Most individuals struggle managing their finances correctly. This has got to do something with their spending and lifestyle habits. Managing finances gets a lot easier if you get the basics right. In the article, we have covered the following financial mistake that you shouldn’t do:
1.Spending More Than What You Earn
Spending more than what you earn will put you in a situation where you start hating your job as you are not earning enough to cover your expenses. It is for this reason that individuals are always advised to limit their expenses to less than what they earn. This will help in the long run as you would instil financial discipline. No matter how much you make, your expenses should never exceed your income. If it exceeds, then you have no choice but to avail credit. If by any chance you are unable to handle credit responsibly, then you will end up in a debt trap, which is hard to come out of.
2.Not Following the 50:30:20 Rule
Every individual should have a budget plan in hand. Ideally, the budget plan should be made on a month-on-month basis, and you must ensure that you stick to it. Every earning individual should follow the budgeting rule of 50:30:20. That is, you must allocate 50% of your income towards needs (groceries, EMI/rent, utilities, and so on), 30% towards wants (gym membership, outings, and so on), and save the rest 20%. Once you have saved enough to build an emergency corpus to fall back on at times of crisis, you can start investing 20% of your income in suitable schemes.
3.Not Planning Your Taxes
Tax planning should necessarily be a crucial part of your finances. If not, you will end up paying more taxes than you actually should. There are several deductions and exemptions available under the Income Tax Act, 1961, and it is only wise to make use of these. It will help if you plan your taxes in the first of the financial year as you are never sure of what is going to happen in the nick of time.
4.Availing Debt Unnecessarily
Availing debt is never a good idea. It would be best if you never availed debt to cover your daily expenses, your income must take care of these. If you are not able to cover your day-to-day costs with your income, then it shows that your budget plan is not right and you should work on this at the earliest and eliminate unnecessary expenses. Availing debt means that you are going to pay back more than the amount you have availed. Also, if you are missing payments, your credit score will take a hit and you will not be able to get loans when you need them the most. Hence, it is good to keep yourself away from debt.
5.Having Too Many Credit Cards
Credit cards are considered high-class debt as not all can handle it. Credit cards are apt only for those that can handle them responsibly. Credit cards may offer great discounts and deals, but if you are not making payments on time, those offers and discounts will not make senses as you will be paying interest, which will be a considerable sum. Also, having too many credit cards will make it hard to keep track of debt, and you may miss your payments. Hence, it would help if you don’t go behind credit cards for offers.
6.Not Checking Credit Score
If you have availed credit, then you should check your credit score regularly. The credit report may be erroneous at times, and if you don’t notice it, your credit score will take a beating. This may hinder your chances of getting credit later. Hence, to be on the safe side, you should regularly check your credit report and raise disputes in case of wrongly entered details.
7.Not Making Investments
It would help if you always made investments with the view of having a better future. Some part of your income must be invested in avenues that suit your risk profile. When in the initial years of your professional life, you should invest aggressively and lessen the risk you are going to take as you near retirement.
8.Not Factoring Inflation
When you make investments, you should necessarily consider inflation. It is something that will eat into your investments. Inflation reduces the worth of your investment over time. To beat inflation, you need to invest in those options that are capable of offering inflation-beating returns. Investing in mutual funds and stock markets is the best way to beat inflation. If you have not factored inflation in your investments, then your investments may not be fulfilling your goals.
9.Not Planning For Retirement
Retirement planning is essential for every earning individual. Why depend on others when you can be self-sufficient. Several schemes allow individuals to set aside a sum periodically for their retirement. Investing in mutual funds, NPS, PPF, and opting for VPF is the best way to plan your retirement. The fact that you set aside a nominal sum every month, you will not feel the pinch.
10.Not Reviewing Your Financial Plan
You must essentially review your financial plan at least once a year. This will help in accommodating changes that may help in achieving your goals faster. If you are unable to assess the same, then you may seek the help of a financial advisor. A change in income, expenses, and economic factors make it necessary to review your financial plan.
Handling your finances becomes seamless and effortless by getting the basics right. The key to a great financial plan is to keep your expenses much lower than income.