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When blind spots are financial, they can work against us, unintentionally destroying our good efforts to make progress with our money. Proactively searching out the aspects of our financial lives that we’ve neglected can yield many rewards, financial and otherwise. Here are the three most common personal finance blind spots and there is a high probability that you have at least one of them. The following are the blind spots to avoid in a financial crisis.
Not bothering to calculate how much you require: The average person has to save around 50 percent of his/her post-tax salary. But the proportion differs from person to person. An investment banker who has an unpredictable career should save more than the average person. So, calculate the amount based on your specific situation.
Optimistic return assumptions will wrongly indicate that you can get away with saving less: We talk of ‘nominal returns’ in daily life the interest rate on a fixed deposit, for example. And, a nominal return minus inflation is called ‘real returns’. Post-tax real returns, on your entire net worth, over your remaining lifetime are likely to be close to zero percent. It is optimistic to assume a figure which is higher than that.
You probably have a good idea of how much money is coming in each month, but just how much is flowing out, toward expenditures like Rent, Food, Transportation, etc. It’s likely more than you think and, chances are, you could find ways to cut back.
To figure out exactly where you spend more of your money than you mean to, record your purchases for a couple of months. You could try writing expenses down in a notebook or using an app that will track your spending, such as Cost Track-Expense Tracker.
Not being able to pay more than the minimum month after month means you’re spending more than you have. That’s a path to credit card debt, which will make you fall even farther behind on your savings goals.
Analyze your spending habits and identify areas where you can cut back in order to free up your cash and pay your balance in full. If you’re already in the red, consider avoiding your credit cards altogether and going cash only, which will force you to stay on budget.
You can’t get to where you’re going if you don’t know exactly what you want. Think about what you want your future to look like and then come up with precise savings goals. Next, calculate how much you need to save for future purchases and for how long, and start setting aside a certain amount each week or month.
If you can barely pay your bills each month, you’re living salary-to-salary, which makes it nearly impossible to build up substantial savings. You either need to increase your income or spend less. You can also find a part-time job, start a side hustle or establish passive income. If you are aiming to spend less, start by reading up on money-saving strategies from everyday people who save half their income.
An emergency fund is essentially an amount of money that you keep aside for emergencies. It is a fund that you can access at the hour of crisis or for unexpected and unplanned scenarios, and not for meeting your routine expenses. So, you must design it specifically to meet unexpected financial shortfalls that may apply to you. Say, you have decided to have an emergency fund of ₹1 lakh. In this case, you can put aside ₹5,000 or ₹10,000 every month before you accumulate the corpus you need. It is OK to even cut down on your investments to build this amount.
Many people get into an “I’ll save and invest more when …” mindset. I get a promotion, I find a new job, I finally get that raise, I get married, the kids are out of school, etc. The problem is that tomorrow usually comes with its own set of challenges, so it’s not magically easier in the future.
The simple solution is to prioritize savings and investing today right now, no matter the amount and no matter the circumstances. What matters most is working toward your goals today, and not assuming that it will somehow be easier in the future.
The worst financial products pay the highest commissions. And salesmen push the products that have the highest commissions. So, if a salesman is pushing you to buy a product, it is probably a bad product insurance investment policies, structured products and credit risk funds. The best products are usually not pushed by anyone. You have to make the effort to find out about their features and buy the most suitable products.
If you pay higher-than-average fees on equity mutual funds hoping to earn above-average returns, then you are likely to lose money over the long term. In other words, invest in equity mutual funds where the Total Expense Ratio (TER) is below the average.
Deep inside, we wish to do the best with our investments. This is usually harmful. It makes people buy complex and dangerous products. Buy simple investment products and put your investments on autopilot.
A common excuse for not having an adequate emergency fund is that something unexpected came up. Many people don’t budget for irregular expenses that actually are expected, such as birthday and wedding presents, vacations and property taxes. These expenses don’t fit in the monthly budget, and therefore often get forgotten when allocating your cash for the month.
The simple solution is budget for irregular expenses on a regular basis. Determine an estimated annual amount and set up an automatic monthly transfer to a separate savings account that you can tap into when the expenses hit. In addition, save regularly in your emergency fund for actual emergencies.
Believing clichés such as ‘invest hundred minus your age in equity’: If a 30-year-old was lucky and his/her ESOPs (employee stock options) worked out well, then he/she may have a material net worth. Such a 30-year-old should not invest 70 per cent of her net worth in equity because she may permanently lose half of her equity investment during a severe stock market crash.
‘I have to take a lot of risk because there is no other way to meet my goals’: If you have saved less than you needed to (let’s say for retirement), then you are naturally more desperately in need of high returns and hence you may be tempted to take more equity risk. But if you did that and in the rare event that the stock market crashes by say 50 per cent, then you would not be able to meet even your basic needs such as paying your rent during retirement. So, such a person does not have the financial cushion to take high risk and hence she/he should take less risk.
Falling for the myth that ‘equity is safe in the long-term’: Over a five to 10-year horizon, there is a higher probability that equity will at least match inflation. But there is also a material probability that it will generate returns that are lower than inflation.
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