5 top financial mistakes to stay away from
To err is human. We make mistakes all the time,
whether it is our professional life or personal life. These mistakes help us to
make the right decisions.
We also make a number of financial mistakes as
well. Here are the top five financial mistakes that you should avoid when
investing.
1. Spending before investing
There is a popular notion that we should save the
money that is left. The money left with us after we take away our expenses.
But, if this was the case, then most of us would have never have enough money
to save or invest. According to a rule of thumb, one should earmark at least
20% of the income for saving or investing. If you are not able to invest 20% of
your income, then start at 5%. Once you are comfortable or you are able to
invest more, then you can gradually increase the allocation to 20% or 30%.
Automating your investments is a simple and easy
way that will help you do to invest a certain proportion every month. Investing
in mutual funds through systematic investment plan is one such way to automate
your investments and build wealth over the long term.
2. Waiting for the right time to invest
It is seen that most individuals believe that they
don’t earn enough money to start investing. They keep postponing their
investments to a later date. Waiting for the right time to invest is another
financial mistake.
Studies have shown that how much money we can
invest, depends on how rich we ‘feel’. The focus word is ‘feel’ not how much
money we actually have. Hence, you may earn Rs. 1 lakh a month and still
not feel rich enough to invest. On the other hand, person B with a monthly
income of Rs.20,000 might be investing Rs. 5,000 to Rs.10,000 per month.
Hence, there is no right time to start investing.
When you invest in mutual funds through systematic investment plan(SIP), now is
the right time to start investing. Moreover, you need a large amount of money
to invest through SIP. You can start a SIP with Rs.5,00 per month.
3. Not investing in financial goals
Goals keep us motivated and make us work harder to
achieve it. Investing without financial goals is like a ship without its
rudder. The ship will easily sway along the direction of the wind or sea
currents without having a sense of purpose or direction. Investing is no
different. The financial goals can be early retirement, having a sizeable
retirement corpus, buying a house or a car etc. It varies from person to
person. Financial goals will make us focussed. As a result, we are less likely
to take a wrong decision based on short-term news.
4. Constantly jumping to the best performing fund
We all work hard to earn money. Hence, it is
logical that we will look for the best funds and the top performing funds to
invest. However, it is important to choose the right fund than the best fund.
It may not be easy for individual investors to understand the reason behind its
spur in performance.
Looking for the top-performing funds to invest is a
common mistake that many people do. Shifting from one fund to another is also
an expensive affair, as depending on the fund, exit load and taxation may be
applicable.
Instead of focusing on the one-year or one-month
performance, look at its long-term performance, consistency, how well the fund
has performed against the benchmark and peers.
Also, concentrate on financial goals rather than
chasing the highest performing funds.
5.Redeeming or stopping your investment due to
short term volatility
Redeeming or stopping SIP because of short-term
volatility are the two most common mistakes that investors make. In the case of
equity investment, the ups and downs in the market is a common feature. Hence,
you have to take it as a part-and-parcel of your investing life. Sometimes the
best thing to do is to do nothing. Instead of being bogged down by the short
term volatilities, focus on your goals.
These were the top five financial mistakes that
people make when investing. Talk to a financial advisor if you have any
queries.
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