Financial planning is nothing but a very important routine of day-to-day life. Just like we wake up every morning, sip a cup of tea, have our breakfast, and prepare our mind for the day. The problem is that all of us realise the importance of financial planning but only a few of us make it a part of our daily routine.
Here are 5 very common mistakes that young financial planners make, which can affect the returns and savings planned at the time of retirement:
1. Starting late
The wise people say it is better late than never. Yes indeed. However, in case of financial planning starting late though it means a start at last, it will still affect the long-term savings and investment plan. For instance, if you start financial planning at 35 when you started earning from 30, you will have to invest almost double of what you would have invested monthly if you were to start at 30 itself, to make up for the 5 years of lack of planning. Else, you end up losing the compounding value benefit for the 5-year period.
2. Knowing everything, doing nothing
Generally, when you start earning at a young age, there are tendencies of getting excited, losing focus on long-term goals, inability to make long-term objectives, and inability to quantify them. You know the importance of financial planning for securing your family’s future. However, for some reason or the other financial planning tends to take a back seat. Please note that if you started earning early in your life, you can’t have a bigger boon than that from an investment point of view. You can be well ahead of time in terms of planning your retirement, home, car, children’s education and marriage, and all those wonderful vacation. All it takes is starting at the right time. Once you have a financial plan in place, you will know your goals in terms of returns from investment, your achievements so far, and how much more distance you need to cover.
3. Afraid of investing
Many people are afraid of investing. They can’t make up their mind on where to invest without any risk. There is risk at every step of life. Even when we cross a road, we are at risk of an accident. Does that stop us from crossing the road? It doesn’t. We try to exercise caution while we cross looking to the left and right and complete the task. This act of exercising caution reduces the risk of an accident by a huge percentage. The purport here is that you can’t run away from risk. The best way to tackle it is to understand the risk and learning to manage it the way that suits you best. Once you know your risk appetite, you will be able to manage your funds in a much more efficient manner.
4. Leaving your savings idle in your bank account is the safest bet
Leaving your hard-earned money idle in a back account without even contemplating to invest it diversified sources is a big mistake. Bank interest rates hover in the range of 4-4.5% and the inflation rate is around 6%. Thus, what you end up thinking as protection of capital is in actuality, losing your principal sum. You need to remember the basic premise of any investment plan is to beat the inflation rate to give you effective returns in the long run. Only then will you be able to ensure that your principal amount does not reduce. Therefore, you must keep your eyes open to good options such as SIP, equity, corporate fixed deposits, IPO, OFS, and NFS. In fact, you will get much more returns than the principal amount you invested only if you plan to beat the inflation rate. This will help you maintain your lifestyle very easily and effectively. Higher the risk, higher the returns and thus, it is important to perform a ‘risk vs. returns’ analysis before you invest your hard-earned money.
5. Not balancing and reviewing your portfolio
As a young investor, despite your risk appetite being higher it is very important for you to understand the importance of balancing and reviewing your portfolio regularly. This will help you in doing away with non-performing investments and in realigning your portfolio to get you the best results from your savings.
Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.