Indians probably have a lot of cultural tendencies towards saving. While this is beneficial to a certain degree and offers security in times of need, it has most negative aspects associated with it too. People tend to save but lack proper focus on wealth development, which eventually creates long-term damage. Just putting money into a savings account would not alone suffice to accomplish ultimate financial goals. Instead, future financial wellbeing can be highly enhanced through wise investing and planning.
Below are five common financial mistakes that many Indian families make.
Let’s see how to avoid them:
1. Not Maintaining an Emergency Fund
An emergency fund acts as an economic pillow under unexpected situations such as job loss, medical emergency conditions, or sudden financial obligations. Without this, individuals can be forced to take individual loans with high claims, which can give more stress to finance.
Many people believe that job stability or family support is sufficient, but an emergency is unexpected. Medical expenses, car repair and home maintenance may occur unexpectedly, leading to dependence on credit cards or loans from family members. This creates stress and financial instability.
How to Avoid this Mistake:
- Set aside a specific amount regularly to build an emergency fund.
- Aim for savings equivalent to 6–7 months of income.
- Keep this fund in an easily accessible account. You may keep it in a high-interest savings account or a liquid mutual fund.
- Avoid using this fund for non-essential expenses like vacations or shopping.
2. Neglecting Insurance and Retirement Planning
Many young professionals assume that insurance and retirement planning can wait until later in their careers. But, postponing these financial decisions can result in increased expenses and inadequate coverage in the future.
Insurance:
Life and health insurance are often poorly considered since most people think that whatever coverage is provided by the employer is good enough. However, this coverage might not be adequate for major medical unforeseen expenses or even the protection of dependents from unexpected disasters.
Term life insurance offers your family financial security at a reasonable cost, though it is lower if you are younger and healthier.
To prevent expensive premiums and waiting periods, pick up health insurance early.
Retirement Plans:
Most people prioritize their short-term spending over their long-term savings. Because they believe they can start saving for retirement later. However, delaying this could significantly diminish their final retirement corpus.
The retirement plan should be started as soon as one enters the workforce to earn. Even if small amounts are put away every month into EPF, PPF, NPS, or mutual funds, these little amounts may compound into something substantial over the years.
With no retirement fund, individuals may face the dilemma of financial stress after retirement, depending upon their children or the government pension.
How to Avoid this Mistake:
- Buy insurance early to lock in lower premiums.
- Choose a comprehensive health plan that covers major medical expenses.
- Start investing in retirement plans early and increase contributions over time.
- Consider pension plans and diversified investment options for post-retirement security.
3. Delaying Investments
One of the biggest financial mistakes is delaying investments. Many young professionals focus on immediate expenses like rent and lifestyle, putting off investments. However, starting early allows you to take advantage of compound interest.
Investment is necessary to create money and financial security. Many people believe that they require a large amount to start investing, but small, ordinary investments can get a significant return over time.
What Happens If Someone Delays:
- If someone invests ₹5,000 per month at 25 and earns an average 12% return over 30 years will result in a total of ₹1.75 crores.
- Starting at 35, a person will only accumulate around ₹55 lakhs with the same investing amount.
How to avoid this mistake:
- Start investing as soon as you earn, even if it’s a small amount.
- Opt for SIPs in mutual funds, stocks, or index funds.
- Prioritize long-term financial growth over discretionary expenses like frequent vacations or luxury purchases.
- Take calculated risks based on your financial goals and risk appetite.
4. Relying on Conservative Investments
Fixed deposits (FD) and small savings schemes are popular with Indian investors because of their safety. However, these alternatives often provide returns that are barely accompanied by inflation and limit money growth.
Many families believe that FDs, PPFs, and recurring deposits are safe investments. But these instruments may not offer enough growth to achieve long-term financial goals. This is because inflation reduces purchasing power, and the money in FDs may not grow enough to maintain their value.
Alternative Investment Options:
- Equity Mutual Funds: Offer higher returns compared to FDs in the long term.
- ULIPs (Unit Linked Insurance Plans): Combine insurance with investment growth.
- Real Estate: Can generate passive income through rentals and capital appreciation.
- Gold and Digital Gold: A hedge against inflation, but should not be the primary investment.
How to avoid this mistake:
- Diversify your investments with mutual funds, stocks, and ULIPs.
- Assess your risk tolerance and financial goals before choosing investment options.
- Regularly review and adjust your investment strategy to optimize returns.
5. Not Building a Credit Profile
A strong credit profile is required to get loans with favorable conditions. Without the story of responsible lending and timely repayment, individuals may meet difficulties in getting financial assistance when needed.
Many people avoid using credit cards to stay debt free, but responsible use can actually help create a good credit history. A strong credit score (750+) ensures that you qualify for low interest on the loan and get better financial agreements.
How to avoid this mistake:
- Use credit cards responsibly and pay bills on time.
- Avoid excessive debt and maintain a healthy credit utilization ratio.
- Monitor your credit score regularly and take steps to improve it if necessary.
- Take small loans and repay them on time to build a strong credit history.
Conclusion
Expert knowledge is not necessary to get a commitment to economic well-being, self -discipline and consciousness is essential.
Avoiding financial mistakes and making informed decisions helps build a solid financial future. Financial literacy and an active plan are essential today. Start quickly, make smart decisions, and make sure your financial strategies match your life goals. The key to financial success is continuity and discipline – start for a better tomorrow.