These errors can seem minor but don't be fooled by that. A stitch in time saves nine
Financial planning shouldn't be as complicated as it sounds. You may or may not have a complicated Excel worksheet on your computer with all sorts of numbers in never-ending rows and columns that chart out your entire financial future, but there are a few key mistakes that you must avoid in your financial life. These are small mistakes, but ignore them at your own peril. If they go unnoticed or untreated, the affect will haunt you in a big way later. Here are five mistakes that you can easily avoid.
Wealth creation, not tax
Every year we plan to save our taxes. Investments made under Section 80C of the Income tax Act, 1961 allow a tax deduction up to Rs.1.5 lakh. Several instruments are available under this section such as tax-saving mutual funds, Employees' Provident Fund (EPF), life insurance premium and five-year fixed deposits. But before you choose the tax-saving product, ask yourself: do I really need this product, or am I buying it just to save tax? For instance, you might not need a life insurance policy if you don't have any dependants. A traditional policy like an endowment plan would give returns under 5%. "And if you need one, an online term insurance for protection is good enough," said Prakash Praharaj, founder, Maxsecure Financial Planners, adding that for most people the EPF and home loan principal amount (if any) would be enough to exhaust section 80C limits. Similarly, just investing once a year mutual fund (MF), that too in a tax-saving scheme, may be inadequate because that would mean you are keen to just saving taxes, and not really in wealth creation.
Jointly, not alone
This is one mistake that most of us commit when we invest in MFs. Make sure you understand the mode of holding whenever you invest. You could either invest in a single name or jointly (i.e., two or three applicants overall). Within joint holding, an MF offers two choices; either 'joint' or 'anyone or survivor'. Under both modes of holding, the money belongs to you, the first investor. Then what difference does it make if you hold your MF units singularly or jointly?
The main problem comes when the first unit holder dies and money needs to transferred (or transmitted, in MF parlance) to the second or remaining unit holders. While the basic set of documents such as a letter from the claimant, death certificate, know-your-client (KYC) details of the claimant, and so on, are necessary irrespective of whether you have a joint (and surviving) holder or not, the legal documents are required if a single holder dies.
If the nominee is registered, an indemnity bond is required if the transmission amount exceeds Rs.1 lakh. If the nominee is not registered and the sole unit holder dies, then your MF will ask all legal heirs to sign an indemnity bond and give individual affidavits.
In joint holding, financial planners suggest 'either or survivor'. "This will provide flexibility in operations and make it easier to dispose proceeds in case of death of one of the holders. In case of a nominee, she has to undergo a process to get the proceeds of the investment transferred in her name. Further, the legal heir(s) may also claim ownership over the investment and turn to litigation," said Praharaj.
Praharaj and other experts also say that a joint ('either or survivor') method of holding investments works better than having just a nominee to a single holding.
Bengaluru-based financial adviser Mrin Agarwal, who conducts financial literacy workshops for women under Womantra, said that in one of her sessions, she came across a woman whose husband had lost his life while serving in the Indian Army. "They had been married for less than a year. Her husband had opened his bank account in a single name and there was no marriage certificate either. Apart from her personal trauma, she had to run around at courts to get his assets in her name," she said. Such incidents can be avoided by holding assets and various types of accounts jointly.
Keep long term and short term separate
Your financial goals, the reasons for which you need the money, are scattered across your life. You might need the money tomorrow, in a few weeks, months or a few years. And then there are goals that are way ahead in the future.
In other words, you have short-term as well as long-term goals. And it's necessary to plan for both.
According to some planners, many people tend to invest much of their investable surplus in equities, but forget to plan for contingencies.
"This is a problem as investors who start out (with financial planning and investments), themselves don't know if the equity investments made are for long term or for short term. Youngsters have short-term goals like buying a car or house and to make the down payment, they tend to redeem their equity funds", said Agarwal.
Anup Bhaiya, managing director and chief executive officer, Money Honey Financial Services Pvt. Ltd, told us of a client who wanted to redeem his units from an equity fund due to some need at his home.
"We explained to him that this investment was ideally for long-term needs and that the overall investment strategy was missing allocation towards an emergency fund. The investor realised his mistake and started a systematic investment plan in an arbitrage fund," said Bhaiya.
Make sure that when you invest in equities-especially if starting out afresh-some money is set aside simultaneously in a short-term scheme, preferably through an SIP, as Bhaiya recommends. You can also use liquid funds to build a contingency corpus.
Avoid using equity funds for premature withdrawals to meet any emergency requirement.
Limit on utility payments
These days, many of us opt for direct debit facility to make our bill payments, such as for mobile phones, landline telephones, internet charges and others. Instead of submitting cheques or going to the offices of utility providers, we choose the Electronic Clearing Service (ECS) to shift the money out of our bank accounts, every month and automatically, as soon as the utility bill hits the bank account.
Although it's rare for utility providers to overcharge, we have all heard horror stories of someone getting a much bigger bill than usual.
Someone who is used to getting a telephone bill of Rs.600-1,000 may have got a shock seeing a bill of Rs.10,000. This is unusual, but possible.
Unusually high bills may also be because of stolen credit card details. What do you do in such situations? If you think you have been billed wrongly, you will need to complain to your service provider and prove why the usage projected in the bill is not correct.
But there is a precaution that you can take to minimise damage. At the time of applying for the ECS bill payment facility, fix an upper limit for every utility provider. Take a look at your average bill amounts and the highest amount that you have been charged in the past, and fix your upper limit accordingly.
"When you are paying your bills electronically, it's important to keep an eye on the monthly bills as you might just miss larger amounts. When you pay your bills physically, it's much easier to spot a higher-than-usual amount. Hence, fixing an upper limit is important," said Bhaiya.
On-time credit payments
Debt per se is not a bad thing but delaying payments can prove to be a heavy mistake, especially on credit cards.
Banks impose a late payment charge, which is usually a fixed fee depending on the slab of outstanding payment that you fall in. Late payment is charged when you don't pay even the minimum amount due. The killer charge, though, is the finance charge that is paid on revolving credit till the time you actually pay your dues. Finance charges are usually 3-3.5% per month, which translates to 20-40% per year, depending upon the card issuing bank.
N. Vishwanath, a certified financial planner, and founder and chief executive officer, Blue Ocean Financial Services Pvt. Ltd, said, "There are many perils in rolling over credit card debt. It's one of the paths to financial ruin."
If you are making a delayed credit card payment in cash to a direct sales agent that the bank, sometimes, sends, make sure you take a receipt and preserve it.
"One client got recorded as a defaulter in a bank because he had lost the receipt that the DSA (direct sales agent) had given, and he couldn't prove that the dues had been paid," said Bhaiya. If you make the payment by cheque, the charge is usually Rs.100. so choose your option wisely.
A little time spent in the beginning to make the right choices can save you from a lot of trouble later. It's just a matter of knowing the right thing to do.
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