It is an open confession, I have made a couple of mistakes I outline below, however I was fortunate that good sense prevailed at the right time. Find below the 5 biggest money mistakes made by the working professionals of our times.
Mistake #1: Excessive focus on savings
As per latest reports, only 3% of Indian households’ financial savings are held in equities, as against 56% held in bank deposits. Why does this qualify to be a mistake you may ask? Well, depending on your tax bracket, there is a very high probability that your after-tax returns on bank deposits do not even beat inflation. In other words, your after-tax returns are likely to be less than 8% per annum and as a result, your purchasing power will decrease with each passing year.
Mistake #2: Not saving enough for retirement
In an online survey conducted by economictimes.com last year, more than 24% of the 2,578 respondents said they were saving less than 5% of their income for retirement. Another 25% are putting away 5-10% of their income for their sunset years. It is unlikely this will be enough to sustain their current lifestyles when they stop working. It is indeed a sad reality that most of us start planning for retirement pretty late in our working life which can be devastating because in all probability, those who do will run out of all their money in less than a decade. Also, choices are limited at that age, i.e. you can either extend your retirement age or you can cut down on your standard of living, the latter, as you can imagine is very difficult.
Mistake #3: Taking financial advice from the wrong people
I would like to narrate a personal story, which I get a feeling you will be able to relate to. This was around 2009, I was visiting one of the leading banks of India for routine work however, by the time I left, I had committed Rs 5 lakhs for a life stage pension product because the bank rep told me it was offering an amazing return. I had committed multiple mistakes that day.
First, I did not do any research on the product, if I was buying a car of similar value, I would have researched for at least 2 months. Second, it was an impulsive decision for a high value transaction related to product that I did not understand. Lastly, I had taken advice from an individual who neither had the expertise nor the understanding of my goals but I am sure, he made a good commission on the sale. I made less than a 10% return over 3 years on that investment. That incident got me started on a path of financial literacy which has served me very well. I also realized that the only person who understands my financial condition and has my best interests in mind is JUST ME!
Mistake #4: Spending majority of the earnings on depreciating assets
These days we see a lot of young professionals buy luxury cars and high end electronic gadgets because they think that the products are within their reach and they can finally show off their possessions to the world. The reality though is that the world does not even give a second glance to these products as they are so common and the irony is that some of the proud owners cannot afford to take well deserved vacations because of the high EMIs they have to pay for these assets. If the above is not enough to dent the spirits, these assets start losing their monetary value from the day they walk out of the store and are obsolete in less than 5 years. Does this mean that everyone should stop spending money on these items all together? The answer obviously is NO as long as they are bought at the appropriate time- read within budget and for the right reasons.
Mistake #5: Buying house vs renting
For a vast majority of us, buying is the default choice either for investment or for that feeling of fulfillment, however that does not mean it is the right choice always. A recent study published by makaan.com shows that within last three years, key real estate markets have moved from being a place for buying and investing ranking to renting. For example, in metros like Mumbai and Delhi, where the property prices are astronomical and where just the down payment alone can wipe out a third of your networth, it would definitely make sense to rent the house vs buying. The choice of renting becomes even more compelling if you are not sure of settling down in the same city after retirement. On the other hand, you should buy if the rent is very high or you do not like to negotiate with your landlord every time your lease comes up for renewal. The mistake is not in buying itself, but not weighing the pros and cons enough while making the buy vs rent decision.
So which mistakes listed above have you already committed? Even if you have, I hope that you do not repeat the mistakes and get on to the path to financial success earlier in life.