Money is a powerful and important part of life. Without it your life will certainly become difficult. Despite this fact, people make mistakes in handling their money & in the way they treat their money. Do you & your money have a healthy relationship?
Let’s find out if you are making any of the following mistakes:
- Being ignorant about it
It is important to understand your current financial situation. You should know clearly about what you own and what you owe. Maintain a journal of expenses and incomes, loans given and loans taken. Lack of knowledge might cost you dearly.
- Hoarding it
Apart from the fact that you can lose money you’ve stashed in your home from theft or natural disasters your money, because it is sitting idle, is also losing its value on a regular basis due to increasing levels of inflation. Even a simple savings bank account can provide a bit of cushion from inflation although the earnings may be minuscule. You should invest your money properly in vehicles like mutual funds and make your money work for you.
- Comparing your wealth with others
It is all too easy to fall in this trap – wondering about how much more money your friend or neighbour has & taking all kinds of bad decisions based on that comparison. Your circumstances can never ever be similar to anyone else. It’s possible that your neighbour was planning and investing carefully for months before buying that new large screen TV. His purchase did not cost him dearly & his finances are in order. But you don’t know that – all you see is a shiny new black slab on his wall & you want one for yourself the next day.
- Spending it without a plan
Not knowing where your money is going can leave you chasing after it. Be in control – calculate your monthly expenses and then create a budget. Define categories and allot a percentage of your income to those categories like food, utilities, luxuries, investments & so on. Stick to this plan. Very soon you will learn some harsh lessons – like you’re spending money on stuff you don’t really need and could’ve done better by investing that amount.
- Not having a financial safety net
Leaving things to chance is never a good idea. It is important to have a safety net in the form of an emergency fund. Set aside a portion of your income every month for this emergency fund. It will go a long way in tough times.
- Overpaying on insurance premiums
It is a common misconception that just because you’ve taken life insurance policies you don’t have to invest elsewhere. Insurance =/= Investment. Some life insurance companies offer money-back plans which many believe to be investments itself. They are not. Do not waste your money on these expensive premiums – just buy a simple low-premium term insurance plan and invest the rest properly.
- Managing it poorly
Proper money management is an important skill to learn. It doesn’t make sense to leave all your money liquid – like in a savings bank account. Savings accounts offer instant accessibility but offer very poor growth. Neither will putting all your money in illiquid assets work for you – like investing everything in a mutual fund with a lock-in period. You’ll be screwed when you need cash! You have to manage it properly by finding the correct mix – put a portion of your income in a savings bank account for instant accessibility or for use in contingencies, invest some in equity & debt funds for great growth albeit taking a hit on the instant accessibility part, invest some in tax saving instruments & so on.
- Having no plans for your money
Not having proper long-term financial plans in place for fulfilling all your dreams means that you will never be completely financially independent. For gaining financial freedom and achieving those goals a good financial plan is a must. Create long-term goals like buying a luxury car and then create an investment plan to fulfill that goal. Similarly create short-term plans like buying the new iPad & invest accordingly. Striking the right balance is important – it would be foolish to buy the new iPad out of your entire monthly paycheck and having to take a loan to pay utility bills.
- Not paying in cash
Spending cash physically creates a psychological effect. When you literally take money out of your wallet and hand it over to the cashier you truly feel the worth of your purchase. Whereas when you pay with a card or any cashless service all you see are numbers – subconsciously you don’t think of it as money. Paying with a card is less painful and you’re likely to spend more than necessary. Try the envelope system – every month withdraw the money you’ve budgeted for monthly expenses as cash. Find some envelopes and label them – groceries, movie outings and so on. Place the cash in these envelopes according to your budget and then spend only this cash. You’ll be surprised by how aware you become of your spending.
It is said that money is an awful master but a good servant. Take control, riches await.