If you are making these five rookie financial mistakes, it’s time to pull up your socks and make amends before it’s too late.
#1 Living beyond your means
Living in the world of YOLO (You Only Live Once) and FOMO (Fear Of Missing Out) mindsets, it’s very easy to spend on things that we don’t require. While it’s extremely easy to live beyond your means, it can be tough to fix the damage you’ll do to yourself by living this way. As Warren Buffet rightly said, “If you buy things you don’t need, you will soon sell things you need.” Therefore, take charge of your money before it’s too late.
So, start by making a budget and make sure you stick to it. You can follow the 50:30:20 budgeting rule. This rule states that 50% of your take-home salary should be used for important expenses like food, monthly fuel, etc., 30% allocated to flexible spends, and the remaining 20% should be put into savings. You can make adjustments to the 50:30:20 rule depending on your current financial situation.
Post this, take time to list your various sources of income like your net monthly salary, rental income, etc. Then, write down all your monthly expenses (fuel, grocery, supermarket, etc.). Now, as per the rule, assign a certain amount of money to cater to each of your expenses.
#2 Delaying your savings
Every time you delay savings, even by a year, it adversely affects your corpus in the long run. So, how do you save money?
Of course, a Savings Account makes perfect sense. But just keeping it in a Savings Account is not a smart decision. The better approach is to combine your savings with investment planning to make sure that your money doesn’t just sit idle, but also grows. Depending on your financial goals and risk-taking ability, you can invest in a host of investment options including Fixed Deposits, Mutual Funds, Recurring Deposits, etc.
#3 Ignoring insurance
While expecting the best is a good approach to life, preparing for the worst is equally important. We live in a delusion that nothing bad can happen to us. But, emergencies often come unannounced and can jeopardise the financial well-being of your loved ones if you aren’t prepared.
This is when a good life insurance plan comes to the rescue. It provides a financial cushion for your family if something were to happen to you in the future. The rule of thumb says that one should ideally have a life cover, which is at least 10 times of their annual income. The amount of life insurance cover you need will also depend on various factors like your income, life expectancy, and liabilities, etc.
#4 Not keeping an emergency fund
Let’s face it: nobody wants to think or talk about bad things like losing your job, a medical emergency, etc. But life doesn’t always go as expected. An emergency fund can protect you from any unexpected expense you may bump into, whether big or small.
An ideal emergency fund should consist of at least three to six months of your living expenses. You can park this amount in a liquid fund or a Savings account and you’re sorted.
#5 Playing it safe
When we are young, we often make a mistake of parking all our money in safe instruments and not taking advantage of money-market instruments like equities that can reap high returns in the long run.
With rising inflation, it’s difficult to build a sizeable corpus with bank deposits alone. You’ll need the help of market-linked instruments like equity Mutual Funds, stocks, etc. that tend to give better returns. Take advantage of your age and ability to take a risk and diversify your investments to maximise returns, especially when you are younger.
This article was originally published on bankbazaar.com and re-published with permission.