Managing your finances and doing it correctly takes a lot of practice and knowhow. During your financial journey, you might make mistakes, knowingly or unknowingly.
To err is human. While this is true, when it comes to your finances, making mistakes can prove costly. As such, you need to identify and rectify the financial mistakes that you might be making.
Dusshera is round the corner and it is an auspicious day that celebrates the victory of good over evil. So, this Dusshera let good financial habits triumph over bad ones. Here are five financial mistakes that you should forgo this Dusshera –
1. Ignoring an emergency fund
An emergency fund is a must. After all, unforeseen troubles and emergencies might strike anytime! And when they do, they involve considerable financial expenses.
If you have been ignoring the creation of an emergency fund, dispel your ignorance. Create a financial provision for those rainy days. One of the ways to do so is through a term insurance policy.
A term insurance policy is a protection-oriented plan that covers mortality risks and provides financial assistance to your nominee in your absence. By investing in a term life insurance plan, you can create a secured financial corpus for your family when you are not around. This corpus can help your family pay for their lifestyle expenses and also meet their financial goals.
Pro tip: Choose a high sum assured under the term life insurance plan so that your family is adequately compensated. You can use a term insurance calculator to find the optimal coverage. The term insurance calculator finds the ideal coverage based on your financial details and is a useful tool.
2. Spending more, saving less
How many of you face the problem of your income running low before the month end?
Overspending or having high expenses is not good. You need to save for your goals too. As such, you need to cut down on unnecessary expenses and step up your investments. This would help you save up a suitable corpus for your goals without suffering a financial strain later on in life.
Pro Tip: Start the financial planning process. Make a monthly budget and list down your sources of income and expected expenses. This would give you an idea on your major expenses and you would be able to weed out unnecessary spending.
3. Inefficient debt management
If you have a debt, a credit card or a loan, you need to manage it effectively so that you incur the minimum interest expenses. Inefficient debt management means not prioritizing your debts. This leads to inflated interest outgo and your credit score might also suffer.
To manage your debts effectively, pay off high-interest loans first. Common examples include your credit card bills and any personal loans that you might have availed of. On the other hand, if you have a home loan, maintain it. It gives tax benefits and helps you reduce your tax liability.
Pro tip: Do not default on your loan EMIs or credit cards. Pay your credit card bills in full to avoid high interest expenses.
4. Skewed financial portfolio
A skewed portfolio means overdependence on one or two investment plans for generating returns. This is not prudent. A diversified portfolio is essential to minimize investment risks and to enhance the return potential. As such, allocate your savings to different asset classes. Have a mix of equity, debt, gold, etc. for a diversified portfolio. You can even diversify each asset class for better returns. For instance, when investing in equity, you can opt for stocks, equity shares, equity derivatives, equity funds in ULIPs, etc.
Pro tip: Diversify your portfolio with a mix of equity and debt. Gold can also help in hedging against inflation and volatility. You can invest in the different funds available under ULIPs that help in portfolio diversification in a single investment plan.
5. No tax planning
Tax planning means managing your tax liability in such a way that it is reduced. The Income Tax Act, 1961, allows various avenues that help you save taxes. You can choose tax-saving investment avenues to save and plan your taxes too. For instance, under Section 80C, you can save taxes by investing in ULIPs, five-year fixed deposits, other life insurance policies, etc. Similarly, Section 80D helps you reduce your tax liability by investing in health insurance plans.
This would not only help in increasing your disposable income, it would also help you create a tax-efficient corpus.
Pro tip: Take the help of a tax consultant if needed but make sure you maximize the available tax-saving options at your disposal.
The bottom line
This Dusshera, do something that actually brings about good changes in your finances and life. Burn down these financial mistakes and choose the right strategies to manage your money. Once you take control and engage in effective financial planning, financial independence would not be a long way off.
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