Being a finance professional, I come across many investors who find personal finance quite boring and complicated. They think that only those who are from finance background can understand it but it is not true.
If you want to learn it you can find so much information about it. Your starting point should be to start learning the basics. Here I am sharing 10 basic things of personal finance which I find lacking in many investors. This is compiled and based on my daily interaction with different kinds of clients.
Personal finance is not rocket science
Common investors think that personal finance and financial planning subject is very difficult to understand but that’s not true. You can learn new things if you develop interest in it. Read and learn about personal finance. Take efforts to know it properly and then start implementing it.
Cover your basics first
It is very important to set your monthly savings rate and stick to it, prepare monthly budget, analyse about your spending pattern and segregate your expenses as NEEDS and WANTS. Give preference to saving and then spending and know your cash flow.
Never mix insurance and investment
Common man makes this mistake often. They get trapped in misselling of insurance agents and end up buying traditional plans such as whole life, endowment, moneyback and even ULIPs. One should only take Term Insurance for life insurance needs and mutual funds for investment purposes to create wealth in the long run.
Hedge life risks before starting investments
Many times, retail investors’ focus is also on investing and they keep on neglecting hedging their life risks. This ultimately takes a toll on their investments if any unfortunate event happens in future. One should set aside an emergency fund equivalent to 6 months monthly expenses plus all EMIs in most liquid financial products. Take adequate term plan and health cover for self and all family members including parents apart from the health plan provided by the employer.
Always follow goal-based investment theory
It is very important to identify your life goals and invest accordingly instead of random investing. This helps you to keep yourself focussed and disciplined towards investments. You should segregate your life goals in the short term, medium-term and long term duration and invest accordingly.
Always invest according to asset allocation
It is very important to have different types of asset classes in your portfolio. Never be over invested in a single asset class. Allocate your investible surplus (savings) in different asset classes such as cash, equity, debt, real estate and gold according to your age and time horizon required for the financial goals.
Always follow self-risk assessment before starting investing
It is very important to know which type of investor you are. Whether small fluctuations in share market increases your heartbeats or you can keep focused and continue investing? If short term volatility worries you tthen it better you stay away from equity. So before jumping in any Stock recommendation from friends and relatives see whether that suits your investment style as well as your financial goal or not.
Equity is only for long term investments
It is very important that common investors should know that equity investment makes money only in the long run. If you have 7+ yrs financial goals then only add pure equity in your portfolio. Never invest in any equity mutual fund just by checking its performance last year. Mid and small-cap funds are good for 15+yrs life goals. For a shorter period stick to nifty funds, hybrid funds and flexi-caps.
Never chase returns instead focus on the corpus required to be accumulated
Normally retail investors always run after returns. They want to earn maximum return from every investment they make. Always remember returns are not in your hand. What is in your hand is saving more, spending less, investing wisely and controlling your GREED and FEAR while investing. Focus on these things. Focus on the corpus you want to accumulate and try harder to fund it seriously. Returns you earn on your investments should be considered extra. It is an ICING on the cake.
Knowledge and discipline lead you to financial peace
I always believe in this sentence. If one gathers knowledge about personal finance and be disciplined about investing in longer-term one can create wealth and have financial peace.
Preeti Zende is a SEBI registered Investment Adviser and Fee only financial Planner. She is Founder and owner of Apana Dhan Financial Services, Associate of Insurance Institute of India.