Often it is stated that investing is simple but not easy. However, the problem is that people think it is the other way round and end up making some common mistakes. To keep the investing simple, it is important to understand that and one must try to avoid a few mistakes – usually avoided through common sense. Let us understand nine common mistakes a layman makes that eventually destroys their financial lives.
Buying insurance as investment In investing, it is important to know what an investment asset is and what is an amount paid to keep it for emergencies. While cash is one way to be kept for emergencies, insurance is another way. However, the issue is many buy insurance policies as investment ideas. Remember, buying insurance policies for investment purposes is a wrong idea! If you have invested your money in an insurance plan to get a return in future, it is a huge mistake!
Unable to understand the credit card mystery Another common mistake one makes is the over usage of a credit card! This habit not only affects the investment journey but also affects their own credit score if not maintained well. The basic idea of the equation of investment is as Income – saving = Expenses Or as we can put is as follows Income – Investment = Expenses However, the spending or sometimes using credit cards is higher owing to different offers being given on the credit cards. And though the amount is paid later, this eventually leads to overspending. Then there are certain people where they try to pay the minimum amount on Monthly basis – that leads to a debt trap in certain Cases. Further, very few people really enjoy the benefits like free lounge access, buy one get one movie ticket, etc.
Ignoring the idea of compounding As a purpose of mathematical formula, almost everyone has come across the formula of compounding. But knowing something and implementing it practically are two different things. So, very few people really understand its power and only a few use it while investing. This is where people do not start saving early and hence lose out on the benefits of compounding. Starting early gives a compounding advantage to investment.
Depending on stock tips and investing without proper knowledge Many investors depend on stock tips from experts in the field. We wonder why someone would give recommendations to others? We feel if someone is so good at it, the person should invest himself and generate returns. One will find a lot ‘so-called experts’ giving stock tips over different social media networks. Unfortunately, a lot of people fall in a trap of these people and invest money without any knowledge. The result is such people only lose money and then never turn up to market ever. Mostly, the small retail investors suffer such challenges and only feel that equity markets are not a good place for investment. We reiterate that those who hardly understand the equity markets, mutual funds are a better way of investing. Please remember, the social networking sites would be the last thing one should look at while starting an investment journey.
Falling prey to lifestyle inflation Everyone likes to upgrade themselves in life. But it should be a gradual move. However, with finances nowadays available at fingertips and exotic lifestyles visible on social media, such moves have been quicker than expected. Remember, such spending from the future has an additional cost to it. Moving to a larger living space, upgrading a car (regularly through future income) are some of the examples of lifestyle inflation destroying financial lives. Add to that the unnecessary spending on the regular sale happening through e-commerce sites, the unnecessary spending only rises.
Emergency budgets Very few people keep a track of their expenses. Most of them just don’t know where the money is gone. One must understand what income they have, then plan for investment amount and accordingly plan for expenses. In some cases, a few forget to make an emergency budget as well.
Not making financial plan or setting a financial goal People do not know why they need to save money because they don’t know their financial goals. In our blogs how to set financial goals, one would understand in detail why it is important to set financial goals.
No diversification Some people would invest all their money in real estate, some would invest all the money in gold, some would just keep it in the locker, some would invest all the money in the stock market. Very few people understand the right way of diversifying the investments. Diversification is also possible in mutual funds investment. There are some who avoid financial investment as they feel it is complex. However, the financial assets are the most regulated markets and very liquid ones.
Lack of patience Investment is all about being patient. Remember, longer the duration of investment better the returns would be as compounding happens. However, the problem is investors can’t wait for their wealth to grow. People join equity markets reading fancy stories of wealth creation and try to double investments in no time. With the availability of instruments like Future and Options (F&O) the leverage factors come into play and many lose huge chunks in no time. F&O are hedging instruments and few newcomers use it for speculating. They eventually get greedy and that leads to mistakes.