11 Money management mistakes that you should avoid

In today’s busy world earning good money is not enough you should be aware of how to manage your money as well. This becomes very important especially when you are spoiled with too many choices on how you can spend your money by having a luxurious lifestyle, buying anything at one click online, etc.

Let’s look at a few common money management mistakes that we make mainly because of a lack of awareness.

Consider reading: How to Save Money Fast on a Low Income

1. Not having a good term insurance

People often get confused when it comes to term insurance. Most people are not aware of the existence of term insurance at all and they stick with the conventional endowment policies from companies like LIC.

In today’s busy life with unhealthy habits like long working hours, bad food choices, inactive body – you are never too sure about your future. You should get proper insurance for yourself which provides you with insurance coverage of at least 10 times your annual income. Term insurance is a great product that gives you a good life cover with minimal cost.

You should always make sure that you get the term insurance for yourself as early as possible as the insurance premium depends on age. And also with age, your body starts deteriorating – once you start having any serious disease like diabetes then you will not be able to get term insurance for yourself!

2. Company health coverage is sufficient

Most companies nowadays offer good health insurance coverage. As an employee, you have a choice to upgrade the health insurance coverage as well as add your dependents to the coverage as well. Unfortunately, this is not enough! what everyone forgets to realize is – that health insurance is only valid till you are working in that company. If you leave the company or get laid off then you lose your health insurance as well!

So it is really important to have additional protection which you must purchase on your own to protect yourself from unforeseen circumstances!

3. Buying insurance policies for investment

One of the other biggest money management mistake people do is they mix insurance with investments. They just blindly purchase an insurance product that was sold to them with the hope of getting good returns in the future. insurance plans like traditional plans, pension plans, and unit link insurance plans (ULIPs) are loaded with heavy charges which erode your return. Buy a term plan and investment in mutual funds for better returns or invest directly in stocks for better returns.

4. Not focusing on monthly expenses

Ever since the online world dominated the sales in India like Grand Sales and Big sales day. People get trapped in credit card debts and they often purchase things that are not really needed. They just purchased it because it was on sale!

The biggest money management mistake people make is they spend more when they earn more. You should have control over your spending in order to save money so that it can grow to make you rich in future.

Track your monthly expenses – build a budget plan like a 50-30-20 plan.

• 50% of your earnings should be spent on your needs!
• 30% of your earnings should be spent on your wants!
• 20% of your earnings should go towards savings!

Have a look at the top 7 Budgeting Tools To Better Manage Your Money

5. Use of credit cards

No-cost EMI. This term probably has been the biggest personal finance killer of all time. People buy things that are unaffordable just because there is No-cost EMI for that product and end up going into a credit card trap.

One must remember that Credit card EMIs have the highest interest rate in the world. Some credit cards charge up to 36% p.a. as interest cost for your EMIs. So you should be very careful about your credit card expenses and should never buy things that you can’t afford!

6. Lack of emergency funds

We have talked about emergency funds in detail here – What is an Emergency Fund and why you must have one?

You must make sure to understand the significance of emergency funds and should build them right away!

7. Savings & Investing without predefined goals

If you are managing your money without any goals then you will end up working your entire life to make ends need. A goal is very critical for your money management.

You should have short-term, medium-term, and long-term goals for your needs and put your money to work to meet those goals.

Without goal-based investment create confusion and pre-matured withdrawals which ultimately creates indiscipline in your personal finance. Investing to just save your taxes should not be your goal.

8. Relying on friends or relatives or open-source advice

If you have invested in stocks then probably you can relate to this quickly. How often it has happened to you that your friend has tipped with a good stock suggestion but you lost a lot of money with that tip?

Ask yourself – you are not taking medicines by searching on google or asking friends and relatives because you know each one has different health parameters then why are you taking chances in your investments?

Always make sure you understand the investment instrument you are getting into. If you are unsure then consult a financial advisor to help you!

9. Putting all eggs in one basket

The last thing you want to do is put all of your money in one investment instrument such as investing in real estate. This can prove disastrous for you. Always make sure you diversify your investments in multiple instruments so that you do not get hurt when that instrument fails to make any money for you. This is why there is a famous saying – Don’t put all of your eggs in one basket.

Always divide your investments into risk-free, medium-risk, and high-risk categories. Take money management decisions based on your personal conditions and ability to take risks!

10. Not having a customized financial life plan

You should have your financial life plan which gives you a roadmap in your financial journey.

Create a financial plan which can help you steer your life smoothly and you can plan your spending in a way that you live a stress-free life. This helps you in the same way as when you travel and use maps and navigation to reach your destination.

You must keep in mind to take care of people who depend on you. Do not make an assumption that you will not face any unforeseen circumstances!

These are some eye-opener questions that you need to ask yourself. Having a customized financial life plan helps you to overcome these questions and ambiguities.

11. Not reviewing your personal finance periodically

Like you do health checkups regular to make sure you are healthy, similarly, you should review your financial plan periodically to make sure you are meeting the objective. Always remember that when it comes to money things change over time. The financial plan which you have made last year may not be the right one for you with your current situation.

Money management mistakes – closing thoughts

In today’s world, it’s not important how much you earn, it’s really important to understand what you are doing with your hard-earned money.

Are you making the above money management mistakes unknowingly?  You may be doing a lot of harm to yourself unknowingly by just ignoring a few basic things.

Always remember postponing your financial decision is only going to haunt you back in the future, so don’t wait for a trigger to take the first step. 

Go ahead and check if you can avoid any of the money management mistakes we talked about here!

FAQs on Money Management Mistakes