Financial planning helps to determine your short-term and long-term financial goals and keeps a balance between them. It is a great tool for managing income, building assets and also allows a person to plan his or her post-retirement life. Effective financial planning revolves around building wealth both gradually and consistently. Financial planning consists of setting goals (both long term & short term), savings, investing and securing assets among others. However, there are a few common financial planning mistakes that most people make with their money.
Below are a few mistakes that you should avoid:
When it comes to financial planning, people usually ignore two things- the current time value of money and how money loses its value over the time. While we are focusing on increasing income with time, it is also essential to pay attention to the rise in expenses and drop in the value of money because of overall annual increase in prices of common goods and services behind the same.
Being over-confident about the “safe” investments which include Bank FDs, savings accounts, and government bonds will directly lead your portfolio providing returns at a rate lower than the inflation rate. Ignore inflation rate and you will notice that your savings gradually erode away while your monetary plans go haywire.
Keep in mind all long-term expenses while planning for retirement
If you are planning or investing for your retirement, then the most important thing that you should consider is the accurate evaluation and estimation of health care and associated long-term expenses that will take place because of the growing age.
There is no doubt in saying that the healthcare cost will surely increase with the time but saving for such expenses in an accurate way is very important for effective retirement planning. A failure in the same will result in compromising with savings and finances during post-retirement life where the income could be zero.
Not saving enough
For an effective financial planning, the initial years of your investment must be completely focused on savings. At that time, you should make sure that the rate of savings should be higher than the rate of returns. An effective investment plan will take place once you start saving as much as you can in initial years. Just keep in mind that the earlier you start saving, the higher you will get returns.
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When it comes to savings, it’s not about controlling daily expenditures, but it also consists the amount that you pay towards taxes. Search for an effective plan through which you are able to maximize your savings during the initial years of your investment life. If you come under the higher income slabs then the tax savings with the help of adequate investment options is important.
Investing too aggressively or too conservatively
It is advisable for all the people who come under the age group of 20-40 years that they should invest aggressively. It is important to invest using a strong logic by keeping the risk factor in mind. You should maintain a balance between your investment and associated risk otherwise you would end up with losing too much and that will demotivate you from investing more in the future.
Being too conservative and aggressive while investing has its own downsides. If you are too much conservative, then it will lead to losing the value of your money. Securing cash in your savings account will also bring down the value over a period of time. It is advisable to invest in different investment options that carry the risk of a different level. With the same, you are allowing your money to grow at a consistent and an increasing rate.
Thinking financial planning is all about investing
It is a common misconception that most people have in their mind that financial planning is all about investing your money in every possible manner. It is important to note that investing is just a part of your financial planning that only focuses on meeting long-term goals.
For an effective and long-term financial plan, it is advisable to focus more on day-to-day budgeting, suitable insurance cover and smart tax decisions to make an effective and suitable long-term financial plan.
Taking insurance as a tax saving tool
Buying any form of insurance is not about investment. Investing in the insurance policy with the only motive of saving tax is completely waste until you actually understand the importance of insurance in daily life.
In today’s world, where the medical inflation rate is very high, investing in a health insurance is a must. Life insurance is also important if you have dependents. Think about the benefits and features of the insurance first before taking it as a tax saving tool.
No matter how old or young you are, financial planning is something that you may need at every crucial stage of life. It is good if you are planning at a young age as it will help you in having safety cover and also assist in wealth creation. So, start planning today.The writer is CEO of PolicyX.com