Avoid these 5 Mistakes While Financial Planning for FY 2022-23

Financial planning is about building your wealth gradually and consistently. It entails setting specific goals, saving regularly, investing those savings, and protecting your assets. Financial planning is essential for your financial well-being, especially when something like a global pandemic adds a new wrinkle to your ability to save, invest or pay down debt.

A financial new year is an ideal time to reset and construct an effective financial plan that aims to achieve your envisioned financial goals and secure your financial future. Keeping your financial plan on track means doing the right things and avoiding common mistakes.

However, there are some worryingly common financial planning mistakes that can keep you from doing any good to your money. While we may have a vague idea or two of what we want to achieve with our finances, it's easy to take a wrong turn, accomplishing our goals even more out of reach.

Many individuals take up financial planning practices, and due to a lack of financial knowledge, they are bound to make common financial mistakes which may result in some regret. To make this year a year of financial success, it will take some planning and a shift in how you think about money. While mistakes are all part of the learning process, your financial planning blunders could greatly affect you in the long term.

With the focus more specifically on investments and personal finances, your best intentions might sometimes have adverse effect on your financial wellbeing. There are different reasons why this might happen. You might be too optimistic regarding certain investments or might not do thorough due diligence about your investments. If you are careful in your approach, you will give yourself a better chance of bringing your financial planning for FY2022-23 to fulfilment.

Join Now: PersonalFN is now on Telegram. Join FREE Today to get ‘Daily Wealth Letter’ and Exclusive Updates on Mutual Funds

As you shape your financial strategy for creating long-term financial health, here are five key mistakes you don't want to make and what you can do to avoid these pitfalls:

Mistake #1: Setting Unrealistic Goals

When it comes to goals or resolutions, focusing on too many things at the same time is probably the most common mistake that you may make while planning your finances. Paying off credit cards, student debts, retirement, and saving for a house all at the same time can seem daunting. Set S.M.A.R.T financial goals that are reasonable and feasible within the time frame available to you.

While all goals are important, individuals often struggle to make progress when they focus on unrealistic goals. Instead, assess where you're at and what's important to you. Then, choose a specific goal, such as saving one month's worth of living expenses or paying off a specific amount of credit card debt, and concentrate on achieving that goal. Setting realistic goals and making incremental progress toward them by aligning your investment with appropriate financial goals is essential.

Mistake #2: Failing to Build a Safety Net

It is surprising to see many with no emergency funds at all, which is concerning because it is an important financial buffer and can prevent you from getting further into debt. Many tend to ignore the importance of having a large enough emergency fund in place, and this can land them in serious trouble. Not having an emergency fund has hit individuals, especially because of the COVID-19 crisis, which has resulted in job losses.

A big lesson that the pandemic has taught us is how important it is to have an emergency fund. Here's where you should take your extra money and work towards building funds that will sustain 12-24 months of expenses, including loan EMIs. Even if there isn't a worldwide emergency on the horizon, it's still necessary to be prepared for the occasional curve balls that life may throw at you.

However, Millennials can sometimes be overconfident and ignore the risks of not having a rainy day fund. Any amount is a good place to start an emergency fund, it can be hard to pull together, but it can be a total lifesaver when unexpected happens.

You can also think outside the box when it comes to your emergency fund. It shouldn't necessarily be a liquid cash in your savings bank account or term deposits. It might be an investment in liquid funds that offer relatively higher returns and are easily accessible. Keep your emergency fund separate from your regular savings account and keep out of it for other expenses. Consider allocating any bonus money, tax refunds, or surplus money you saved from your budget into an emergency fund.

Mistake #3: Waiting to Start Retirement Planning

Retirement might seem like a long way off, but life has a way of throwing things at you. You may be busy with things like buying a car or a house, raising a young family, or repaying student loans and don't get around to thinking about retirement until your 40s.

The earlier you begin planning for retirement, the easier it will be to meet your objectives, providing you with more time to enjoy your golden years. Finding a balance between putting money down for later and having enough money to pay for things now is the key to retirement planning. Keep in mind that the price of delaying retirement planning can be high.

With compound interest, even modest amounts of savings will grow exponentially over longer stretches of time. However, you may lose this benefit if you aren't starting early enough to take advantage of that compound interest factor.

For example, you could either start your journey earlier at 30 years old and contribute 3% of your income or start late at 50 years old, where you'll need to contribute 20% of your income to get to the same level of savings by the time you are 65.

Mistake #4: Paying off Debt Without Any Savings

Nobody likes debt, but unfortunately for most, it's a part of life. However, some people make the big mistake of not prioritising debt reduction. It could be tempting to pay off as much debt as possible. However, a common blunder is to spend all your funds on debt repayment before saving and investing for the future.

With debt being one of the most stressful financial problems that people have, sometimes you are unaware of what you should pay off first and may end up paying off the wrong debt first. The good idea is to put everything on a list and pay the ones with the most priority first.

Look at any debt you have and what needs to be paid first, starting with the highest interest rates. Paying off credit cards with higher interest rates first is beneficial in saving you some money. Be strategic about the debt you are trying to pay off.

By getting rid of your debt, you will improve your credit score and free up money, which will allow you to put more money towards key financial goals, such as your retirement, child's higher education, etc.

Mistake #5: Investing Frivolously

A major and most common financial planning mistake that one makes is investing frivolously. Making unworthy uninformed investment decisions may hamper your financial future. Invest your money only after properly analysing the risks and personally understanding the investment opportunity.

Asset allocation and diversification are the two main elements of any portfolio for wealth creation. Make sure you have a well-diversified portfolio that lowers the risk of your investments because not all asset categories (e.g., equities and bonds), industries, or companies move together.

By investing in various asset classes that consist of different companies across markets and sectors, means if a few stocks underperform, they'll be offset by the others that do well. Do not put all the eggs in one basket. i.e. investing all the money in one asset class like equity or gold. This leads to concentration risks of the investment portfolio. A multi-asset investment basket with optimal asset allocation helps balance your risk and returns, mitigates market volatility, and creates a hedge against inflation.

When planning finances, the time value of money, or how money loses its value over time, is usually ignored by the vast majority. Being over-dependent on "safe" investments such as saving accounts, Bank FDs, and government bonds will lead to your portfolio giving returns at a rate lower than the inflation rate. Thus you may consider investing in inflation-beating avenues such as mutual funds. Do your own research don't just rely on any advice from your friends or relatives. Historical returns should not be considered as the sole deciding factor while making investment decisions.

In a tussle between greed and fear, investors try to time the markets. Most retail investors end up underperforming the market as a result of believing they can beat the market. Time in the market always beats trying to time the market, you may always stick through a robust investment strategy that has a long-term approach.

Do not enter into an investment only with a tax saving objective. Such investments lead to locking your investment amount for 4-5 years without yielding good returns. The objective of investment should be to earn returns, and the objective of a tax-saving instrument should be to save tax. When an investor mixes the two, it results in earning overall lower returns.

It is extremely dangerous to put all your money into high-risk assets like NFTs or cryptocurrencies. High-risk and high-volatility investments are increasingly appealing to younger investors looking to build quick wealth and can make long-term. When it comes to financial planning, it's more about preparing for the worse than chasing the highest return.

When the market is volatile, it's easy to make emotionally driven decisions and want to bail on your investments. However, this is frequently a mistake. Take a deep breath and analyse the changes you're considering making before making a hasty decision in a turbulent market.

Financial planning isn't something you do once and then forget about. Periodic reviews of your investment portfolio, financial goals, debts, and other financial matters are vital to ensure that you're remaining on track while making required modifications.

Therefore, the factors such as budgeting, saving regularly, spending wisely, investing, and managing debt are pillars of financial planning. Financial literacy will help you understand the finer nuances of financial planning to be well prepared for life.

We do understand that not everyone is capable of fully comprehending and putting financial planning into effect. Here we recommend you to register for PersonalFN's Comprehensive Financial Planning Service, which is designed to help you achieve your financial goals at the right time and with adequate peace of mind.

PersonalFN's Comprehensive Financial Planning Service is not just another run-of-the-mill service to fine-tune your investments. Consider it to be the yearly maintenance of your vehicle that safeguards your financial well-being.

So if you wish to enhance your financial planning and avoid making financial mistakes for FY 2022-23, you must enrol for PersonalFN's Comprehensive Financial Planning Service today!

Warm Regards,
Mitali Dhoke
Jr. Research Analyst