Many times, we focus on things to do to improve our long term financial health. In this post, let’s discuss some of the financial habits that are likely to affect your long term financial health adversely. These habits can affect you in many ways. You may not be able to invest enough. You may not invest in the right instruments. You may leave a gap in your insurance portfolio which may leave you/your family vulnerable. Eventually, it may even affect your physical and mental health.
1. Borrowing More Than You Can Afford To
You don’t mind taking personal loans for vacation abroad. You have purchased gadgets many times on credit card EMIs. Home loan EMI is a big strain. Major portion of your salary goes towards repaying debt. You are under almost constant cash flow pressure. These are sign that you have borrowed more than you can repay. Sometimes, your hand is forced, say in case of a medical emergency. However, sometimes, it is due to your lack of financial discipline and irresponsible behaviour. Unless you get this habit under control, you are likely to find yourself in a debt trap soon. Too much debt will also compromise your ability to invest for your financial goals. Living with too much cash flow pressure for too long may also affect your health.
2. Not Paying Bills on Time
If you are late on your electricity bills or mobile phone bills, you might get away with a minor penalty. By the way, this is no reason for you to be late on your utility payments. However, if you are late on your credit cards bills or loan instalments, you are not just looking at a heavy penalty. Your credit score (or CIBIL score) may also get adversely affected. A low credit score can compromise your ability to borrow in the future. Even if you can borrow, you may be able to borrow at a higher rate.
It is a matter of discipline. It is acceptable (from lifestyle perspective) if you miss out once or twice. However, if you are regularly missing deadlines (despite having money in your bank account), you need a relook at the way you live.
If you have not been paying your bills on time because you do not have enough money in your account, you have a very different problem at hand. You need to review your income and expense pattern to figure out a way.
3. Indulging Too Much
Money is not an end into itself. It is merely a means to an end. Therefore, you must enjoy your life rather than constantly harping about your finances. However, you must strike balance. Even though you must enjoy your life, you must not ignore the need to invest for your future. One of the reasons that you have not been able to invest well (or as much as you want) is that your discretionary expenses may be very high. To put it in a different way, you are indulging beyond your means. If your frequent dinner outings, expensive vacations, excessive shopping etc are compromising your ability to invest, you need to introspect. You need to make a choice. Enjoy now and compromise later OR exercise a little restraint and enjoy forever.
4. Investing without Goals
You invest in an ad hoc manner. There is no plan or method behind your investments. You do not have financial goals. No targets. You can work without targets if you have lots of money. If you don’t, it is easier to plan if you have goals in mind. It is easier to stick to investment discipline too.
This habit is like a slow poison. The ill-effects may not dawn upon you till you are in the second half of your professional career. By the time you realise, it may be too late. Start early. Let the power of compounding work in your favour. Set financial goals and invest with purpose and discipline.
5. Fixation with Tax-Saving
For many of us, tax-saving is highest priority financial goal. Sounds bizarre, but it’s true. I agree it is important to plan your taxes well. It is important to consider the tax treatment before finalising an investment product. However, you must not make tax-saving the sole criterion behind your investments. Many of us make the mistake of purchasing low return traditional insurance plans towards the end of financial year. Why? To save taxes. Traditional plans give tax benefit on investments and maturity proceeds are exempt from tax. Is that a good enough reason to invest in such plans? Shouldn’t you consider the poor investment returns provided by such plans? Yes, you should but do you? You must first see if the product fits well with your financial goals. Tax benefit, if any, is merely an added advantage.
6. Being Too Conservative
Don’t play too safe when it comes to investments, especially when you are young. Do not limit yourself to fixed deposits, provident funds and low return insurance plans. Take exposure to equity investments too. I am not asking you to start acting on stock tips but you must not shun equity investments altogether. You can start with small exposure to equity funds. Increase exposure as you get more comfortable.
7. Making Wrong Investment Choices
Avoiding bad financial decisions is as important as making good ones. As discussed in an earlier point, traditional life insurance plans must be avoided. Mixing investment and insurance is not advisable. Acting on stock tips is a sure-shot recipe for disaster. Trading in options and futures to make quick bucks is likely to land most of us in financial trouble. There will be many get rich quick schemes promising a very high rate of return. Always remember, if the promised return is too high, it is too good to be true. Many cases of fraud have come up in the recent past.
8. Taking Flavour of the Season Approach to Investments
Flavour of the season approach does not work with investments. When the equity markets are doing well, many investors want to invest in equity markets for even short term goals. To such investors, investing in fixed deposit or PPF is outright criminal. Not a prudent approach. It does not work that way when it comes to investments. You may get lucky a few times. However, in the long term, this approach is likely to cause problems. You must diversify. Keep asset allocation in mind. Do not pay too much attention to short term trends.
9. Nothing Can Happen to You. Not Purchasing Health Insurance
Life is fickle. Today, you may be the healthiest person on the planet. Tomorrow, you may be in long queue to meet a doctor. You may not have spent a day in hospital for the first 35-40 years of our life. That does not mean you never will. Many of us think that the past trend will continue. That is one of the reasons many of us don’t purchase health insurance even when we can afford to. It is a waste of money, isn’t it? If you have enough money to fund your hospital expenses without dipping into your corpus for other goals, then you can do without health cover. If you don’t, you must purchase adequate health cover to guard against such exigencies. As you age, the chances of getting diagnosed with an illness will only increase. A prolonged hospitalisation can dent your finances really badly. Purchase health cover when you are young and healthy (before you are diagnosed with any serious illness).
10. Thinking You Will Be around Long Enough. Not Purchasing Adequate Life Cover
I am not saying that you must be paranoid. However, it is your duty to ensure that your family won’t suffer financially if you were not around. Purchasing a life insurance plan is the best way to do it. You may have been investing well with a lot of discipline. The growth in your investment corpus may be in line with your financial goals too. However, you must understand that you can invest only as long as you are around. If you were not around, such investments will stop and your family will fall behind on investment target. With adequate life cover, you can take care of this uncertainty in life. And yes, do not settle for a random number. Calculate your life insurance requirement and purchase a term life cover.