Rookie mistakes to be avoided (DNA 16th Sep 13)

These are some of the recurring investment faux pas that most people still tend to make even in their 30s

Vijay Pandya

In your early twenties, it seems the money you earn is never enough to last the month. Saving seems to be an impossible concept, unless if a strict parent imposes restrictions on spending and forces you to do it. The mid-twenties is when future goals become clearer and saving for them starts off in earnest. The crucial difference between saving and investing usually gets highlighted in your early thirties. However, having over a decade of experience doesn’t help much. Managing money and managing investments are two totally different tasks, requiring an entirely different approach and set of skills. Making money earn money is the key factor here that tends to be missed out. Earning less Saving enough money to pay three to six months of living expenses in case of job loss concerns is a good idea, but then keeping that amount for a rainy day in your savings account is just plain stupid. Invest it in fixed deposits instead and keep rolling them over instead of encashing on maturity, its that simple. Unbalanced portfolio Similarly, while equities do give a good rate of return, the risks are equally great. Maintain a balanced portfolio so that volatile markets do not completely deplete your net worth overnight. Diversify across instruments and sectors even while dealing with ‘safe’ options like mutual funds. Unclear goals Do you want to live in a spacious 2BHK flat or opt for a 1BHK and send your child abroad for higher studies? Buy an entry-level hatchback or top-end SUV? Party every weekend or once in a few months? Vacation abroad twice a year or once in two years? Unless if you are clear about your projected spends, it will be impossible to plan your investments in sync with them. Unexpected inflows Diverting your Diwali bonus for an outstanding credit card payment gets you out of a financial crunch but did you learn anything from the experience? They say those who do not learn from history are condemned to repeat it and you may just exemplify that adage next year. Unexpected inflows should be invested and reinvested, not spent. Stopgap solutions Taking a personal loan to bridge the gap and buy a bigger house solves an immediate need but adds a high-cost liability that will offset whatever returns your current investments are making. Instead, ‘break’ a few fixed deposits before their maturity. Losing projected interest for a few months is better than paying it multiple times over for years on end. Following friends What works for your office colleague, school buddy or train friends may not necessarily be applicable to your financial situation. Blindly investing where others do without understanding your own financial potential, abailities and constraints, is strictly avoidable. Top 5 Problems And Solutions 1 Uncontrolled spending One way to control and monitor your spending is to open a separate bank account and designate it as a spending account. Both husband and wife need to spend only from it. As soon as you receive your salary, transfer the budgeted amount, say Rs 25000 to your spending account. Then spend your monthly expenses from it. This account is for all your expenses. Investments or EMI will not be mingled with it. Whenever you check it, you will be able to make out how much has been spent so far. End of the month you will have a complete history. Now you can analyse and control your spending. At the beginning of the month, your mind knows the balance is 25000 and the countdown starts. It starts thinking how we can run the show for the rest of the month with this balance. 2 Credit card trap The simple and successful way to use credit card is to pay the 100% due amount on the due date. Minimum balance payment, EMI purchase through credit card, balance transfer from one credit card to the other will slowly take you to the debt trap. 3 Money compatibility Couples often don’t work on their money compatibility. This is a serious problem. Check how compatible you and your spouse in money management. You may be conservative and your spouse may be aggressive. You may think that the best place to invest is stock market and your spouse may think bank FDs. You should communicate your money management style to your spouse as well as you need to understand the money management style of your spouse. Both of you need to analyse the merits and demerits of money management style of each other and their own. Then you need to create a mutually agreed combined money management style.This will be vital to you both throughout your married life to help minimise stress from disagreements about money. 4 Not having a plan If you are not having a financial plan, then things will not be under your control. A financial plan tells you what is your potential and what are all the things possible with that. This gives you clarity and confidence. 5 Poor risk management Life cover, health cover, property insurance and having emergency reserve: These 4 items are more discussed and less practiced.