This Women's Day, Take a Pledge to Avoid These Mistakes When Managing Money

It is an age-old fact that women are better managers than men when it comes to money management. Women are better at handling hard-earned money because they are sensible, reasonable, and conservative at times, rather than being persuaded by irrational excitement. For example, during the pandemic, when many households were subject to pay cuts or loss of income, the conservatism and budgeting practice by many women helped families sail through challenging times.

However, if there is one aspect where women need to catch up is managing their finances independently. Unfortunately, most women naively stay clear of all financial planning. It is observed that a sizeable number of women rely on the men in the house. There is still a dependency, especially among Indian women, on their father, brother or spouse, etc., either wholly or partially, mainly due to lack of financial awareness and the fear of making unintended financial mistakes.

There has never been a more important time for women to take their rightful place at the table. Women can obtain the confidence and skill to make educated financial decisions by learning about money management. We all make financial mistakes at some point in our life; the essential thing is to learn from them and avoid making them again as much as possible. This article will help women prevent common financial mistakes while managing their personal finances at any stage of life.

Recently, I was in conversation with my aunt Rashmi; she said, "Mitali, there is an event at my office on the occasion of International Women's Day on 8th March. I need to prepare a speech that involves guiding women about financial planning. Could you please help me with some unique financial planning tips that I could add to my speech?"

To which I replied, "Well, rather than explaining some financial planning tips instead, you could mention the financial mistakes that women must avoid while managing their hard-earned money."

Aunt Rashmi replied, "Alright, this sounds interesting, and it may enlighten the women to prevent any such financial mistakes while money management. But, how exactly should I explain if you could mention in detail."

I responded, "For instance, you could share your personal experience that could be more relatable. You could mention how you faced financial challenges amidst the pandemic when your husband was suffering from COVID-19. As you were dependent on your husband for all financial matters, it was a daunting task for you to manage money without him. Relying on the male in the house and not being involved in making financial decisions is a major financial mistake that many women make."

"Today, women are leading a financially independent life. Do note; financial independence is not just about you earning and owning certain assets, it involves your active participation in major financial decisions in life, whether it is the household or personal investments, tax filing, etc."

Given that, keep in mind that you can make your own financial decisions and plan for your future. You do not always have to depend on someone for your financial well-being. However, there are some basic financial mistakes that women must avoid while managing money matters, with proper guidance and adequate financial knowledge, you could easily prevent these financial mistakes.

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On this occasion of International Women's Day, let me guide you about the common financial mistakes, and let us take a pledge to avoid these mistakes while managing money:

Mistake #1 - Not Having a Budget

"A budget is telling your money where to go instead of wondering where it went." - Dave Ramsey

Budgeting is the basis for all money management, yet many households either don't have a budget or they have one but are terrible at working within it. Every woman managing the household expenses must maintain a budget and take charge of the budget while preparing a budget with her family. It's essential to have a clear picture of your financial situation as this will allow you to make better decisions and feel more comfortable about your future financially.

While it can seem a bit overwhelming, the time it takes to track income and spending is well worth it to your long-term financial goals. It's important to recognize your budget needs to be detailed; otherwise, it minimizes its accountability of it. A budget will help you reduce your unnecessary expenses and encourage you to save regularly and invest for the future. It will help you in defining your S.M.A.R.T financial goals, such as a child's higher education and marriage, along with your own aspirations like a holiday abroad or owning your own car.

Budgeting will help you understand where you're spending your money, and it can also give you a friendly reminder of how well you're working towards your financial goals

Mistake #2 - Not Maintaining an Emergency Fund

Another mistake most women commit is not maintaining a separate emergency fund to tackle financial difficulties such as severe illness, accidents, or any unexpected event in life. Emergencies strike without warning, and they often come with various financial complications. The COVID-19 pandemic is a classic example that has taught us to be prepared for any emergency.

If you are married and working, you may consider maintaining a joint emergency fund with your spouse, with your respective contributions per month. Ideally, the emergency fund should contain an amount at 12-24 months' worth of living expenses, including loan EMIs if any. Savings accounts offering a decent interest rate or liquid funds under mutual funds are a great avenue to park your emergency funds.

Whether you are married or single, failure to maintain an emergency fund may hit you hard whenever a financial crisis surfaces. The absence of it would result in the requirement to borrow immediate funds from lenders or family or exhausting your credit card limit to pay for such unexpected expenses.

Mistake #3 - Not Protecting Yourself with Adequate Insurance Cover

Not having adequate life and health insurance coverage can be a major financial mistake that one makes. Lack of insurance may create financial hardship in times of emergencies, be wise and protect your loved ones by putting an insurance plan in place and preparing for the unexpected.

Term insurance would protect your family financially fulfil their financial obligations when you aren't around by providing an assured sum to them upon your untimely demise. This would assist in the continuation of investments and repayment of existing debts.

Working women should ensure they have purchased separate term insurance to ensure their family is secure in their absence. Additionally, with a continuous rise in medical costs, you cannot commit the mistake of not purchasing health insurance.

Health insurance would assist you in bearing the high medical costs; wherein a single hospitalization bill is capable of eradicating your savings. Single mothers or married women may either choose a family-floater plan and get children included in it, or you may opt for a top-up medical policy to cover medical costs in case of disability or accidents. If you already have insurance cover, review your policy with your agent to make sure you are optimally insured.

Mistake #4 - Only Saving and Not Investing

Women tend to avoid investment-related decisions because there is a fear of going wrong and consider saving into traditional financial instruments with low risk. Saving is merely parking your idle money in your bank account without the motive of generating much return from it. However, investing is when you put your surplus money to use by parking them in investment avenues such as Fixed deposits, Mutual funds, or PPF.

When you invest, your money works for you by generating returns during the investment period. Investing in worthy avenues enables you to achieve your envisioned financial goals. Therefore, make sure you don't commit the mistake of merely saving and not investing. Both savings and investment are vital aspects of financial planning.

Before investing, women should know their investment horizon and assess their risk-taking capacity and financial position regarding their expenses and income to select the right investment avenue. For instance, you may consider investing in mutual funds via a Systematic Investment Plan (SIP). Start by investing smaller amounts as low as Rs 500 per month and gradually increase the amount once you are confident with investing your money and are financially aware. ELSS (Equity-Linked Saving Scheme) is an ideal investment choice for working women since these are Equity-Oriented Mutual Funds and provide tax benefits up to Rs 1.5 lakhs per year, under section 80C of the Income Tax Act, 1961.

Mistake #5 - Not Planning for Retirement

Many women tend to delay their retirement planning for later years, and starting early leads you to create a large corpus for your golden years. Planning your retirement is as important as your present financial plans. Identify the amount of money you will need when you retire from work, adjust your current cash outflows, and park some funds aside for your retirement plan. Ensure you invest in a robust retirement plan and make investments as per your suitability.

Planning for your retirement at an early age will ensure you continue your financial independence in the future, and you need to depend on your spouse or children in your retirement phase.

Mistake #6 - Debt Burden

Women love shopping, and many financial institutions consider this as an opportunity to offer credit cards with special discounts on various purchases. Do note that you may end up falling prey to debt traps as credit cards charge a very high rate of interest, and borrowing consumer durable loans or personal loans may increase your debt burden.

Maintain a debt-free life to attain a financially secured future. Having debt is not bad but not being able to repay it on time is harmful to your financial health. You may have borrowed a loan to fulfil some financial requirements, such as an education loan for your children or a home loan. Ensure you make timely repayments and maintain a good credit score for future eligibility of any borrowings. Do not borrow another loan to pay off the existing loan EMIs it will create a debt burden for you.

You must ensure that your debt-to-income ratio is below 40% and you can repay the loan on time. You must focus on debt reduction and management, as it will help you to maintain your financial well-being and prevent you from any debt stress.

Mistake #7 - Not Being Financially Literate

Lack of knowledge and being 'jargon inverse' often leads to many women taking a back seat when discussing finances with spouses and family. Most women rely on their partners to make various financial decisions, such as investment and insurance, primarily because they are reluctant to learn about financial products and the importance of being financially literate.

To begin with, women should read financial newspapers, magazines, online portals etc., to get at least a basic understanding of personal finance. In addition, there are several online e-course that provide adequate financial knowledge at the comfort of your home.

Gradually, women should gain all the necessary financial knowledge that would enable them to take financial decisions independently, even in the absence of a spouse due to divorce or death. If you are a working woman, knowledge regarding employee benefits, how to invest your savings, type of insurances necessary etc. is vital to secure your future and make the most of your earnings. This financial awareness would enable you to make informed financial decisions at the right time.

Financial literacy aims to assist you in better comprehending the intricacies of financial planning, saving, and investing. It is a life skill that you must grasp to maintain sound financial well-being. Financial literacy will help maintain a secure financial future, prevent financial mistakes, and become your own financial planner.

This International Women's Day, take a pledge to enhance your financial literacy and avoid these financial mistakes while managing money. It will enable you to achieve your long-term financial goals and become a financial guardian for your family.

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Warm Regards,
Mitali Dhoke
Jr. Research Analyst