3 Ways To Avoid Common Personal Finance Mistakes

Personal finance meltdowns are ugly. Nobody plans one yet it seems to happen to most people at some time or other, often more than once.  Studies show personal financial crises are usually the results of common “mistakes.” Here are three simple ways you can avoid painful personal finance mistakes:

1.  Plan Your Finances

As our financial journey gets on its way, we add on bank accounts, credit cards, buy few things on EMIs, and so on. Marriage, kids, dependent elders begin to happen, as do loans and taxes. Then one day, you find years have gone by and things aren’t that simple any more.  The way out is to create a financial roadmap for yourself right at the onset – one you revise as you move forward.  Your financial plan should include:

Financial goals: Data tells us more often than not we only get as far as we intend to. Where do you want to go in your financial journey? How far? How fast? Perhaps even why.

Financial milestones:  By what age do you wish to accomplish your basic goals? How will you know if you are missing some of your targets or whether your plan needs course correction?

Revenue map: What are your income streams and how much do they bring in? Are there other ways you can monetize your time, attention and other assets? Do you have variable incomes like incentives, commissions or dividends? What are your minimum assured earnings in a month, in a quarter, in a year?

Monthly budget: Where should your money go? What are your roti-kapda-makaan expenses each month? What are your annual expenses (taxes, insurance, subscriptions, AMCs, etc.)? What are your regular non-mandatory expenses (entertainment, shopping, vacations, gadgets, etc.)?  Use Personal Finance Apps that help you track your spend, pay your bills and stay within budget.

Big ticket dreams: This shows us what we value, as well as how hard we are willing to work to get it. This list also evolves with time, and it can be amusing to revisit your old lists. You will surely be crossing out few items because you got them, but more importantly, you will crossing out items because you will no longer see value in them.

Investment/Insurance: There is no better time to invest or insure yourself and your loved ones than now.

Retirement plan:  How are you going to remain financially independent once you get old, infirm and needy? It seems far away when you are young but it is good to have it in your vision.

2. Talk About Money

Typically, one person handles the financial stuff in a family. Other members are often unaware of details like how much gets spent on what, where money comes from, or where to find emergency funds. Here are some things that will help.

A Common Information Repository: Have all your financial details documented in a secure place, and make sure all family members are aware of how to access these details.

List out Goals and Tasks: Make a goals list and categorize into his, hers, and ours.  List out all financial tasks that need to be completed each month or year, and have everyone be familiar with it and how to carry them out.

Teach Your Children:  Help children become aware of their needs and wants and how those expenses get met. Set up savings accounts if possible and help them manage their pocket money and gift money.

3. Understand Debt

There are two broad types of debts – those with high interest and those with low or no interest. Debts can also be categorized into loans, installment purchases and credit cards.

Loans for assets:  These loans are backed up by an asset you are already deriving value from. They help us acquire assets our income would not permit otherwise.

Loans for consumption and expenses: These are loans you take when stuck for spending money. These can be handloans or institutional loans. These loans are usually offered at very high interest rate and with multiple hidden charges.

Credit Cards: Nothing as nice or financially lethal as warm plastic.  Most people count available credit limit on their cards as money they have in case of emergency. Nothing is further from truth. Available limit is your future earning the lending bank wants you to spend today, so you can pay amazingly high interest on it for the rest of your life. Avoid using credit cards other than as replacement for cash in bank. Pay off total amount due every time if possible.

If you have already taken few of these steps, congratulations. You are well on your way to avoiding common personal finance mistakes. Yes, some of them demand a little discipline and delaying gratification. Some might require you to review how you look at a good life.  The one thing they will ensure is that you do not ever have to worry about a personal finance crisis again. Don’t take my word for it. Give it a try.

Subhorup Dasgupta is a Hyderabad-based writer and artist. His writing on frugality and responsible living stresses the need to understand, simplify and organize money as a crucial step towards a happier life.  He blogs at Subho’s Jejune Diet.