Five grave financial mistakes Indians make

Ranjit PunjaCreditMantriThere are enough workplace and household demands on the average person without the pressure of having to be a wizard at personal financial planning as well! However, it is a good idea to be aware of some of the mistakes that many Indians commit due to ignorance or inertia when it comes to their personal finances. Here are the some of the more common errors to steer clear of when managing your finances. Not maintaining an emergency fundIt is vital to have a cash buffer at all times to tide you over any unforeseen financial crisis like losing your job or paying for emergency medical expenses. Caught unprepared, people are forced to take a personal loan which can be very expensive with interest rates going up to 30%. You need to consciously set aside a specific amount regularly to create a cash fund that is equivalent to 6-7 months of income. You should make sure that contributing to this fund is non-negotiable and that you do not dip into it for any other non-vital expenses. Neglecting insurance/retirement planningMost young people think insurance and retirement planning are mid-career financial goals, to be considered only once they have a larger income. Some don’t even consider insurance and retirement plans as being important aspects of financial planning. Buying insurance is a relatively cheap way of buying not only financial security for your loved ones, but also buying priceless peace of mind.Of those who realize the need to buy insurance, many fail to realize that insurance becomes significantly more expensive once you turn 40 and it is cheapest to buy a policy when you are young and healthy. There are similar advantages to investing in a retirement fund early on in your life. Retirement might seem a long way away when there are so many more immediate pressing expenses to take care of. It seems like one item that can be dealt with later in life. However, you need to plan now for the day when you no longer have a steady and sizeable monthly income.  Delaying investments until later in lifeThere are many expenses to be taken care of when you are in the early stages of your career and many find it difficult to spare any money for investments. “Essential’ spending on holidays or entertainment in your 20s is replaced by spending on children’s education and EMIs in your 30s and beyond. Warren Buffet has a mantra for people who think they do not earn enough to save. According to him, rather than thinking that Income-Expenses=Savings, you should view it as Income-Savings = Expenses. Savings should be the priority, not expenses! Saving from the early years of your professional life gives you greater growth than investing a larger amount for a smaller number of years later in life. Despite the small size of your saving, the advantage of compounding coupled with the increased number of years will lead to a sizeable amount when you need it. The longer you wait to start building your investment portfolio, the smaller your final corpus will be.Relying on conservative investmentsFixed deposits and small savings schemes are still the most beloved form of investment for millions of Indians. While they are safe investment instruments, they are not particularly lucrative and might merely keep up with inflation, leaving you at the same place financially as you were when you first opened the FD. Investing in equities can gain you an income that grows faster than inflation. You need to change the investment approach of your 30s (in perhaps FDs) to match your greater income and greater needs of your 40s and beyond.Not building a credit profileIt is conventional wisdom in India that it is never a good idea to take a loan and that being debt-free is the ideal situation to be in. Many millions pull themselves back from taking a loan because of this attitude. In the process, they unwittingly fail to build themselves a credit record. When they do finally apply for a loan – say a housing loan or auto loan – they face the very real possibility of being turned down simply because lenders have no record of their past repayment behaviour and have no way of evaluating their credit worthiness. It is important for your long term loan-eligibility to build up a credit portfolio that demonstrates that you are a responsible borrower. Taking loans and credit cards and making timely repayments helps you build a solid credit profile. This will enable you to qualify for loans easily as well as make you eligible for attractive terms and conditions. It doesn’t require financial wizardry to avoid the mistakes above. A little bit of commitment, self-discipline and awareness goes a long way in enabling you to enjoy a lifetime of financial security.