7 Financial Traps You Need to Avoid Like the Plague
Vol 13 | Issue 17
The road to financial success is carpeted with roses – and you know what comes right along with the roses, the unappealing and sometimes injurious thorns. While personal finance is not rocket science, there are still traps that you need to avoid, or your financial goals can suffer severe setbacks.
No need to get unduly worried though. Here, we lay down the 7 most common yet harmful financial traps. Avoid them, and you will do better financially than most others.
|The author lists 7 financial traps that you need to flee from (Photos for representational purpose only)|
1. Saving without investing
Saving is an important step in sorting out your finances. But the biggest mistake people make is in thinking it is the only step. Yes, no financial journey can start without saving some portion of your income.
However, if your money is only accumulating in your saving account, you are actually losing money, since inflation will usually be higher than whatever little interest you are earning on that money. Actively investing the saved money is the only way to build your wealth, despite the inflation.
2. Overusing credit cards
A credit card is a great tool to manage your money and earn some sweet rewards in the bargain. However, there is a pretty no-brainer cardinal rule for using credit cards – only spend on them what you can afford to pay back.
That means you need to pay off the entire outstanding balance, every single month, without exceptions. If you don’t, the balance accrues interest at anything between 24-40%.
Since you couldn’t afford to pay the initial balance itself, it is unlikely that you can pay the almost 1.5x amount, effectively ensuring that you can never get out of the trap once you fall in.
|If you expect your insurance to earn you a good return, neither will you be properly insured, nor will your investment do well|
3. Buying insurance as an investment
It is good to ask if an investment can do more for you than it currently does. The keyword is that it is an investment. Insurance is a tool to prevent catastrophic losses to your family or your finances in case of unforeseen circumstances, like your death or a health concern.
Think of it as a goalkeeper of your football team. The trouble arises when you expect the goalkeeper to also be your top goal scorer. If you expect your insurance to earn you a good return, neither will you be properly insured, nor will your investment do well.
Let your insurance protect you like it is supposed to, and leave the earning to your actual investments.
4. Sticking to ‘safe’ investments
Safe investments, like fixed deposits and provident funds, certainly have a place in your portfolio. However, if you only stick to these investments, you will lose out on the immense wealth-building capabilities of equities and other such ‘risky’ investments.
When you’re investing for the long term, it is crucial that you are not taken in by short-term volatility. Safe investments are good for protecting your wealth – once you’ve built it up. They need the ‘risky’ investments to do their job and accumulate your capital in the first place!
|Jewellery is great to own, but can't be seen as a great investment|
5. Considering jewellery as an investment
Jewellery is great to own, but for reasons other than its investment potential. Often, we attempt to justify jewellery purchases as investments that you can also wear on your person.
However, in most cases, jewellery is not a great investment. If you want the hedging benefits of owning gold, it will always make more financial sense to buy plain old gold or even its digital variant.
Jewellery has costs associated with it that will take down the already low returns. So, buy all the jewellery that you desire, without buying the myth of ‘investment’ that gets sold along with it.
6. Investing without research
A friend of a friend has a surefire way to double your money in three days. The radio channel you listen to on your way to work is harping on about the latest IPO in the market.
Investing based on such hearsay is one of the fastest ways – to lose your money. If you are investing actively, i.e. in individual stocks, it is crucial that you conduct at least basic research into the company.
You don’t need to be a financial genius to do so, but learning the fundamentals of how the business you’re putting your money in actually works, would certainly help.
|Making investments based on 'insider information' without personal research is risky|
7. Insider information
The market works in mysterious ways. Our natural reaction to such mysterious systems is to think we can beat them. Hence, the dependence on insider information.
We believe that our network will give us information that absolutely no one else in the country already has. But more often than not, the information would’ve reached multitudes of people before you, who have already acted upon it before you even got a whiff of it.
If you still believe the information you have been fed is genuine, look at the financials of the company before putting your hard-earned money into it, at the very least.
While taking the right financial decisions is crucial, it is equally important to not make the wrong ones. Avoiding the biggest financial traps will set you apart from the pack, and give you a huge head-start in the journey to achieve your goals!
Priyanka Mashelkar is Dy. Commissioner of Income Tax and Author, 15 Sure-shot ways to Hit the Jackpot