Common Mistakes Due to Lack of Financial Awareness
A majority of us keep making mistakes unknowingly which destroys our financial lives. Why is it important to be financially aware? Some of these 9 common mistakes are:
.webp "Why is it important to be financially aware")
1.No Clarity Between Asset and Liability:
Anything that loses its value with time or presents a future obligation is a liability whereas assets provide economic benefits. Thus, buying a car is never an asset but a liability as it depreciates in value consumes fuel, and has regular maintenance costs associated with it. Sometimes people opt for a car loan and pay interest for it too.
2. Taking Insurance Policies for Investment:
Nearly 9 out of 10 people make this mistake. They take insurance policies because they want to invest money. Educate yourself on term plans, endowment plans, money back, etc. like for instance life insurance options for a term plan.
3. Credit Card Trap:
How many of us only pay the minimum amount due on credit card payments? If you are the one who does that then you are trapped in a credit card mystery. Credit cards charge a hefty rate of 2% or more per month which comes out to nearly 24% per annum. At times people take cards that attract an annual fee because they offer benefits like 1+1 movie tickets, free lounge access, etc. Do you avail of these benefits enough to justify that annual fee? If not, why not switch to free cards without any annual fee.
4. Power of Compounding:
Albert Einstein said, “Power of compounding is the eighth wonder of the world.” How many of us actually understand the importance of this statement? The best example of this compounding can be seen in the case of PF for salaried people. If you don’t pull out your PF money at any point in time, then you will see that after 20-25 years of work-life the amount credited in this account as interest will be more than what you would be contributing. The sad part is that we keep cashing out our PF account whenever we change jobs, this is especially true in the case of private-sector employees.
5. Knowing Only About Conventional Investment Instruments:
Most of us are ignorant about the various investment instruments available and their tax implications. We keep on investing in conventional modes like bank FDs which give us a pathetic rate of return and that too is taxable. We are happy earning 6–7% annual interest which is just enough to beat inflation in most cases. There is also a good percentage of people who don’t even do that and sit on cash.
Their wealth keeps eroding every year because of inflation. The inflation rate was around 5.24% in 2018. It means the value of Rs 100 becomes less than Rs 95 if you were keeping it in cash.
6. We Keep Dillydallying:
Never procrastinate investment decisions. You need to start Investing from today because if you keep saying “I will invest from tomorrow,” understand that tomorrow never comes. Similarly, if you are in a private-sector job start planning for your retirement from the day you start earning as there is no pension after retirement in the private sector. The sooner you start the better it is to accumulate more corpus with less investment.
7. Not Taking Medical Insurance:
Medical emergencies can happen to anyone and it can eat up all your life savings just like that. A single accident is enough to shatter all financial dreams and plans. Healthcare cost is rising in India and to manage it without insurance is idiotic. You should always have medical insurance in place to take care of medical emergencies.
8. Keeping Family Members Ignorant About Money Matters:
This is a big blunder that most of us make regularly. Forget about kids, even your spouse is not aware of money matters. In most Indian families discussing topics related to money is considered taboo even with immediate family members. It is a big topic and I will cover it in my next post.
9. Buying Left and Right as Things are on Discount:
This is an era of e-commerce and all big players whether it's Amazon or Flipkart come out with “Great Indian Sale”, “The Big Billion Days” etc. to lure you with huge discounts. These sales are a good opportunity to buy things that you actually need and not for just buying unnecessary stuff because it is on sale. Moreover, if you watch carefully you will find that such sales are on every other month on virtual platforms these days.
Give a thought if any of the above-discussed points applies to you or someone you know because it indicates a lack of awareness about personal financial management. It’s important to manage the money you earned correctly to make it work wonders for you.