Five Common Financial Mistakes You Should Avoid
Everyone makes mistakes. However, how we learn from them is what matters the most. In light of this, there are a few common mistakes you could make that could harm your financial health and hinder your journey toward financial freedom. The following are some financial mistakes which could have a long-term impact on your financial health.
1. Sharing critical financial details with others
You should not disclose your online banking details, passwords, ATM pin, debit/credit card details, etc., to anyone. Keep these instruments and access details in a secure place. It is also important to keep information about your investments, e-wallet, UPI, etc., safe and secret. Laxity here could result in misuse and significant losses.
2. Ignoring inflation while investing
Investing in your financial goals is one way to create wealth. It is said to be a negative real return rate when inflation is higher than your investment return. For example, suppose the prevailing bank fixed deposit rate is 5.20% p.a., and the inflation rate is 5.50%. It means your wealth is eroding by a 0.30% rate as inflation is higher than the return you earn on an investment. Now, it’s not uncommon for investors to ignore inflation and focus only on the nominal return on investment. But if you want to create wealth in the long-term, you must focus on earning a higher real return on investment.
3. Not having an adequate contingency fund
A contingency fund is a corpus that can be used to meet essential expenses during a financial emergency — the Covid-19 pandemic being the latest example. Countless people lost their jobs or saw a significant fall in business income during the pandemic-necessitated lockdowns last year. However, the going was less difficult for those who had contingency savings in place compared to those who had an inadequate emergency fund.
4. Not repaying credit card dues on time
As such, you must never breach your budget while using your credit card and ensure you clear the total outstanding within the interest-free period during every billing cycle. You can consider giving your bank a standing instruction to auto-debit your card dues to avoid missing payment deadlines. Also, paying only the minimum amount due would keep your card account active but you’ll still have to bear the avoidable interest charges on the balance dues and you might not be eligible for interest-free periods until you clear the dues in full. On the contrary, timely repaying your credit card dues in full would not just help you save on interest charges and penalties but would also contribute towards improving your credit score.
5. Ignoring insurance purchases
The purchase of insurance is deprioritized by many people as an unnecessary expense. Even so, adequate coverage is necessary to protect your assets (and your dependents’) from the financial impact of unanticipated incidents. For example, if you or any of your family members require hospitalisation, the medical bills could easily ruin your family’s finances in the absence of a health insurance policy.