5 top financial mistakes to stay away from

To err is human. We make mistakes all the time, whether it is our professional life or personal life. These mistakes help us to make the right decisions.

We also make a number of financial mistakes as well. Here are the top five financial mistakes that you should avoid when investing.

1. Spending before investing

There is a popular notion that we should save the money that is left. The money left with us after we take away our expenses. But, if this was the case, then most of us would have never have enough money to save or invest. According to a rule of thumb, one should earmark at least 20% of the income for saving or investing. If you are not able to invest 20% of your income, then start at 5%. Once you are comfortable or you are able to invest more, then you can gradually increase the allocation to 20% or 30%.

Automating your investments is a simple and easy way that will help you do to invest a certain proportion every month. Investing in mutual funds through systematic investment plan is one such way to automate your investments and build wealth over the long term.

2. Waiting for the right time to invest

It is seen that most individuals believe that they don’t earn enough money to start investing. They keep postponing their investments to a later date. Waiting for the right time to invest is another financial mistake.

Studies have shown that how much money we can invest, depends on how rich we ‘feel’. The focus word is ‘feel’ not how much money we actually have.  Hence, you may earn Rs. 1 lakh a month and still not feel rich enough to invest. On the other hand, person B with a monthly income of Rs.20,000 might be investing Rs. 5,000 to Rs.10,000 per month.

Hence, there is no right time to start investing. When you invest in mutual funds through systematic investment plan(SIP), now is the right time to start investing. Moreover, you need a large amount of money to invest through SIP. You can start a SIP with Rs.5,00 per month.

3. Not investing in financial goals

Goals keep us motivated and make us work harder to achieve it. Investing without financial goals is like a ship without its rudder. The ship will easily sway along the direction of the wind or sea currents without having a sense of purpose or direction. Investing is no different. The financial goals can be early retirement, having a sizeable retirement corpus, buying a house or a car etc. It varies from person to person. Financial goals will make us focussed. As a result, we are less likely to take a wrong decision based on short-term news.

4. Constantly jumping to the best performing fund

We all work hard to earn money. Hence, it is logical that we will look for the best funds and the top performing funds to invest. However, it is important to choose the right fund than the best fund. It may not be easy for individual investors to understand the reason behind its spur in performance.  

Looking for the top-performing funds to invest is a common mistake that many people do. Shifting from one fund to another is also an expensive affair, as depending on the fund, exit load and taxation may be applicable. 

Instead of focusing on the one-year or one-month performance, look at its long-term performance, consistency, how well the fund has performed against the benchmark and peers.

Also, concentrate on financial goals rather than chasing the highest performing funds.

5.Redeeming or stopping your investment due to short term volatility

Redeeming or stopping SIP because of short-term volatility are the two most common mistakes that investors make. In the case of equity investment, the ups and downs in the market is a common feature. Hence, you have to take it as a part-and-parcel of your investing life. Sometimes the best thing to do is to do nothing. Instead of being bogged down by the short term volatilities, focus on your goals.

These were the top five financial mistakes that people make when investing. Talk to a financial advisor if you have any queries.