It is said that a habit is like a cable. You weave a thread of it each day and eventually, you cannot break it. As much as this true for your normal social habits, this is also true of your financial habits. In fact, one of the key reasons most investors fail to realize the full potential of financial planning is due to the negative impact of bad financial habits. Let us look at 7 such bad financial habits and how to break these habits
- Procrastination of the process of financial planning
This is the primary and most common habit that individuals need to break. Most people tend to erroneously believe that it is still too early to worry about financial planning. Hence they tend to procrastinate on the decision. Remember the earlier you start the process of financial planning the lower your costs of operation and the higher the potential for wealth creation. When it comes to your long term wealth creation and your journey towards your financial goals, time matters more than timing. Remember, procrastination is the thief of time and hence when it comes to financial planning, the earlier you start the better off you are and more likely will be the success of your financial goals.
- Indulging yourself with high-cost debt
The problem with high-cost debt is that you do not realize its magnitude till you are overwhelmed by it. High-cost debt comes in various types. Splurging on your credit card, paying just 5% on your credit card and rolling over your debt, taking personal loans at regular intervals, relying on personal loan top-ups for consumer purchases are all examples of bad high-cost borrowing. Look at it this way. You pay nearly 35% per annum on your credit card and 20% on your personal loan. When you splurge on consumer items you are obviously not earning a return higher than this cost. That is a cardinal financial bad habit.
- Not appreciating the difference between saving and investing
You ask most people how they are planning for their future and they will tell you that they have stacked up money in the bank. Think about it! How much wealth can you create with 3.5% on your savings account or 7% on your FD account? Obviously, if you are looking at the power of compounding over your active lifetime you need to seriously look at investing. Instruments like equities and equity funds are the places where you can actually create wealth. Agreed, that you need debt funds and liquid funds for stability and regular returns, but there is little you can do if you do not create a substantial corpus. That is only possible by investing in the power of equities.
- Cut your coat according to your cloth
One of the core principles of financial planning is that you have to extract every penny of money that you can save. Our bad habit is that we get the principles wrong. Most of us tend to look at savings as a residual item after spending. In reality, you need to look at spending as a residual item after your target savings are taken care. Nobody created a great financial plan without the ability to cut the coat according to the cloth.
- Getting your short-term and long-term priorities wrong
This is a very common problem most of us do not realize. Equity is a long-term investment but we try to spend more time trying to make money by trading equities in the short term. On the other hand, debt is stable and good for the short term. But most of our PF money and Insurance investments are into debt. You need to reverse this habit. Your long-term money should go into equities and your short-term money should stay in liquid avenues. When your traditional habits take them into the reverse situation, you are destroying wealth in the short term and not creating enough wealth in the long run.
- Not giving adequate importance to the planning process
If you want to get rich and retire with a comfortable corpus of money then you need to plan for it. Most people tend to predicate their long-term wealth on a host of uncertain factors. They give too much importance to the role of chance in creating wealth in the long run. That is a mindset you need to break out of. If you want to create wealth in the long run then the best way is to plan for it. Just waiting for divine intervention will not take you too far.
- Mixing your emotions and your financial decisions
Financial planning is a very dispassionate and objective affair. You have to let your head rule your heart. Your parents may have made big money on real estate but that does not mean that the same applies to you. You need to use your own judgement in this case. Avoid falling in love with any form of investment and look at each of them on the basis of merit. Also, just look at them in current context only. The moment you let your emotions cloud your financial judgement, you are likely to make wrong financial decisions.