5 mistakes in financial planning you must avoid as a young investor

Always remember that financial planning is very crucial part of your day-to-day life. In simple words, just as we wake up every day, sip our morning cup of tea, enjoy our breakfast, and prepare for another day of work, we need to include financial planning as part of our daily routine. The good thing is that all of us know this or are at least aware of this. However, just a few of us realise the significance of financial planning and make it a crucial part of our day-to-day routine.

 

 

 

 

Let’s have a look at the 5 mistakes that young financial planners must avoid to ensure that the returns and retirement savings are not affected:

 

Commencing late

The earlier you start the financial planning process the better for you. Please remember that your money compounds over time. Thus, more time means higher effect of compounding. Starting your financial planning at a later age will affect your plans for long-term savings and investment, since you have a lower time horizon for your money to grow. Let’s say you start financial planning at 30 years when you started earning from 25 itself. In that case, you will have to make double the investment on monthly basis of what you could have invested had you started the process at 25 itself. Only then you will be able to make up for the lack of planning for the 5 years. If you don’t make this adjustment, you will likely lose benefit of compounding for that 5-year period between the age of 25 and 30.

 

Know everything, do nothing    

Most people who start financial planning at a young age tend to get excited and often lose focus on their long-term goals. Thus, this could affect the accomplishment of long-term objectives. What happens generally is that young investors are aware of the importance of financial planning, but somehow end up missing the bus on executing their plans. Your family’s future lies in your hands. Hence, don’t let financial planning take a back seat. Ensure that you have clear goals in place and quantify them, which makes them measurable over a time horizon. By starting to earn at a young age, you have been blessed with the biggest boon to make your retirement and life’s dreams come true. However, this requires planning ahead of time and making the right investment choices. Thus, knowing everything and doing nothing is a sheer waste of your valuable earnings and investment potential as a young investor.

 

Fear of investing

Many young investors fear investing their money, since they are afraid of losing it. Therefore, they always stay confused and can’t make up their minds on investment choices. It is crucial for you to understand that risk exists at every step of your life. Despite being highly careful and attentive, you will be at risk while crossing the road. Does this stop you from being cautious and well-planned while crossing? The answer is no. Then why don’t you apply the same theory to investing. Prepare a detailed financial plan, research your investment options, monitor your investments, and reap the good results. By spreading your money across asset classes, you mitigate the risks of investment. The best ways to manage investment risk is by understanding your own risk appetite. This will help you plan your debt-equity asset allocation based on your risk propensity.

 

Letting your money lie idle in your savings bank

Please note that the bank interest rates range from 4-4.5% while the inflation rate is about 6%. Thus, returns on your bank savings account will not be enough to beat growing inflation in the long run. In your attempt to protect your capital, you are risking losing your principal sum itself in the long run. You must always look at diversified investment options that include MF SIP, equity, corporate fixed deposits, IPO, OFS, and NFS. This will ensure that you spread your risks effectively as well. Moreover, this will be the only way you can maintain your lifestyle effectively and plan towards a peaceful retired life. Thus, perform a ‘risk vs. returns’ analysis before you plan your investment strategy.

 

Not re-balancing and reviewing your investment portfolio

Re-balancing and reviewing your investment portfolio at regular intervals is crucial as an investor. This will help you largely in getting rid of all your non-performing investments while assisting you in realigning your investment portfolio to provide you with the best possible results from your savings.

To know more about financial planning and investment, write us at investmentz@acm.co.in

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