9 Common Financial Mistakes to Avoid in 2024

1. Negative Cashflow

One of the most common financial mistakes is not maintaining a positive cash flow. This means spending more than you earn, leading to a cycle of debt. To avoid this, creating and sticking to a budget is essential.

Track your income and expenses and ensure that your income consistently exceeds your expenses.

2. Excessive Debt

Debt can be helpful when used wisely, such as buying a home or investing in education. However, an exceptionally high-interest debt, like credit card debt, can be financially crippling. It is essential to keep your debt levels low and manageable.

Always pay your EMIs/ bills on time to avoid late fees and interest charges. Stay aware of the tax benefits your debts may carry and avail them during income tax return filing.

3. Not Building an Emergency Fund

Life is unpredictable, and emergencies can arise at any time. A job layoff, a major illness that prevents you from earning for some time, natural calamities, etc., can strain your income sources.

An emergency fund acts as a financial safety net in such times. Aim to save at least three to six months’ living expenses in your emergency fund.

4. Insufficient Savings According to Future Needs

Many people save without a clear goal in mind. It is essential to identify your future needs and save accordingly. Whether for your child’s education, a dream vacation, or retirement, having a clear savings goal can motivate you to save consistently and effectively.

While formulating a savings plan, you should account for inflation. Focus on building an incremental plan where you increase the saving amount periodically.

5. Unsecured Ways of Saving

Investing in risky ventures without understanding the implications is a common mistake. While high returns are desirable, choosing secure saving methods to protect your capital is essential.

Fixed deposits, the Public Provident Fund (PPF), National Savings Certificates (NSC), the National Pension Scheme (NPS), Government bonds, and others are some of the secured saving options in India.

6. Not Diversify Your Portfolio

Diversification is a crucial principle in investing. You can reduce risk and potentially increase returns by spreading your investments across different asset classes, such as equity, debt funds, fixed deposits, and gold.

Further, it would help if you diversified the sectors within asset classes. For example, you can prepare a mixed bucket of large–, mid-, and small-cap stocks while investing in equity. You can also focus on sector concentration to maximize your profits by investing in trending sectors.

Note: Diversification requires extensive research, and you should create your portfolio around unrelated or negatively correlated asset classes.

7. Relying Solely on One Income Source

Sound financial strategies rely on generating passive income sources to supplement your active income (like salary). Creating passive income sources, such as rental income or stock dividends, can provide financial security and increase overall revenue.

8. No or Insufficient Retirement Planning

Many people neglect retirement planning entirely or until it is too late, particularly in Indian families.

It is crucial to start planning for retirement early in your career and enjoy the power of compounding. Consider investing in retirement schemes like the National Pension Scheme (NPS) or mutual funds specifically designed for retirement.

In the age of social media, it is easy to fall into the trap of unnecessary spending due to peer pressure or the desire to maintain a particular lifestyle. It is important to be mindful of your spending and not let social media influence your financial decisions.

Also, the expectation of going viral causes some fin-influencers to promote unreliable financial schemes and products offering higher returns on investment. It is crucial to identify such ‘too-good-to-be-true’ schemes and avoid investing in them.

The best way to grow wealth by investing is to understand and follow the basic concepts. You can consult certified financial planners if needed or have time constraints.

Conclusion

Avoiding these common financial mistakes can lead to financial stability and security. Remember, there is always time to start making wise financial decisions. You can avoid these mistakes and achieve your financial goals with discipline, planning, and awareness.

Risk Disclaimer: Investments are subject to market risks. Read all scheme-related documents carefully before investing.

Q. What do you understand by negatively correlated asset classes?

Negatively correlated asset classes move in opposite directions. When one asset class performs well, the other will likely perform poorly. For instance, traditionally, stocks and high-quality bonds are negatively correlated. When the stock market goes down, the rates of high-quality bonds go up.
What are the 5 asset classes to achieve portfolio diversification?
1. Equity
2. Fixed-income investing like bonds, securitized debt instruments, etc.
3. Real estate
4. Gold
5. Fixed deposits

Q. How do I know if I invested in a secured asset class?

Government-backed or regulated investments like NSC, PPF, and fixed deposits are relatively secured investments. Other asset classes, like corporate bonds and securitized debt instruments, can be assessed for security by their credit ratings.

9 Common Financial Mistakes to Avoid in 2024

Table of Contents