When it comes to financial literacy, most of us are still a novice as it isn’t taught at schools and colleges. I’ve known people who have no clue where their money goes and have no proper budgeting in place. There are lots of places online to learn how one can manage finances better. If you are looking for some common mistakes and looking to avoid them, keep reading on. I really hope no one commits these 6 mistakes as it’ll ruin their career and may end up causing irreparable consequences.
Beware of little expenses; a small leak will sink a great ship.Benjamin Franklin
Make sure to give this book a read: Rich Dad Poor Dad: What the Rich Teach Their Kids About Money That the Poor and Middle Class Do Not! It’s the famous book called “Rich Dad Poor Dad by Robert Kiyosaki”. It helps you enhance your perspective on how you view things and learn to differentiate assets and liabilities.
What are the common financial mistakes that people commit?
So here’s a list of common financial mistakes that are destroying your lives, according to me:
Not setting up a budget:
The first thing many people think of, as soon as they get their paycheque, is what to spend it on. This mindset will make you rely heavily on salary and in odd chances that if you are not paid, you will land up in big trouble. Consider setting up a budget. Every month, set aside your savings first and leave the rest for expenses to come. It shouldn’t be the other way around. For long term wealth creation, this is something really important.
Not setting up an emergency fund:
This is another big common financial mistake that I’ve seen people do irrespective of their age. An emergency fund is a must for every salaried employee. It will act as a cushion in case you are fired or want to take some time off from work. Without this, you will end up in a debt trap. Consider saving up and setting aside 6 months of your salary for any emergency.
Getting into a debt:
Most of the people fall into this trap and end up paying hefty interest. EMIs aren’t friendly, they are meant to push someone into buying depreciating assets like cars, houses. And to top it off, these things are usually ones you don’t even need in the first place. You are much better off saving for the things you need and getting it later. This will teach you to appreciate and value it even more. The process of delayed gratification will go a long way in achieving this. That is if you want to buy something, wait for 3 days, think it over and then decide if it’s still needed.
Not having an insurance plan:
Why do you need an insurance plan when the company you work for already has one? The plans offered by the company do not offer enough coverage and will only cover you in most cases unless you opt to include your family. A term insurance plan is certainly a must, especially if you’re the only person earning in your family. This will act as a replacement for your monthly salary, in case something bad happens to you. Not only is it better than other endowment plans, it usually comes with less premium. Also, insurance products mustn’t be considered as investments.
Starting too late with their savings and Investments:
The secret behind retiring early is to start saving early. Compounding is considered as the 8th wonder of the world. People generally wait until they are in the late 20s or even 30s to start investing. By doing this, they’re missing out on a lot and will make a considerable difference in the corpus that they will receive later. Start saving as soon as you receive your first salary and keep maintaining financial discipline. Doing this will give you stability.
And the most common financial mistake of them all is what they call “Keeping up the Joneses” mentality. People have a strong tendency to spend more if they have more. It is the mentality that one has to keep up with their relatives’ and friends’ spending habits. While it’s necessary sometimes, it’s more often not, uncalled for. Spending lavishly on marriages, buying a house on a huge loan, getting an expensive gadget can take the dream of early retirement far away. Thus one has to be mindful of the things he spends on and be able to classify assets and liabilities.
It doesn’t matter how much you are earning right now, because that will only go up. All that matters is how you spend and save your money. Preventing these common financial mistakes and being mindful of the difference between assets and liabilities will be the differentiating factor of you managing money or money managing you!
There are a lot of books available on finance, but some of those really deserve a mention such as The intelligent investor, The Automatic millionaire and How to retire happy, wild and free. These books are written by fantastic authors. Living live frugally doesn’t mean you will definitely get rich but that’s just one of the many qualities required. Give these books a read to know more about investing and getting early retirement from the author’s perspective.
Hope this post helps you avoid common financial mistakes. Let me know your opinions on this post, I will give my thoughts on it. Until then, hang on to Life!