Navin Chandani, CRIF Regional Managing Director - India and South Asia, shares his views on the importance of setting financial targets as you plan your goals for the new year, 2023. Learn how to avoid common missteps and make prudent financial choices for your future.
Having a financial plan gives you clarity in life, leads you to make the right financial decisions, and gives it meaning. Planning your finances involves determining how much money you will need to earn, save, spend and invest so you can reach your life goals.
The new year is a time for resolutions, so why not set your financial goals as well. A New Year’s resolution is often incomplete without financial planning, as failure to do so can prove to be costly in the long run.
Ahead of the new year, here are the top 10 financial planning mistakes to avoid:
- Investing without a specific objective
It is common for individuals to invest without having a proper objective in mind and to make investments purely for tax purposes or to maximize returns. When investing, it’s important to keep in mind the purpose of the investment.
- Leaving your credit report unmonitored for long period
Many people, even those who are more aware, do not check their credit score until they need a loan or credit card. You should check your credit report regularly as it shows what has raised or lowered your credit score over the past year.
- Defaulting on repayments such as credit card and EMI payments
If you miss making your payments on the due date it will adversely affect your credit score. It can impact your creditworthiness, making it difficult for you to borrow in the future. So, commit to staying on top of your payments in 2023.
- Opting for too many credit cards
Avoid using too many credit cards to repay another line of credit. Multiple credit cards can be difficult to manage, lead to overspending, and damage your credit score if you apply for multiple cards in a short period of time.
- Inability to balance debt, savings, and investments
It is wise to first prioritize the payments that need to be made and make them step by step. Make small contributions to your savings while paying down significant debt. You may also choose to invest when you have surplus funds. The bottom line is that it is just as important to repay your debts on time as it is to save and invest for your future.
- Compounding is powerful, don't underestimate it
The power of compounding is one of the basic concepts of money-making that many individuals overlook. Essentially, compound interest is earning interest on your interest, compounding your returns over time, provided you do not withdraw your money. The money invested will result in returns from both the initial capital and the collected earnings in the long run.
- Leaving insurance out of your financial planning
An effective financial plan includes insurance. It is important to be prepared for the unexpected to ensure that even in the event of a financial crisis, you will still be able to reach your goals. By having life insurance, you can protect those who are financially reliant on you.
- Making retirement plans without accounting for inflation
The currently increasing inflation has many worrying that their savings will continue to lose value as prices rise. Check your budget to see where you might need to adjust your spending and make sure you're saving enough for the retirement you want.
- Emergency funds are important but ignored
Having an emergency fund is more imperative than ever before. It might hurt that an extra amount is being deducted from your monthly income amongst all your debt. In times like these, when fears of economic instability and job cuts are on the rise, an emergency fund can be a lifesaver.
- Lack of proper analysis due to pressure to invest in a short period
In the months leading up to the end of the year, you may already be running out of time to make tax-saving investments, and you may not be able to analyze all your options. Investing at the beginning of the year allows you to put aside small amounts rather than a large sum in one go; your money will have more time to grow.
It is therefore wise to plan your finances based on both short and long-term goals. Make prudent financial decisions by improving your financial understanding, reviewing existing financial arrangements, and aligning your future plans accordingly. As a result of such financial discipline practices, it is possible to build a healthy financial portfolio.