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Common Financial Mistakes to Avoid

As we enter the new financial year 2023-24, it's time to introspect about how we have fared so far in terms of our financial goals and the direction we are moving in. Also, we need to remind ourselves of the financial mistakes we did in the past so as not to repeat them. The mistakes can seem deceptively small in themselves, especially, when things are hunk-dory but their potential to completely derail our financial lives can’t be overlooked. For example, not having an emergency corpus because we fall in a higher-income bracket can seem okay when things are smooth. But, if there is one lesson that Covid-19 and the ensuing lockdown have driven home, it’s that adverse situations such as job loss or medical emergencies can arise anytime.  Hence, it is important to avoid such mistakes so that they don’t mess with our long-term financial goals.

Mentioned below are some of the common financial mistakes that we knowingly or unknowingly commit.

1. Not Having a Rainy Day Fund

In essence, an emergency fund is the money set aside to handle unforeseen situations in life. If you lose your work, you may use the money to cover a few months of expenses without getting into debt. You might even use it to pay for an unforeseen expense. Having a safety net in the form of an emergency fund not only adds to financial stability but also leads to peace of mind. The thumb rule says one should have an emergency corpus which is equal to 6 months’ salary although the figure may change as per individual circumstances.

2. Not Having Adequate Insurance Cover

It should go without saying that the death of a family's breadwinner would have a far more detrimental effect on the family's financial future than a recession, a salary cut, or higher loan interest rates. However, few people are aware of the significance of having enough risk coverage as the majority of people view insurance as a non-returning investment. Also, there is always a probability of unexpectedly becoming sick and requiring expensive treatments. Health insurance ensures that undergoing long term treatment does not put the financial position of the family in danger.

A sound financial plan should include health as well as a Term Plan to not only be prepared for medical emergencies but also safeguard the future of our financial dependents.

3. Putting off Tax Planning until the Last Moment 

Doing a task in a hurry often increases the probability of making mistakes. This applies to investing for tax-saving too. Often, we wait till the last month to invest for tax-saving. The pressure of the approaching deadline can not only lead to confusion but may also turn out to be unfruitful monetarily. On the other hand, starting early gives us enough time to research carefully before investing.

4. Not Considering Inflation and Taxes While Selecting Investment Options

More often than not, we tend to get carried away by the short-term performance of an asset class and make investment decisions based on it. In doing so, we forget to consider the fact that both inflation and taxes continuously nibble at the returns. Hence, the right thing to do is to look for inflation-adjusted after-tax returns. That way, we can get a better idea about the return-generating potential of an investment option.

5. Trying to Time the Market

It simply means jumping in and out of the market based on its short-term performance. It should not seem exaggerated to say that predicting the market direction with 100% accuracy is impossible. Needless to say, false predictions or rumors can cost us dearly in the form of mark-to-market losses apart from missing periods of exceptional returns. Hence, the right way is to invest in a disciplined manner while staying focused on long-term financial goals and not letting short-term volatility distract us. As the adage goes, “It's not about timing the market, but about time in the market”. 

It's likely that we've made at least one of these mistakes while handling our finances, and that's acceptable. The secret is to recognize and understand financial mistakes so that we can try to stop them from happening again in the future.