There are a few common financial mistakes that could have a long-term impact on your financial health.
Truth be told, we all commit mistakes. However, how we learn from them is what matters the most. That being said, there are a few common mistakes that could have a long-term impact on your financial health and could even put an obstacle in your journey to achieve financial freedom.
In other words, these are mistakes that you simply cannot afford to make! Prior knowledge about these mistakes could be a great help in avoiding them. I’ve listed down a few such mistakes in a bid to protect your finances from their adverse impacts.
1. Sharing critical financial details with others
Do you know that according to banking rules, even spouses are not allowed to use each other’s debit or credit cards to withdraw money at ATMs or for shopping? According to media reports, a few years ago, a bank had refused to refund money to a woman customer stating that an ATM card is non-transferrable. The woman’s husband had used her debit card at an ATM but the transaction didn’t go through due to a technical glitch.
The point being, you must not share your online banking details, passwords, ATM pin, debit/credit card details, etc., with anyone. You must also keep these instruments and access details in a safe place. Similarly, you should also keep data related to your investments, e-wallet, UPI, etc., safe and secret from everybody. Any laxity in this could lead to misuse and significant losses.
2. Ignoring inflation while investing
Wealth creation is one of the key objectives when you invest in your financial goals. However, when the inflation rate is higher than the return you earn on your investment, it is said to be a negative real return rate. For example, suppose the prevailing bank fixed deposit rate is 5.20% p.a., and the inflation rate is 5.50%. It means your wealth is eroding by a 0.30% rate as inflation is higher than the return you earn on an investment. Now, it’s not uncommon for investors to ignore inflation and focus only on the nominal return on investment. But if you want to create wealth in the long-term, you must focus on earning a higher real return on investment.
3. Not having an adequate contingency fund
A contingency fund is a corpus that can be used to meet essential expenses during a financial emergency — the Covid-19 pandemic being the latest example. Countless people lost their jobs or saw a significant fall in business income during the pandemic-necessitated lockdowns last year. However, the going was less difficult for those who had contingency savings in place compared to those who had an inadequate emergency fund.
The point being, building a corpus that could fund your day-to-day expenses and debt obligations for at least six months in the absence of a regular income is something you just cannot ignore. You can do so by allocating required savings at the beginning of the month and cutting down on discretionary expenses if required. Furthermore, if you used your emergency fund last year and now your income is back on track, you must take steps to replenish the fund at the earliest.
4. Not repaying credit card dues on time
Credit cards could be great tools to boost your savings by maximising the value of your card spends – provided you use them smartly and responsibly. However, many still make the mistake of using their credit card recklessly and not repaying their dues on time. Credit card users get an interest-free period of usually up to 55 days beyond which interest charges are imposed. These dues therefore snowball in no time and could soon become unmanageable, also damaging your credit score along the way.
As such, you must never breach your budget while using your credit card and ensure you clear the total outstanding within the interest-free period during every billing cycle. You can consider giving your bank a standing instruction to auto-debit your card dues to avoid missing payment deadlines. Also, paying only the minimum amount due would keep your card account active but you’ll still have to bear the avoidable interest charges on the balance dues and you might not be eligible for interest-free periods until you clear the dues in full. On the contrary, timely repaying your credit card dues in full would not just help you save on interest charges and penalties but would also contribute towards improving your credit score.
5. Ignoring insurance purchases
Many people deprioritise insurance purchases thinking they are unnecessary expenses. However, the fact is adequate insurance protection is an absolute necessity to safeguard your (and your dependents’) finances from the impact of unanticipated emergencies. For example, if you or any of your family members require hospitalisation, the medical bills could easily ruin your family’s finances in the absence of a health insurance policy.
Similarly, in case the breadwinner of a family meets an accident or suddenly loses his/her life, the dependents’ financial future could be at great risk if the breadwinner doesn’t have adequate life insurance protection. As such, you must not delay purchasing a comprehensive medical insurance plan (ideally worth at least Rs 5 lakh) and an adequate life insurance policy if you haven’t done so already not just to protect your dependents’ finances but also to safeguard your own financial goals. These insurance purchases would also help you save taxes. So, don’t ignore necessary insurance purchases because those are perhaps the best thing you could do with your money.
(The writer is CEO, BankBazaar.com)