Financial planning is the cornerstone of a secured future. It is only with meticulous planning that one can address major financial goals and leave a legacy. It is also a dynamic activity that requires regular monitoring and a customised approach. It takes concentrated efforts and self-discipline to ensure that all the key aspects are covered, and the desired outcomes are achieved.
Read on to know the common mistakes that individuals commit while planning, and the ways to avoid them.
- Giving Life Insurance a Miss.
Ask a financial planner and the first suggestion would be to hedge against uncertainties and have an adequate life cover so that your dependents are not left in the lurch in your absence.
Life insurance, particularly term insurance, is an effective risk mitigating tool that helps your dependents square off liabilities, maintain their lifestyle, and keep financial goals on track, even if you are no longer there. A term insurance plan can act as an income replacement by offering a large cover at an affordable premium.
- Not Setting Up an Emergency Corpus
A sudden layoff or a medical emergency can hit your budgets and derail the most carefully created financial plans. Setting up an emergency corpus can help you sail through troubled waters. Ideally, you must build an emergency corpus equivalent to six months of your family’s expenses.
While cash in the bank is the traditional model, you can consider parking the emergency corpus in ultra-short-term funds. These funds invest in fixed-income instruments and have potential to offer better returns than FDs, with similar liquidity (Mutual Funds do not assure or guarantee returns while FDs have fixed returns).
- Not Investing in Health Insurance
Nobody ever said, ‘I am healthy and will be that way throughout my life’. If someone did, it is indeed a misplaced notion. Rising health care costs coupled with general inflation makes health insurance a must. A health insurance policy can help you mitigate out-of-pocket expenses in times of medical emergencies, by taking care of the hospitalisation and treatment costs.
Along with a traditional health insurance policy, which is an indemnity plan that reimburses hospitalisation expenses, one must also consider buying a critical illness plan. Such plans are fixed benefit plans that pay a lump sum if you are diagnosed with a critical ailment, thereby aiding in meeting pre and posthospitalisation expenses.
- Not Investing to Beat Inflation
For long-term wealth creation and to build a sizeable corpus for various life goals, one must consider investment avenues offering inflation-adjusted returns. While bank FDs offer assured returns, they might not be enough to beat inflation. The net returns from FDs are lower post taxation.
Hence, it is essential to invest in avenues such as mutual funds, particularly equity-oriented funds, that have the potential to generate higher inflationadjusted returns over long term. Offering diversification, these also help build wealth in a disciplined and sustained manner.
If you had invested Rs. 1000 on the fifth of month for ten years in S&P BSE Sensex at an XIRR of 16%, it would have helped you build a corpus of around Rs. 2,96 lakhs. (For illustrative purpose only. Past performance may or may not be sustained in future)
Deferring Retirement Planning
An essential life goal that is often procrastinated, retirement planning should ideally start from the day you start earning. Saving and channelling a small amount each month towards retirement can help you build a substantial corpus, cushioning you from inflation in the long-run.
Being an early bird has its rewards, as it brings in the power of compounding, a disciplined investor’s best friend. For instance, if you started working at the age of 23 and you had invested Rs. 1000 in S&P BSE Sensex, in thirty years at a rate of 15% it would have helped you accumulate around Rs. 68 lakhs. (For illustrative purpose only. Past performance may or may not be sustained in future) Further, increasing the SIP amount as your income increases, helps you build a substantial corpus for your twilight years.
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