FIFA World Cup has raised expectations from football players like never before. The worst thing a football player can face is scoring a self-goal. It not only reduces his team’s chances of winning that match but is also a morale dampener.
Here are a few self-goals you must avoid scoring while managing your money:
Going gung-ho with one product or one asset class
Football is a team game. There are star players, but one star player cannot defeat the entire opponent team. Teamwork matters. While scoring goals is an important thing to win a match, you also need a specialist to keep your goalpost. The world of money, too, works in the similar manner. You need a mix of investments offering varying risk-reward.
Returns in the recent past influence many investors and they try to pick that asset class or that scheme which has done well. This approach generally does not help as no asset class can be the hot favourite forever. Investors end up losing money as the sentiment turns against the chosen scheme or the asset class.
Not all asset classes go up or fall together and hence it makes sense to run a diversified basket of investments. “You should not be putting all your money in one investment product or one asset class. Instead take a stock of your need and invest as per your financial goals,” says Kiran Telang, co-founder and director at Dhanayush Capital Advisors.
This could be ultimate enemy of an investor. It is akin to ninety minutes time allotted for the football match. The time does not stop and nor does inflation.
“Inflation eats into your wealth’s purchasing power in a slow but sure manner,” points out Vinayak Savanur, founder, MoneyMintingMantra, a financial planning firm. At the inflation rate of 6 percent, the price of a shirt goes up to Rs 1,060 which was available at Rs 1,000 a year ago.
Most of the household expenses are subject to inflation and can burn a hole in your pocket. In case of healthcare and education, the rate of inflation is in excess of 10 percent. If you have to pay for your daughter’s education 10 years from now, don’t just look at today’s cost of inflation. Be prepared to pay the inflation-adjusted cost of academic courses at top notch institutes.
“While drafting an investment plan to achieve long term goals such as retirement, do not forget to account for inflation. Choose investments wisely with an intention to beat inflation,” says Savanur. If you fail to beat inflation, you will accumulate inadequate funds and you will not be able to achieve your goals. All your efforts will almost go in vain.
Saying no to insurance
Purchase of insurance is linked with the need to save income tax, in most cases. However, the limit under section 80C is kept at Rs 1.5 lakh for many years and is overcrowded with many investment options. Health insurance though enjoys dedicated tax deduction, not many find it lucrative as there is not ‘returns receivable’ on it. Personal accident insurance and home insurance covers do not have tax benefits attached to it, which makes many to skip them.
Many individuals end up either ignoring insurance or choose to buy inadequate insurance. “Insurance is not about the return on investments. One should always remember that an individual is exposed to key risks – death, illness and disability. Think of these risks in the absence of adequate insurance,” says Kiran Telang. Insurance helps you fill gaps and saves your family from hardships in case the bread-winner is absent or unable to earn a living. Buy adequate term life insurance and health insurance as early as possible.
Ignoring financial goals
Have you ever seen a football match without a goalpost?
Goalposts matter. When you do not have well defined financial goals your investment plans go nowhere. Even the best possible investments fail to deliver just because the cash flows are not aligned with your financial goals. For example, you have a financial goal of paying for your vacation overseas next year and you purchase a low-cost ULIP with that money. Here the ULIP may do well but you cannot withdraw your money at the end of one year.
Some ignore their financial goals citing that these goals are far off. Typically, retirement is something a few want to talk about. But they do forget the fact that for all other financial goals they can raise a loan, but no one gives loan to survive retired life. “It is better to review your financial situation and your financial goals. Adjust the goals for inflation and start saving as per your plan,” says Savanur.
Taking too much of debt
Borrowing is no more a taboo. Rather it has become an enabler for millennials. Inability to differentiate between wants and needs pushes many to go for loans to fund their purchases. Instant loans, personal loans and credit card funding is available at a click of button and that may lead to too many loans. Being unsecured in nature these loans come at a high rate of interest. Costly loans typically make you pay a lot of money in interest. For example, you end up paying Rs 26565 in interest over 36 months while repaying a loan of Rs 1 lakh if the interest rate stands at 16 percent.
Put straight, you end up burning a lot of your income in servicing these loans. And you find it difficult to save money, which in turn ruins the investments required to achieve your financial goals. It is better to differentiate between good loans and bad loans. Avoid taking loans for consumption purpose as far as possible.
Committing these mistakes with your money is akin to scoring a self goal in a football match. Better be disciplined with your investments and achieve your financial goals.
Disclaimer: The views and investment tips expressed by investment experts are their own and not that of the website or its management. Users are advised to check with certified experts before taking any investment decisions. Moneycontrol.com