Financial independence is something a lot of people strive to achieve. Despite the high percentage of people looking to achieve this status, very few actually manage to. Often, while focusing on the next multi-bagger, top performing fund or booming real estate investment, we end up making costly mistakes that ultimately impact our family’s financial well-being. One of the best ways to avoid this is by understanding how to manage money efficiently and make it work in your favour. Let’s look at a few ways we can make wise investment decisions.
Avoid making costly mistakes
Investing in an ad-hoc manner. Bankers, insurance agents and others tend to sell you plans or funds that aren’t useful for the long run. Leaving you accumulating products serving little to no purpose.
Inadequate insurance against risk. To most, insurance is an investment tool or a tax saving option. As most people do not look at tax saving prior to January, insurance becomes an easy option to latch on to. Often, despite paying high premiums, most people end up with inadequate insurance covers. This is because people tend to mix insurance and investment decisions and tend to overlook the actual financial risk a family might face. Most liabilities, critical illness cover, disability cover, no income protection or social benefits are other parameters that go uncovered.
Over-concentration in real estate. As stereotypical as it sounds, people do tend to hoard real estate, believing it to be a great investment avenue. There’s also the belief that in addition to being insulated from market oddities, real estate also provides huge returns and tax benefits. So, many borrow to invest in real estate and end up leveraged. This is a highly dangerous strategy to adopt. Especially during real estate crashes, the illiquid nature of real estate makes it a lethal investment option.
A myopic view of tax planning. Most believe tax planning to be a tool for minimising taxes. They indulge in tricks such as showing a limited income or weak balance sheet to fool the tax man. This can be avoided by understanding that the right goal of tax planning is to maximise post-tax income.
Adopt best practices
Start with a goal in mind. When you are planning your investments, you should always begin by defining your financial goals. They will act as a base to make all your money decisions. Taking into consideration factors such as the time horizon for each goal, your risk profile, return requirements, expenses, liquidity needs, etc. can help you create the best path to meet your financial goals.
Create an emergency fund. It is essential that you set aside 4-6 months of your family’s living expenses to meet any unexpected circumstances, instead of dipping into the corpus you have planned for your other essential financial goals. If you haven’t created an emergency fund already, now is a good time to start. For those who already have an emergency fund in place, make sure you review your fund at regular intervals and top it up in case of any shortfall.
Maintain a savings budget instead of an expense budget. Review and analyze the expenses made during the year which will help in effective financial planning for the next financial year. Try to curb unnecessary expenses. Ideally, set a savings target of 15-20% of your gross annual income to deploy it productively in investments. Following this approach, you save for your future financial goals while also taking care of your current needs.
Start early, do not wait until the last minute to do your tax planning. Start saving for tax at regular intervals with the help of the right tax saving products. This will avoid any last minute ad-hoc investments in tax saving products and also help you build wealth in the long run.
Chart a plan for financial success
It’s important to understand that you can’t take one size fits all approach while planning and investing. The idea isn’t simply to invest in the scheme delivering the best returns. It’s is to create a portfolio that gives you the best shot to meet your financial goals. Keeping this in mind, your plan will be based on your current age, current asset base, expenses, and overall risk profile. Your investments will depend on your liquidity needs, financial goals, return requirements, time horizon, and risk appetite.
In the world of investing, no one is immune from making mistakes. However, to be a winner, you must make fewer costly mistakes as possible. Taking the help of a good, qualified financial planner is smart decisions. He or she will help you make the most of your investments, stop you from making mistakes and help you be certain of your financial future.