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Money Mistakes You Need to Avoid To Become Rich Research Team | Posted On Friday, October 10,2014, 11:09 AM

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Money Mistakes You Need to Avoid To Become Rich



It is the end of the month and I am broke again. Just waiting for my salary. The money just isn’t enough. Every month has a new expense. The spectacles are broken…The bike needs repairs…My laptop was stolen…Somehow expenses rise to meet my income.

What can I do differently to change my situation? What money mistakes do I commit that lead to this sorry state of affairs? These questions constantly plague you.

Remember: It’s not your salary that makes you rich, it’s your spending habits – Charles A Jaffe .

Why a Financial Goal?

"An investor without investment Objectives is like a traveler without a Destination" – Ralph Seger

A financial goal is a target you set for yourself :

  • You want to go for a foreign holiday
  • You want to buy a new car
  • You want your children to study in a good college.

This is only half the financial goal. The next step is how you plan to achieve this. You have to keep aside money from your paycheck (salary) regularly each month to achieve this goal.

Set aside as much of each paycheck as you can for investing. This should be no less than 10 percent of your income.

You have to identify investments which suit your risk profile (How much risk you are willing to bear to achieve these goals). If you are willing to take risks (an aggressive investor) then an investment in equity (stocks and mutual funds) is the way. Investing in equity has a huge risk but may give you a good return.

A return of 20-30% is not uncommon in stocks. This investment would help you reach your financial goal is no time. If the markets crash your losses are huge and it may take several years to reach your goal.

Remember : No risk ...No return.

If you are a conservative investor you can invest in fixed deposits, PPF or even debt mutual funds. The returns are much lesser than equity but these investments are relatively safe.

Remember : A slow and steady approach to reach your financial goal rather than not arrive at all.

Avoid Common money Mistakes

Living on Debt

Debt : A trap which a man sets and baits himself, then deliberately gets into.

A loan is living today on your future income. A loan is given to you (say by a bank) to meet your current needs and expenses and you have to pay it back from the income you would earn in the future with interest.

A Home Loan is a Good Loan
You can take a home loan to buy your all important home to fulfill your physical and emotional needs. This is a necessity and as you cannot afford to purchase the home on your current salary, you take a home loan and then repay the bank through the EMI payments.

Remember: Purchase a house that meets your needs. If you need a 2 BHK apartment then do not pick a 3 BHK apartment. This will needlessly put you in debt as the interest you would have to repay on the home loan would be high. You can also take a home loan to purchase a second house as a long term investment.

The interest you pay on the home loan is fully tax deductible if you give the second house on rent. You can also use the rent you collect to repay the home loan.This is a twin bonanza. You practically get the second home free and after you repay the loan all the rent you collect is yours.

Credit Card Debt is a Bad Loan
Credit card debt is a trap . You keep swiping and don’t realize where the money has gone. Worse if you do not make your payments within the billing cycle and the grace period you have to repay the credit card borrowings at an interest rate of almost 36% per year.

How to Avoid Money Mistakes

Know Your Insurance Needs

Buying a Wrong Insurance Policy
You may be insured with a number of life and general insurance policies and pay a hefty premium each year. But are these the right polices for you?

Term Life Insurance
It is a must have if you are just married or have young children and you are the sole bread winner of the family. A term plan is cheaper than an endowment life policy as a term plan is a pure survival policy. You survive the term of the policy you get nothing.

Tax saving under Section 80 C on the premiums paid for the term life policy and the maturity amount you get is tax free under Section 10 10(D).

An Endowment Life Plan is a twin benefit plan (Insurance + investment). You pay a premium and get a sum assured (fixed sum of money) if you die before the maturity of the endowment policy .If you survive till the maturity date of the policy you get a maturity amount ( Sum assured + Bonus).

The bonus could be a guaranteed bonus (a fixed % of the sum assured for the first 5 years of the policy as well as a revisionary bonus paid out of the profits of the Insurer and a terminal bonus given in the final year of the policy).

Over and above this a tax saving under Section 80 C on the premiums paid for the life endowment policy and the maturity amount you get is tax free under Section 10 10(D).

So Why Take a Term Life Plan Rather Than a Life Endowment Plan?

A term plan is a pure insurance plan and caters only to your insurance needs. Never mix insurance with investment such as in a life endowment plan. Pay a low premium for your term insurance policy and invest the remaining money in equity if you are an aggressive investor and a fixed income such as a fixed deposit if you are a conservative investor.

You would get a better return than the endowment policy.Take rider benefits such as an accidental cover or a critical illness cover basically an additional benefit for a higher premium.

An endowment policy has a high premium as it has insurance and investment benefits and also insurance agents get a huge commission if they sell these polices. This commission is paid to the agents out of the premiums you pay for the policy.

Money Mistakes to Avoid

An Insurance Policy Just to Save Tax?
The insurance agent would advise you to take up an endowment life policy even though it does not match your insurance needs telling you it will save you your taxes.

You need to take an insurance policy for insuring your life and not to save on tax. If you want to save tax then there are other tax saving instruments under Section 80 C. Please read articles on Section 80 C.

Remember : Buy a life insurance policy to meet your insurance needs and not to save on tax.

Other General Insurance Policies you Need

  • Home insurance
  • Health insurance
  • Car insurance

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