Financial planning is the base of your investing activity. However, often people tend to get their financial planning wrong. As a starting point, here are 10 critical mistakes to avoid.

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Not defining your goals

When you set your goals, remember that it is your plan for the next 30 years. So it has to be comprehensive. Define your goals thoroughly and ensure that a SIP is tagged to each goal. That is possible only if your goals are  well defined.

Starting late

Ideally, you need to start the financial planning process the moment you start earning. The earlier you start, the longer you have for achieving your goals and the longer you have to create and nurture income-earning assets and investments. The longer you create assets, the longer the income on your assets creates further assets. This is the power of compounding.

Not reducing your debt

Once you create your financial plan, your first step should be to reduce your debt. If you are paying many Equated Monthly Installments, then you are unlikely to generate anything worthwhile to invest. Use any surplus money to reduce high cost debt, like credit cards and personal loans.

Ignoring protection

You need protection at multiple levels. You need to insure your life, assets  and liabilities to ensure that you don’t disrupt your plan just to save money. Adequate protection also improves your risk appetite.

Focusing too much on tax saving

Don’t load your portfolio with endowments and Ulips for the sake of tax-saving benefits. Keep insurance and investments separate. Tax saving is needed, but it should not become the theme of your financial plan. When you focus purely on reducing your tax burden, you tend to take financial planning decisions that are sub-optimal. You may save tax, but miss out on more relevant investment opportunities.

Underestimating inflation

While calculating the future cost of payables, don’t be too conservative on inflation. Inflation is not just the government announced rate of inflation, but what we experience. For example, inflation in India may be currently around 4%, but it has been around 7% over the longer term. It is better to assume higher inflation to ensure funds are adequate.

Overestimating returns on investment

Just because equities generated 18% last year does not mean that they will generate 18% for eternity. Debt funds outperform in certain years due to falling interest rates. Don’t take them as benchmarks. When you overestimate investment returns, you tend to under invest and that is likely to result in lower corpus creation.

Not budgeting

One of the best ways to save is to reduce your expenditure. Most investors tend to expect that investments alone will take care of their financial needs. That is unlikely to happen if you continue to borrow, keep expanding your EMIs, rely on high cost debt or live an unnecessarily extravagant life.

Ignoring costs, fees, taxes

Ensure that you don’t end up paying too much in the form of churning costs or Total Expense Ratio. Also ensure that the fees you pay to your financial advisor are proportionate to the benefits that you are deriving. Any investment decision is a tax trade-off. Ensure that you make money net of taxes too.

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Not monitoring your financial plan regularly

Creating and executing the plan is not the end of the process. You need to constantly monitor it. Set triggers on a regular basis. Review your plan broadly at least every quarter and thoroughly once in a year. Re-balance your financial plan at least once in three to four years, to ensure that your plan is in sync with your goals.

By: Sandeep Bhardwaj 
(The writer is chief sales officer, Angel Broking)

Source: DNA Money