9 Common Obstacles to Your Financial Success And How to Overcome Them

While we all are aware of the importance of saving and financial planning, the journey towards achieving our financial goals is not always easy. There could be countless hurdles that may arise, even if you are committed to achieving your financial objectives. Some of these obstacles are a result of poor financial habits, while others are unexpected emergencies that cannot be avoided. This article elucidates the 9 common obstacles to your financial success and how to overcome them.

1. Not Having a Budget:

Budgeting is a strategy for establishing a fair plan to use your earnings efficiently. A budget is a comprehensive breakdown of your projected income and expenses over a specific period, typically a month. It allows you to monitor your finances, manage your spending, and avoid debt accumulation. Failing to have a budget could result in prioritising spending over saving, which may impede progress towards financial goals.

To address this challenge, implementing a budget is necessary. The 50/20/30 budget rule is an effective starting point. This involves allocating 50% of income towards fixed expenses such as bills, EMIs, and food, 20% towards savings, and 30% towards discretionary expenses like hobbies or entertainment. While there are many free budgeting tools available online, you can start with simple tools like a pen and paper or an MS Excel sheet to grasp the concept. By tracking your expenses and comparing them with your estimated income, budgeting can help you make informed financial decisions, prepare for unforeseen circumstances, and attain your financial goals.

2. Not Having S.M.A.R.T. Financial Goals:

Imagine going grocery shopping without a shopping list of what you need to buy. You may end up wandering around the store and picking up unnecessary items, forgetting important ones, or overspending. Similarly, investing without a clear purpose or defined goals can lead to financial failure.

It is crucial to ensure that your financial goals are Specific, Measurable, Achievable, Realistic, and Time-bound, i.e., they should be S.M.A.R.T. Additionally, it is best to categorise your goals into short-term (up to 2 years), medium-term (between 2 to 5 years), and long-term (over 5 years). Following the S.M.A.R.T. framework can increase your chances of success in achieving your financial goals and ensure that you are taking the right steps towards a better financial future.

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3. Poor Debt Management:

Effective management of debts is essential for achieving financial stability because debts can hinder savings and accumulate interest over time, reducing the amount of money that can be saved. However, you can begin by prioritising repayment of the costliest debt and planning to repay others over time. Eliminating debt burden results in more disposable income for saving and investment in profitable opportunities.

It is important to address high interest debts, such as Credit card and Personal loans, which can have exorbitant interest rates, causing you to repay two to three times the amount borrowed. These loans consume a significant portion of your income, leaving little for other expenses. Debt consolidation can help reduce the interest rates for revolving debt. Avoid taking on new debt to satisfy immediate wants and practice delayed gratification to maintain financial wellbeing. Maintaining a debt-to-income ratio below 40% should be your goal.

4. Lack of Financial Discipline:

Building wealth is impossible without self-discipline, particularly in terms of spending. Spending more than one earns makes it difficult to build wealth, no matter how slowly one tries to do so. Failure to control spending is the most common roadblock to financial success, and impulsive spending can easily undermine even a well-thought-out financial plan. No spending-tracking app in the world can truly help you control your spending urges; it is up to you to exert self-control. One approach to this is to ask yourself honestly whether you truly need an item before making a purchase and making decisions accordingly.

5. Lack of Financial Knowledge:

Not having enough financial knowledge can hinder your ability to save money. Improving your understanding of investing and financial management can lead to better financial stability for both yourself and your future. It is important to expand your financial literacy because solely relying on savings accounts or Bank fixed deposits may not be sufficient to build wealth.

If you lack financial knowledge or do not have a finance background, it can be challenging to comprehend the risk associated with modern financial products like mutual funds, SIPs, and stocks. Therefore, having some level of financial literacy is necessary to understand the risks and returns related to these products. With financial literacy, you can assess the risk and return of different financial products and select the ones that align with your financial objectives. Enhancing your financial knowledge can be achieved by reading financial information from various sources like newspapers, websites, and magazines, which will improve your understanding of financial concepts and keep you updated with the latest financial news. Additionally, you can listen to financial podcasts, use financial management tools like EMI calculators and SIP calculators, and enrol in financial literacy courses. It's also possible to connect with financial experts through social media.

6. Ignoring the Inflation:

Ignoring inflation can be an obstacle to financial success because it erodes the purchasing power of your money over time. If you do not account for inflation when making financial plans, such as setting savings goals or retirement plans, you may not have enough money in the future to maintain your current lifestyle. For instance, if you plan to save Rs 20,000 per month for your retirement and expect to retire in 20 years without factoring in inflation, the money you save may not be worth as much in 20 years due to inflation. Hence, you may not have enough money to cover your expenses during retirement, which can lead to financial crises.

Furthermore, unfortunately, lifestyle inflation often goes unnoticed. Lifestyle inflation is the tendency of individuals to spend more as their income increases, which can lead to a higher cost of living and reduced savings. This can happen consciously or unconsciously, but the result is the same -- a higher standard of living that requires more income to sustain. To determine if you have experienced it, reflect on the expenses you had when you first started working and compare them to your current spending habits.

Ignoring inflation and lifestyle inflation can also affect your investment decisions. If you do not consider the impact of inflation on your investment returns, you may invest in assets that do not generate returns that beat inflation, which can lead to a loss of purchasing power over time.

7. Not Planning for the Contingencies:

Not planning for contingencies can be an obstacle to financial success because emergencies and unexpected events can occur at any time, and they often come with significant financial implications. Without a contingency plan, you may have to dip into your savings or take out loans to cover these expenses, which can set you back financially. Additionally, not having adequate life insurance and health insurance coverage for medical emergencies or the loss of an earning member can leave the family vulnerable to financial hardships. Therefore, you should plan to have a sufficient contingency fund and insurance coverage in place to protect yourself and your family from financial setbacks.

8. Peer Pressure to Spend:

Peer pressure to spend can become an obstacle to financial success because it can lead to lifestyle inflation. When people start earning more money, they may feel pressure from their friends, family, and colleagues to upgrade their lifestyle and spend more on things like clothes, gadgets, dining out, or vacations. At times, people may succumb to peer pressure and overspend. It is important to be mindful of such situations and avoid being swayed by the opinions of others rather than spend wisely to achieve long-term financial goals.

9. Poor Tax Management:

Poor tax management can be another obstacle to ones financial success. Many people in India do not have a proper understanding of the tax system, leading to ineffective tax planning and under-investing. Failing to plan and manage taxes can lead to a significant impact on personal finances, such as paying penalties and interest on unpaid taxes. Moreover, inadequate tax management can lead to missed investment opportunities as you may be reluctant to invest due to the perceived complexity of the tax system.

There are several tax-saving investment options, such as Public Provident Fund (PPF), National Pension System (NPS), Equity Linked Savings Scheme (ELSS), and Unit Linked Insurance Plan (ULIP). Failing to make use of these investment opportunities and not taking advantage of the tax deductions available under different Sections of the Income Tax Act, 1961, can result in an increased tax liability.

Therefore, it is advisable to have a good understanding of the tax system and develop a sound tax planning strategy to minimise tax liability and maximise returns. Seeking professional help from a tax consultant or financial planner can also be beneficial in managing taxes effectively.

To conclude:

Achieving any financial goal in life will inevitably come with its own set of challenges and obstacles. While it is impossible to completely avoid these hurdles, it is possible to recognise them in advance and strategise how best to overcome them in order to achieve your financial objectives.

KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.