7 Common Financial Mistakes made by Indians

India is one among the fastest developing economies across the world but the financial literacy amongst a common man is still limited and thus to some extent the general public makes investment decisions based on herd mentality resulting in some glaringly obvious financial mistakes. Six of these mistakes are:

1. Not maintaining an emergency fund.
2. Not saving enough.
3. Not investing.
4. High concentration in Gold investment.
5. Relying on conservative investments.
6. Neglecting insurance planning.
7. Neglecting retirement planning.
8. Let’s understand and steer clear of these common financial errors while managing our finances.

Not maintaining an emergency fund

It is very important to have a cash buffer to tide us over any unforeseen financial requirements, such as paying for emergency medical expenses or automotive repairs. If caught unprepared, one may be forced to take personal loans. These loans are very expensive with interest rates as high as 30% annually.

It is advised to set aside a fixed amount regularly To help in creating a cash fund that is equal to at least 6-7 months of income. Contributing to this fund should be non-negotiable as would be dipping into the fund for any non-vital expenses.

Not saving enough

Indians, especially the older generation are known to save a significant percentage of their income- more than any other country in the world, but that number has been steadily declining. The savings rate in India stood at 36% in 2008 which dropped to 27% in 2019. Saving is important to secure our future. With the availability of a multitude of goods and services at our fingertips, it is not uncommon for millennials to eat, spend and purchase beyond their earning and saving potential. As a first step, spend a Sunday morning looking into your savings over the past 6 months and reviewing your monthly expenses by category. Identify a future goal- do you want to buy a car or a house in the next 2-5 years? Think about where you can curtail and consolidate expenses and how much more you can save.

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Not investing

Stashing away a portion of their earnings for a goal is a financial ritual for many Indians, though it has been steadily declining for a few years now. They believe that savings help in fulfilling future objectives like owning property, children’s education, and so on. Thanks to inflation, it has become rather impractical to think that saved money will support these objectives completely, regardless of the amount saved.

Money lying in banks in fixed deposits or savings accounts yield between 4%-7% interest. A more viable option is investing your savings in places that can yield greater returns. Investing from the early years of life gives greater growth than investing a larger sum of money for lesser years later in life.

The longer you wait to begin building an investment portfolio, the smaller the final corpus will be. Young Indians may find investments terrifying, as they aren’t sure about the returns and benefits. But it’s important to understand that having a large sum of money for making investments is not always necessary.

High concentration in Gold investment

Indians consider physical gold as a very valuable asset. Some consider it a liquid investment since it can be readily exchanged for cash at their local jewelry store. There is a myth about gold being the safest and most secure form of investing money. Even if there is any validity to that statement, in the long-run, it can yield comparatively low returns.

Gold is undoubtedly a way to protect one against inflation but it is not certain to be the best option for investment. Historically, Gold has been treated as a type of insurance for investors, especially during emergencies. These circumstances may have arisen due to geopolitical upheavals resulting in sovereign default and higher counterparty credit risk associated with listed companies as opposed to gold which one could always hold onto. Heavy usage of gold in India during the wedding reason has also been a large contributor to people investing in gold. Gold is not a poor investment option but it has to be done in moderation while taking into account the overall risk-reward for the individual investor along with their willingness and ability to take risk to maximise the investment returns.

Relying on conservative investments

Small savings schemes and fixed deposits are still the most beloved types of investment for almost all Indians. Even though they are safe investment instruments, they are not very lucrative and may merely keep up with inflation, leaving you in the same financial position as before when you first opened the FD.

Investing in other asset classes such as equities, bonds, futures, options etc. may help you gain an income that can grow faster than inflation. The truth is, you will have to change your investment approach in the 30s to match greater income and needs in your 40s and beyond.

A common mistake among many investors is to invest all their money in an asset class familiar to them. This deprives them from high risk adjusted returns which they could have earned by diversifying our investments.

Neglecting insurance planning

While we cannot predict the future, we can always be as prepared as possible. Investing in insurance, be it health, life, house, etc provides a wealth of security and protection when during a crisis. Monthly/yearly payments are a small price to pay when you consider the actual financial impact during an emergency.

COVID-19 has shown us all the fragility of one’s life and the potential impact it can have on the family left behind and hence it is extremely important to take insurance very seriously, be it life- insurance on the home-loan which covers the principal loan amount in the event of the primary loan applicant passing away or a yearly health insurance which ensures that one doesn’t have to dip into their savings in case of any medical emergency.

Neglecting retirement planning

Depending on your age, you may want to maintain your current lifestyle after retirement or perhaps even improve it. You might want to have the flexibility of retiring at 50 instead of 65. Retirement may seem to be far off, but it is extremely important to save up for it. Not saving for retirement is a very common mistake around the world. Retirement is most often misinterpreted as pension, but accumulating a retirement corpus is different and an addition to a monthly cash flow that a pension would provide. . Availing insurance coverage that can be renewed lifelong could also be a great retirement tool. Most people prefer not to opt for regular annuity plans, so creating their own retirement corpus is extremely important. It is vital because of inflation, especially medical and lifestyle inflation which affects the retired phase of life.

Conclusion

You do not require any sort of financial wizardry to make your money work for you. Awareness, self-discipline, and commitment goes a long way in ensuring you enjoy a lifetime of financial security.