7 Financial Habits to Avoid

"Earning a lot of money is not the key to prosperity – how you handle it is." Dave Ramsey, leading American financial guru. Building a corpus for the future requires careful planning and discipline. It’s important to inculcate good financial habits that will help you make progress in your financial plans. At the same time, it is important to avoid habits that might drag you back. Here are 7 financial habits that might be preventing you from growing your money effectively.

Using credit cards irresponsibly

Credit cards are great financial tools, but don’t use them to spend beyond your income. When used well, credit cards can help you build a credit history. However defaulting on your bills can rack up interest and hamper your credit score, which will affect your borrowing in the future.

Using life insurance for investments

Life insurance is primarily there for financial security, not as an investment tool. Unfortunately, many Indians tend to use it as an investment tool. Keep life insurance for the right purposes, and invest in returns-generating avenues which keep pace with inflation like equity and debt mutual funds to grow your corpus.

Not planning ahead

As per the 50/30/20 approach to budgeting, you may consider spending 50% of your income on essential household expenses including EMIs, 30% on leisure, and 20% on savings and investments. You may consider investing money for the future in mutual funds to meet your children’s education plans and your retirement plans, based on your long-term financial goals.

Not planning for emergencies

COVID-19 has shown the importance of setting aside some funds for emergencies. In particular, those whose earnings were affected by the pandemic, realised the value of emergency savings. Try to set aside some money for unforeseen situations, such as a job loss or sudden hospitalisation.

Investing only in physical assets

It is natural for people in their 40s to be risk-averse and prefer investments in physical assets such as gold or property, given their responsibilities and their greater familiarity with these assets. However, you should also consider newer investment options such as gold funds, equity funds, and debt funds.

Investing only in domestic assets

Investing only in Indian stocks makes you vulnerable to short-term shocks in the domestic stock market. Don’t put all your eggs in the same basket. You could diversify risk by investing in international equity funds, and benefiting from the economic growth of other countries.

Not investing through SIPs

A systematic investment plan (SIP) allows you to build a corpus for the future by investing small amounts. Long-term investments like these help to smoothen out market volatility. By investing through SIPs, you can save affordably and regularly in order to create a suitable corpus for your financial goals.

Be alert to the above mentioned financial habits and try to give them up completely. By removing them from your life, you’ll avoid the common pitfalls that affect other investors, and set yourself up for financial prosperity.

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