Indians are among the best in the world in most occupations and are highly respected in the international community. This is one of the reasons why India has achieved amazing growth over the past 20 years. In addition to reducing costs, the expertise and experience in most professional fields are also superior to or comparable to those in developed countries. But they make some common money mistakes.
However, in terms of financial management, most people have made several mistakes.
We have listed the seven common money mistakes people often make.
1. Excessive expenditure and loans
As more and more people continue to borrow, banking is booming in India. At the same time, as more and more people continue to default on their loans, recovery institutions are also booming. Although India has one of the highest savings rates compared to Western countries, it is indeed not the same for the next generation. Although most people’s income today are high and stable (higher than previous generations’ incomes), their expenditures are equally high. One of the main reasons is that they have a lot of expenses and loans. Nowadays, there are too many temptations, all you have to do is call a bank or financial institution to get a personal loan. In the process of keeping up with the next-generation iPad, gadgets or cars, many young people end up spending a lot of their income on EMI. This tops the list of our common money mistakes people often make.
In addition to EMI, insurance premiums and personal expenses quickly swallow up income. Therefore, sometimes I will be surprised to find that people with a monthly salary of seven figures or more find it difficult to save. This is because they have other major expenses, such as penthouses, bungalows, yachts, etc. Because these are high-priced items, even for wealthy families with high incomes, paying down debt and maintaining these debts often result in liquidity crunch.
Some people, especially business owners and professionals, borrow because their accountants advise them to do so from a tax planning perspective. This is mainly to take advantage of depreciation and interest deductions. However, when considering such temporary decisions, the family’s liquidity, current needs and future requirements are not fully considered, which often exposes the family to serious cash flow problems.
2. Excessive concentration on real estate
Although this sounds like a stereotype, most people like real estate as if there is no tomorrow. One of the biggest reasons is our love for real estate, which many people think is a huge investment. In addition, there are a lot of black money in the system, and many people have a lot of cash income, which can easily buffer real estate investment. In addition, they believe that real estate can not only avoid market turmoil, but also bring excellent returns and tax incentives. As a result, they borrow money to invest in real estate and were leveraged (which means they assumed debt).
Most Indians have completely forgotten the 1995 Indian real estate crash and the quiet period of the following years, until 2003 to 2004, but these memories have reappeared in recent years. Over-concentration on real estate is a very dangerous strategy, because during the collapse of real estate, this may prove fatal, especially because real estate is an illiquid investment. We see many families with rich assets and poor liquidity. This comes 2nd in our list of common money mistakes people often make.
3. Insufficient insurance for death, disability, professional liability and loss of income
Most people buy life insurance as an investment and invest a lot of money in life insurance policies. This is because people attach great importance to life insurance as an excellent tax-saving tool, and many people are obsessed with tax-saving tools. In addition to the fact that most people are busy with daily activities, they often wake up between January and March each year to do something tax-saving. The answer is simple. “Let’s buy a life insurance policy. Anyway, my friends, bankers or family members have been chasing me to buy.” Because of this temporary purchase, most people end up with too many unrelated policies. The best part is that most people pay high premiums, but insurance is low.
Despite the high premiums paid, most people have insufficient insurance in life insurance. If they die prematurely, they will not be able to assess the actual financial risks their families will face, and most debt is not included.
At the same time, their critical illness protection is negligible or absent, the disability protection is negligible, there is no income security, and there are no social security benefits.
This area must be properly addressed to ensure the maintenance of lifestyle, creation of wealth and protection of wealth.
4. Investing in an ad-hoc manner, due to time constraints
Most people ’s investment portfolio may look like this: real estate investment exceeds 50-60%, debt (PPF, insurance policies, time deposits, bonds and post office) exceeds 30-40%, and cash accounts for 5-10% (saving account, Short-term time deposits and cash), gold (mainly bought as jewelry) and very negligible equity.
Most people only have these investments: real estate, PPF, EPF (for employed people), gold and insurance policies.
Considering that people are busy every day, sometimes they don’t even have time to spend time with their families. There is hardly any precious time available for the entire family, and in most cases, financial planning will retreat to the second line. At this time people will eventually make decision based on the recommendations of different agents or groups (chartered accountants, colleagues, banks, real estate) Businesses, family members, insurance agents and financial advisers. There is no coordination between all the suggestions sought in these different groups of people, so the actions are extremely arbitrary in nature. Therefore, if you see the financial situation of most people (even the most experienced ones), you will clearly see that this is a hodgepodge of products accumulated over time.
5. Lack of goals-formulation and planning
“I always go with the flow. I have not set any plans,” said the famous Bollywood actress. It’s easy to say, but if you don’t set goals and plans, there is no meaning in life. Yes, life will go according to plan, sometimes you need to make correct adjustments, but life will definitely happen, such as death, retirement (everyone will get older, and will stop working or slow down at some point), pay taxes.
When people plan vacations for a few months or discuss with their family about the next big car to buy, I am sometimes shocked, but when it comes to financial planning and goal setting, they say: “I don’t have time now. Or I will do it later”
6. No written financial plan
Accordion to us, this is one of the common money mistakes people often make, almost everyone. Most people do not understand the concepts of financial goal setting, cash flow and debt management, insurance plans, asset allocation, maximizing after-tax income, retirement and property plans (wills, powers of attorney, and trusts). The reason is simple: in personal finance there is no formal education in financial planning.
Because of this limited knowledge, they will eventually make costly mistakes. Their understanding of the importance of financial planning is passive rather than positive. Only when an event occurs they realize the necessity of financial planning or the overall view of the financial situation.
7. Myopia of tax planning
Most people generally believe that the purpose of tax planning is to minimize taxes and often do things that are not in their best interests. They obtained several loans in an unplanned way, bought real estate and life insurance, and indulged in the means of deceiving taxpayers, such as showing limited income or weak balance sheets, the only purpose is not to pay taxes. However, the correct goal of tax planning is to maximize after-tax income.
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