These six bad money habits will hurt you in the long run.
Money habits in terms of saving, spending and investing go a long way in determining what your financial future looks like. We often tend to ignore our future financial needs with bad money habits becoming a part of our lifestyle. This may lead to costly debt, lower loan eligibility and insufficient networth. While spending beyond your means and not saving enough are common bad money habits, here are others that can hinder your financial well-being in the long run:
Waiting for ‘more money’ to invest: Most early earners or those with lower savings rate delay their investments till they receive a higher paycheck or accumulate a sizeable corpus in their bank account. However, postponing investments comes with a significant opportunity cost due to the power of compounding. With compounding, even the returns generated from your lower investment amounts leads to an exponentially larger corpus in the long run.
What to do: Build the habit of investing in mutual funds through SIPs for your financial goals. With SIPs, you can invest in mutual funds for as little as Rs 500 per month. Apart from ensuring regular investment at periodic intervals, it will also help average out your cost of investments in case of market dips and corrections.
Making late payments or paying minimum due amount: Making late payments of credit card dues not only cost money in terms of late payment fee and finance charges, but they also lower your credit score and future loan eligibility. While the late payment fee usually ranges from Rs 100 to Rs 750, finance charges may range anywhere from 14 percent to 47 percent per annum. Additionally, the interest-free period on your fresh credit card transactions stands withdrawn till the repayment of your entire dues. Also remember that if you are paying the minimum due amount, you are only spared from paying late payment penalty — finance charges and withdrawal of interest-free period would still apply.
What to do: Avoid paying just the minimum amount due and convert your outstanding bill amount into EMIs if you are unable to pay the entire amount by the due date. Set up standing instructions in your bank account to enable automatic payment of your credit card dues by the due date. And if you are facing problems paying off your credit card bill, try and curb your spending through it.
Maxing your credit card: Credit utilisation ratio is one of the major parameters used in calculating your credit score. This ratio states the proportion of your total credit card outstanding against the total credit limit available on all your cards. As lenders usually consider credit utilisation ratio of over 30–40 percent as a sign of credit hungriness, credit bureaus too reduce your credit score on breaching this level.
What to do: Try to contain your credit card spends within 30–40 percent of the approved credit limit. If you are frequently breaching this limit, request your existing card issuer to increase your credit limit or avail of additional credit cards.
Not fetching credit report regularly: Most customers lack awareness regarding the importance of a credit report and the need for its regular monitoring. Credit reports can contain wrong information due to clerical errors made by the lender or by the bureaus themselves. Such misinformation can reduce your credit score and thereby hurt your future loan eligibility. Similarly, fraudulent credit accounts or applications in your name can also bring down your credit score. You would not want to detect such errors when you need a loan urgently. Periodic checking of your credit reports is the only way to detect such errors. Tracking your credit score is also an excellent way to build it through responsible credit behavior.
What to do: Fetch your credit reports regularly, at least once a quarter. Alternatively, visit online lending marketplaces to fetch your credit reports along with free monthly updates for absolutely free.
Investing without identifying financial goals: Financial goals refer to the future needs or targets expressed in terms of money. Identifying financial goals helps you to plan your investments according to their required investment amount, time horizon and your own risk appetite. Moreover, fixing financial goals also helps in achieving better asset allocation as investments can then be made based on the time horizon of those goals and your risk appetite.
What to do: Start by identifying your big-ticket expenditures, such as buying a home, car or creating your child’s education corpus, and the time horizon left to achieve them. Take the help of online SIP calculators to determine the monthly investments required for each of your goals and set monthly SIPs of those amounts to ensure regular investments. All salaried professionals need to plan for their retirement as early as possible.
Redeeming your EPF corpus: Most employees tend to redeem their EPF balance on switching their jobs. However, doing so can increase your tax liability as EPF withdrawals of Rs 30,000 and above made before the completion of five years of continuous employment attracts 10 percent TDS. Moreover, being a sovereign-guaranteed instrument with tax-free returns, EPF is an excellent fixed-income investment to reduce market risk to your post-retirement corpus.
What to do: Instead of withdrawing EPF balance on switching jobs, transfer your old EPF balance to your new employer. This would help you build a substantial risk-free retirement corpus with the power of compounding working for you.(The writer is CEO & Co-founder of Paisabazaar.com)