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How to become better at managing money? The best way to start is to avoid making costly mistakes that will be pulling you down and taking months or even years to recover. Many financial blunders are easy enough to avoid once you know what to watch out for.
1. Decision Paralysis
Today there are so many choices, so many financial products and so many offers. It all bundled with financial jargons. It becomes really difficult for one to understand. Also there is plenty of information available on the web, on the media and on the neighborhood. This makes decision making much more complex. All these things coupled with the fear of making a wrong financial decision lead us to the DECISION PARALYSIS. We don’t take any decision and start postponing it.
2. Ignoring Personal Finance
Most of us think that we need to work hard to make money and build wealth. I agree that you need to work hard but that is not enough. You work hard for money. How the hard earned money can be left idle? If you could focus on your personal finance, your money will start generating passive income with which you can achieve your financial goals with comparatively less effort.
3. Peer Pressure
Peer pressure plays a notorious role in taking wrong investment decision. One feels very safe when he takes the decision, which everyone around him/her has taken. But a product suitable for your colleague or your cousin need not be suitable for you.
4. Too early to plan retirement
You may be saying ‘who me? I am too young to be thinking about retirement”. It is not so! Rethink. You should have started thinking about it yesterday. Because time flies quickly. If you were smart, and planned for retirement when you are young, your retirement years will be really those “Golden years”. If not you need to compromise and you need to work longer and retire later than others.
5. Trying to make quick buck
Risk-Return Trade off Principle is a very basic and profound investment principle. Low level of risk is associated with low potential returns, whereas high level of risk is associated with high potential returns. So as to generate high returns one need to tolerate high risks. If you are comfortable only with low risks, you can expect only low returns.
No one can defy this basic principle. A scheme cannot deliver high returns with low risk. There were no such schemes in the past. There are no such schemes in the present. There will not be such schemes in the future too.
Finance company deposits which assured high interest rates have defaulted. One of the latest examples would be the ponzi scheme by Madoff.
Whenever you hear about such schemes with low risks and high returns, you understand it is an illusion. It is better to ask more questions and get it clarified, instead of making assumptions.
6. Investing in things you don’t understand
If you are choosing to invest in a scheme which you don’t understand then you will also not understand what type of returns to expect.
Do you understand the Highest NAV Guaranteed Schemes? Who gives the guarantee and what is guaranteed?
Do you understand Futures and options completely? Ultimately from where does money come if you are profiting and where does the money go if you lose?
7. Investing in what is hot
If you are investing in what is hot, then you are following the crowd. If you follow the crowd, you will get what others are getting. You will not get anything more. You need to be fearful when others are greedy and you need to be greedy when others are fearful. So don’t go by the market trend or the hot pick of the month. Think like a contrarian and follow value investing.
8. Too many cooks
If you have different agents or advisors for different investment products (insurance, mutual funds, stocks…….), then none of them will know your complete picture. Their advice will be very limited and biased towards their products only. Too many cooks spoil the soup.
How to fix these financial blunders?
v Give priority to your personal finance and spend some quality time on that. We all work for money. So we need to efficiently manage our money to secure our future.
v Set your financial goals like kid’s higher education, buying a home or retirement with more details. Work out a personalized comprehensive financial plan to achieve the goals. Then create an action plan for the year in sync with the comprehensive financial plan. Be committed to your financial plan.
v Obtain assistance from a professional financial planner who has knowledge and access to all financial products in the market. Ask the right questions and understand the plan and products before proceeding on the same.
These tips will refrain yourself from making those financial blunders and managing your money better.
The author is Ramalingam.K an MBA (Finance) and certified financial planner. He is the Director & Chief Financial Planner of holistic investment planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He Can be reached at email@example.com