pradeep Sir,
I did not get you.
You mean to say that I should have mentioned in the article itself about - 'nothing wrong in buying a property with home loan as long as an individual saves and invests money for other goals too.??
Well Said .. Nice Post Sree - Keep Post such wonderful Concepts- i am a big fan too :)
Dear Srinivasa,
Thank you. Do share the post with your friends. Keep visiting!