Top 5 financial mistakes that could drain your wealth

Everyone makes mistakes. However, the most important aspect is how we learn from these errors. There are several financial common mistakes that can have a lasting effect on your financial well-being and may hinder your pursuit of financial independence.

In essence, these are errors that should be avoided at all costs. Being aware of these pitfalls can significantly aid in steering clear of them. Here’s a list of such mistakes to help safeguard your finances from their detrimental effects.

1. Disclosing sensitive financial information to others

It is important to note that banking regulations prohibit even spouses from using each other’s debit or credit cards for ATM withdrawals or purchases. A notable incident reported in the media involved a bank denying a refund to a female customer because her ATM card was deemed non-transferable. Her husband had attempted to use her debit card at an ATM, but the transaction failed due to a technical issue. The key takeaway is that you should never share your online banking credentials, passwords, ATM PINs, or debit/credit card information with anyone. It is essential to store these items and access information securely. Additionally, you must protect your investment data, e-wallet, and UPI details from unauthorized access. Any negligence in this regard could result in misuse and substantial financial losses.

2. Overlooking inflation in investment strategies

The primary aim of investing is to build wealth in alignment with your financial objectives. However, when the inflation rate surpasses the returns generated from your investments, it results in a negative real return. For instance, if the current fixed deposit interest rate offered by banks is 6.50% per annum while the inflation rate stands at 7.00%, your wealth diminishes at a rate of 0.50% due to inflation outpacing your investment returns. It is not unusual for investors to disregard inflation and concentrate solely on nominal returns. Nevertheless, to achieve long-term wealth creation, it is essential to prioritize obtaining a higher real return on your investments.

3. Insufficient contingency fund preparation

A contingency fund serves as a financial reserve to cover essential expenses during emergencies, such as the recent Covid-19 pandemic. Many individuals experienced job losses or significant declines in business income during the lockdowns. Those with adequate contingency savings fared better than those lacking sufficient emergency funds. The key takeaway is that establishing a fund capable of covering your daily expenses and debt obligations for a minimum of six months without a steady income is crucial. This can be accomplished by setting aside necessary savings at the start of each month and reducing discretionary spending as needed. Additionally, if you had to utilize your emergency fund in the past year and your income has since stabilized, it is imperative to take prompt action to replenish that fund.

4. Failure to Repay Credit Card Balances Promptly

Credit cards can serve as effective instruments for enhancing your savings by optimizing the benefits of your expenditures, provided they are utilized judiciously and with responsibility. Nevertheless, many individuals err by using their credit cards indiscriminately and neglecting to settle their balances punctually. Typically, credit card holders enjoy an interest-free period of up to 55 days; however, once this period elapses, interest charges are applied. Consequently, these outstanding amounts can accumulate rapidly, potentially leading to unmanageable debt and adversely affecting your credit score.

It is imperative to adhere to your budget while utilizing your credit card and to ensure that the total outstanding balance is cleared within the interest-free period for each billing cycle. One effective strategy is to set up a standing instruction with your bank for automatic debit of your credit card dues, thereby minimizing the risk of missing payment deadlines. While paying only the minimum amount due may keep your account active, it will result in incurring unnecessary interest charges on the remaining balance, and you may lose eligibility for interest-free periods until the dues are fully settled. Conversely, consistently repaying your credit card balances in full and on time will not only help you avoid interest charges and penalties but will also aid in enhancing your credit score.

5. Overlooking Insurance Acquisitions

Numerous individuals tend to underestimate the importance of insurance acquisitions, perceiving them as superfluous expenditures. Nevertheless, it is crucial to recognize that sufficient insurance coverage is essential for protecting your financial well-being, as well as that of your dependents, against unforeseen emergencies. For instance, should you or a family member require hospitalization, the resulting medical expenses could severely jeopardize your family’s financial stability without a health insurance policy in place. In a similar vein, if the primary earner in a household experiences an accident or unexpectedly passes away, the financial future of the dependents could be significantly compromised if there is no adequate life insurance coverage.

Therefore, it is imperative to prioritize the acquisition of a comprehensive health insurance plan (preferably with a coverage of at least Rs 5 lakh) and a suitable life insurance policy if you have not already done so. This not only protects the financial interests of your dependents but also secures your own financial objectives. Additionally, these insurance purchases can provide tax benefits. Thus, it is essential to acknowledge the importance of necessary insurance acquisitions, as they represent one of the most prudent uses of your financial resources.