FINANCE SPECIAL....................... Five money mistakes that will take you down

Five money mistakes that will take you down

It is about the way you manage funds and not how much you earn. Taking a hard look at your decisions may help

INSURANCE HAS TWO SIMPLE RULES: STICK TO THE MOST BASIC FORM, AND INSURE IMPORTANT ASSETS ADEQUATELY

Have you ever been frustrated with your financial situation? Or envied your colleague who despite earning as much as you seems relatively better off ? Maybe you have explained such feelings off by thinking that you don’t earn enough. The reality, however, may be that you aren’t managing your money well. Here are five oft repeated money mistakes that you will regret: Cash flow indiscipline Tracking your cash flow is as important as investing your money in the right products. “Not tracking your cash flow gives you a misplaced sense of your financial status. The biggest fallout is that people are led to believe that they are doing well going by what is in the bank. This could be untrue because what is in the bank also needs to go towards savings and investments for future goals. So, in the larger context, most people will find they are living beyond their means,” said Suresh Sadagopan, founder, Ladder7 Financial Advisories.

The ideal way of going about tracking your cash flow would be to jot down all your expenses and income so that you can work up a budget. “But if tracking expenses minutely feels cumbersome, then the simplest way is to allocate money towards an emergency fund and investments and move the rest to a spending account,” said Sadagopan. Emergency funds help in times such as a medical contingency when you may face a cash crunch. No focus on goals If you have ever bought a life insurance policy in a last minute scampering to save on tax, you have illustrated what it is to invest without any goals in sight. There is a good chance you realize by now that yo u b o u g h t an insurancecum-investment plan, which not only of f ers very little insurance, but has exorbitant surrender costs. Having clear goals not only instills the discipline to save, they also act as a window to asset allocation and to gauge your risk appetite. “When you define your goals, you also set a time horizon for them. This, in turn, helps you with asset allocation. For instance, for a short-term goal, like buying a car, you would focus more on fixed returns, whereas for longterm ones, such as retirement, you would lean towards equity,” said Sadagopan.

Say, you want to take a vacation, but your equity heavy portfolio—which you were planning to use to fund the vacation—just turned sour

due to a market dip. You will either have to cancel the trip or bankroll your trip, both of which are painful decisions. Living on loans Debt is no longer a bad word. In fact, many individuals take home loans to buy a house, but what hurts is if you overstretch or take debt for consumption instead of asset building.

“Some people are paying monthly instalments that go up to 60% of their monthly income leaving very little to save or invest elsewhere. Most people want to buy a house because real estate is seen as an asset that will always give phenomenal returns. This is a fallacy,” said Manish A Shah, co-founder and chief executive officer, BigDecisions.in. “Taking loans to fulfil needs such as buying a vehicle and other consumer durables can increase burden without any significant benefit,” said Anil Rego, chief executive officer and founder, Right Horizons. Living off credit cards, which impose high interest of 22-44% annually, or taking personal loans may boost your lifestyle in the short term, but can bring you very close to a debt trap.

Even if you have a bouquet of policies, there is a good chance that you are still underinsured. “Underinsurance is a persistent problem, even at high income levels. In fact, people with high income need more insurance. But it’s found that the amount of existing insurance cover grows at a much slower pace than income growth,” said Shah, based on a study conducted by BigDecisons.in on its users.

There are two simple rules to follow: stick to the most basic form of insurance, and adequately insure important assets such as life, health, house and vehicles. This is the minimum that you need. Taking unqualified advice Caution against unqualified, uncertified financial advice can’t be stressed enough. Engage with the whole process of taking advice: take interest in your finances, go to your adviser with all your concerns just as you would with a doctor, and stick to the products that you are able to understand. You don’t need pot loads of money; what you need is money managed well.

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