With inflation rising year after year, a well-planned financial strategy is the armour you need to avoid a financial crisis. It allows you to live a luxurious lifestyle while having enough funds in your bank account to deal with uncertainty. Eliminating bad financial habits does not happen overnight; it takes a few months of disciplined behaviour. And, with the New Year only two months away, there is no better time than now to kick off poor money habits.
Bad financial habits to kill this New Year
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Overspending
Your savings rate is critical. And in order to improve, you must keep a close eye on your spending. Overspending has many negative consequences, the most common of which is getting buried in debts.
Here is how to break this poor spending habit. - Prepare a monthly budget and try to stick to it.
- Keep only a portion of your salary in the card that you use for your monthly expenses. You can maintain another account for saving emergency liquid funds.
- Avoid eating out at expensive restaurants regularly and instead, prepare your meals at home.
- Control your urge to splurge at the malls and shopping centres.
- Avoid regular outings for clubbing, partying, and so on.
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Not having emergency funds
Emergency funds are a saviour during tough times. It serves as a financial buffer for either planned or unplanned expenses. It is recommended that you have at least twelve times your monthly income set aside for emergencies.
For example, if you have a personal loan and are making on-time EMI payments, but suddenly a financial crisis strikes as a result of job loss, managing debt obligations becomes difficult. In such cases, having an emergency fund can help you get through the crisis. Similarly, this reserve aids during medical uncertainty.
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Investing in penny stocks
Anyone who is financially awoken, vests interest in the stock market. However, while investing in stocks may appear simple, it requires significant knowledge. If you are investing solely based on the returns, you will end up losing your hard-earned money. The best piece of advice to follow this New Year is to keep a safe distance from penny stocks.
These are the stocks that are typically operated by large retail investors using a pump-and-dump strategy. Big investors pick any low-value stock at random and buy shares in bulk, causing the stock price to rise. When the stock rises by 200-300% in a short period, they withdraw their investment, causing share prices to fall.
Also Read: Top 7 Short-term Investment Plans in India -
Not buying loan insurance
The concept of loan insurance is still new in India, but it is one of the most beneficial instruments you must invest in. Loan insurance is a financial product that comes in handy when you have a debt obligation but you lose your job, suffer a setback in business, or are involved in an accident that causes disability or death.
Loan insurance is vital whether you have a personal loan, home loan, or car loan. Before purchasing this coverage, it is critical to review what situations the insurer covers. Having a loan insurance will protect your family from the burden of paying off your debt in case of any misfortune.
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Skipping health insurance
Medical insurance is a crucial financial product in the realm of inflation. If you are yet to buy one, purchase it before the beginning of the New Year for yourself and your dear ones.
Medical insurance covers numerous scenarios. Pre and post-hospitalization expenses, OPD charges, and consultation fees are among them. You can also get cashless treatment at any hospital having a tie-in with your insurer.
Medical insurance also provides tax advantages under Section 80D. Depending on your and your parent's age, you can claim a maximum deduction of Rs 1, 00, 000.
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Ignoring asset allocation
Putting all your financial eggs in one basket is dangerous. If you have this poor financial management habit, get rid of it right away. Your investment portfolio must be diversified. It should consist of a mix of equity and debt instruments.
For example, if you want to achieve some major financial goals in the next five to ten years, you should allocate more of your portfolio weightage to equity-oriented schemes. On the contrary, if you want to secure your retirement, you should prioritise debt-oriented investments such as government bonds.
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Carrying multiple credit cards
Credit cards can be useful in difficult times if used wisely. However, in reality, things are very different. People typically spend their credit cards extravagantly on shopping, dining, travel, and other activities. Result? Bills pile up, and you find yourself in a debt trap.
Moreover, credit cards that are used for more than 30% of the total balance impact your credit score. Also, the interest on your credit card is too high, so, if you don’t keep your credit card usages under control you end up paying way more than you spend.
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Not tracking your Credit Report
The credit report contains details of your borrowing history. It includes information on the total number of outstanding debts, EMI payment history, default cases, previous loan settlements, and much more. Tracking your report keeps you informed on what poor financial behaviour you are following.
Here are a few tips you can follow this New Year to improve your creditworthiness. - Automate your debt repayment.
- Keep your debt portfolio mix of unsecured and secured loan products.
- Avoid filling out multiple loan applications.
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Not planning your taxes
Many provisions in the Income Tax Act of 1961 help individuals save money on tax payments. However, this will only be useful if you are aware of the various sections that provide deduction or exemption benefits.
It is best to seek the advice of a chartered accountant for tax planning. If you are filling out your own taxes, keep the following sections in mind: 80D, 80C, 80TTA, 80E, and 80G. Section 80C alone can help you save Rs 1, 50,000 in taxes.
Also Read: Section 80C: All About Tax Deductions Under Section 80C -
Debt without assessment
Financial institutions provide product-specific loans and loans that are handy in multiple situations. However, before finalising any loan product or proceeding with the application, you must understand your needs and analyse your capacity to repay the loan without hitting your monthly expenses and savings.
Every loan product requires you to pay interest on the borrowed amount. And overborrowing will make repayment tough. It is always a smart idea to avoid large loans until it’s an emergency. However, small-ticket loans with minimal processing fees and low interest rates are to finance your product purchases can be used smartly.
To conclude
Following good financial habits can help in wealth generation. It assists you in achieving your short and long-term financial objectives with ease. Effective financial management starts with getting good health insurance, being careful with your investments, keeping track of your expenses, and applying for a loan only for the amount needed. This New Year, keep these ten mistakes in your mind and make sure to implement them for enjoying financial independence!
