Summary of this article
There are some financial mistakes that can haunt you for years to come. These are the types of errors that can drain your bank accounts, derail your long-term savings plans, and leave you in a lurch when you need money the most.
However, by knowing what they are, you can avoid them altogether.
if you pay your credit card dues in full and within the stipulated time, you’ll not only avoid interest and penalty charges but also help your credit score.
Your financial journey isn’t shaped just by how much money you make and save – it’s equally influenced by the financial mistakes you don’t make. All of us would have made some mistake with money some time or the other and learnt from it. But there are some financial mistakes that can haunt you for years to come.
These are the types of errors that can drain your bank accounts, derail your long-term savings plans, and leave you in a lurch when you need money the most. The best part is that by knowing what they are, you can avoid them altogether. Here are five financial moves that can cost you big time and how to avoid them.
Focusing On Investment Returns Without Considering Inflation
Creating wealth is one of the prime goals when investing towards your financial goals. However, if the inflation rate is greater than what you earn on your investments, your investment is considered to have a negative real return rate. Say, for instance, the current bank fixed deposit rate is 6 per cent per annum, and inflation is running at 6.50 per cent. Your wealth is decreasing at a rate of 0.50 per cent because inflation is greater than your investment earning.
Many investors tend to overlook inflation and pay attention only to the return on investment being quoted for an investment product. If your goal is long-term wealth creation, ensure you focus on earning positive real returns on your investments.
Sharing Critical Financial Information With Others
Bank rules prohibit even your spouse from using your debit or credit card to withdraw money from ATMs or shops? According to a media report, some years back, a bank had denied reimbursement to a lady customer citing that an ATM card is personal to the owner and cannot be transferred to anyone. The lady had attempted to use her debit card in an ATM which failed due to a technical error.
The moral of the story is that you should never share your online banking credentials, passwords, ATM pin, debit/credit card information, etc. with anybody. You should also store the physical instruments and access credentials safely. Likewise, you should keep the information about your investments, e-wallet, Unified Payments Interface (UPI), among others, confidential from everyone. Failure to do so can lead to misuse and could make you lose a lot of money.
Not Maintaining Sufficient Contingency Corpus
A contingency corpus is something that could take care of your essential expenses if you find yourself in a financial emergency. The Covid-19 pandemic, for instance, was the latest crisis that resulted in millions of Indians losing their jobs or facing a steep decline in business revenues. If you were one of the fortunate few to have built contingency corpus over the years, the Covid years weren’t certainly easy, but easier compared to others who did not have an adequate emergency fund.
The moral is that you cannot afford not to have a corpus that could cover your day-to-day expenses and debt repayments for at least six months should you lose your regular income. You can build such a corpus by dedicating a portion of your savings at the beginning of the month and cutting down on lifestyle expenditures, if needed. Also, if you had to dip into your contingency savings last year and are back to earning regularly now, make sure you replenish your emergency fund as soon as possible.
Not Clearing Credit Card Dues On Time
Credit cards can actually serve as excellent financial tools that help you make the most of your card spends and thereby increase your savings – if used wisely. But many tend to misuse their credit cards and end up not clearing their dues. Credit card holders enjoy an interest-free period of up to 55 days after which interest is charged on the dues. So, your dues grow exponentially in no time and can quickly become too large to manage, while also hurting your credit score.
Hence you should never overspend while making purchases with your credit card and also make it a point to pay the complete outstanding amount before the billing cycle ends to take advantage of the interest-free period. You may even set up a standing instruction with your bank to auto-debit your card dues so you don’t miss the payment deadline. Further, by paying only the minimum amount due, you will keep your card account from being classified as inactive. However, you will still be charged interest on the remaining dues (which is needless!) and you also may not get interest-free periods until you pay your dues in full. On the other hand, if you pay your credit card dues in full and within the stipulated time, you will not only avoid interest and penalty charges but also help your credit score.
Skipping On Insurance Purchases
Many skip buying insurance as they feel it’s an unnecessary expense. However, having the right insurance cover is essential to protect your (and your family’s) finances against unforeseen eventualities. Take medical emergencies for instance. If you or your family need hospitalisation, your family’s finances could be wiped out if you don’t have a health insurance plan.
Likewise, if the sole earning member of a family is disabled in an accident or passes away suddenly, the family member’s financial security comes under severe threat if that person isn’t insured. Therefore, if you haven’t purchased an adequate health insurance plan (worth at least Rs 5 lakh ideally) and a sufficient life insurance policy, do so soon not only to secure your family’s financial future, but also your own financial goals. You will also be able to save taxes by making these insurance purchases, under the old tax regime.
