Pitfalls one must avoid when it comes to managing money matters

The month of April marks the beginning of the new financial year in India. Most retail investors regard this as a fresh starting point in their journey towards financial planning. Financial planners receive a barrage of queries from investor regarding the efficacy of their financial plans and strength of their investment portfolio.

While this vigor to have a sound financial plan in place is great, it is prudent to not let emotions get the better of you. Rational decision-making, to prevent careless money mistakes, is a must for building financial prosperity. If you, too, are looking to embark on the wealth-creation process afresh, it is advisable that you avoid the below pitfalls:

Have no plan in place

You can't hit a target unless you aim for it. If financial well-being is your target, you must aim for it with a proper plan. While most retail investors find it easy to define their financial goals, they find it difficult to accumulate the required funds. A clear road map is thus imperative to achieve the targets. Following steps can help you to prepare a financial plan:

Step 1 - Put an amount against each goal depending on your lifestyle and expectations

Step 2 - Define a timeline. For example, if you are 30 and wish to retire at 50, you have 20 years to accumulate required funds

Step 3 - Invest in right instruments to build the necessary corpus in the defined time frame as per your risk-appetite

Procrastinate

Once you have zeroed on a financial plan, do not procrastinate on putting it into action. You can make the benefit of compounding work in your favor by practicing systematic investments as early as possible. To understand this point, take the example of two friends A and B. Both of them decide to retire by the age of 60. A, however, starts investing when he turns 30 while B waits for two more years to undertake this exercise. Assuming that they both start a monthly Systematic Investment Plan (SIP) of Rs 1,000 at 12% rate of return, by the time of retirement, A would have accumulated Rs 35.3 lakh, while B would have Rs 27.6 lakh. The example clearly shows that kick-starting the investment process early-on gives you an edge which procrastinating can take away.

Invest without proper research

Investments are a crucial element of any financial plan. But how do you go about investments, is what eventually determines your success. If expert 'tips' from friends and family are the basis of your choices then you are in for serious trouble. There are no get-rich-quick schemes that are worth squandering your hard-earned money on. Do research before committing your money to an investment option. Learn about the pros and cons, returns offered and the performance record of an option to make a wise choice. Read up on financial markets and learn more about investments concepts from qualified experts to reap greater benefits.

Stay away from equities

A study of investment options clearly shows the superiority of equity as an asset class. Even though there is an increase in awareness about the benefits of equity investment option, many retail investors still refrain from including it in their portfolios. This is primarily due to some past experience or hearsay on how investors have burnt their fingers in the stock market. Equities are crucial to an investment portfolio for generating inflation beating results. If you conduct thorough research to identify the right stock to invest in, your investment is likely to generate long-term wealth and help you fulfill your financial goals.

Overlook tax planning

Many taxpayers may find their bank accounts empty at the beginning of the new financial year. They may have been forced to divert their savings to tax-saving instruments at the last minute, towards the end of the previous financial year, because they didn't plan for taxes in advance. If you fall into this category, it is time for you to break the cycle. Start providing for this eventuality right from the start of the financial year. Understand your tax structure to gauge its impact on your take-home package. Awareness of various heads and benefits that you can claim under different sections of the Income Tax Act will help you to minimise your tax burden. Fashion your investment choices to include instruments that help you to save more and pay fewer taxes.

Fall into a debt trap

All efforts to streamline your finances can go haywire if you are caught up in a debt trap. High-interest on loan installments and credit card transactions at times create a debt trap where individuals may have to apply for top-ups or fresh loans to repay existing ones. It is therefore viable to refrain from loan products as far as possible. In case you need to avail a loan, always go for the term loan and try to get rid of the same at the earliest. Once you go for a loan, ensure that you pay your monthly EMIs to avoid charges. Try not to delay your loan installments or credit card payments to avoid the vicious circle of ballooning debt.

BE SMART WITH YOUR FINANCES

• Have a clear roadmap in place for your finances and don’t procrastinate putting it in action
   
• While investing in equities don’t fall for ‘stock tips’, do thorough research and select stocks with care

The writer is MD & CEO, Axis Securities