Thursday, October 28, 2010

Common mistakes that ruins our Financial Planning

Basic Rule # 1
Basic Rule # 2
Basic Rule # 3

Mistake No. 1: Excessive/Frivolous Spending
 It may not seem like a big deal when you pick up that double-mocha cappuccino, stop for a pack of cigarettes, have dinner out or order that pay-per-view movie, but every little item adds up. Just Rs.25 per week spent on dining out costs you Rs.1,300 per year, which could go toward an extra mortgage payment or a number of extra car payments. If you're enduring financial hardship, avoiding this mistake really matters - after all, if you're only a few rupees away from foreclosure or bankruptcy, every paisa will count more than ever.

Mistake No. 2: Never-Ending Payments 
Ask yourself if you really need items that keep you paying for every month, year after year. Things like cable television, subscription radio and video games, cell phones and pagers can force you to pay unceasingly but leave you owning nothing. When money is tight, or you just want to save more, creating a leaner lifestyle can go a long way to fattening your savings and cushioning your from financial hardship.

Mistake No. 3: Living on Borrowed Money
Using credit cards to buy essentials has become somewhat normal. But even if an ever-increasing number of consumers are willing to pay double-digit  interest rates on patrol, groceries and a host of other items that are gone long before the bill is paid in full, don't be one of them. Credit card interest rates make the price of the charged items a great deal more expensive. Depending on credit also makes it more likely that you'll spend more than you earn.The best way to avoid spending on card is not to have any.. and if you must have credit card, have only one and cautiously track your spending.

Mistake No. 4: Buying a New Car/ not affordable house
Millions of new cars are sold each year, although few buyers can afford to pay for them in cash. However, the inability to pay cash for a new car means an inability to afford the car. After all, being able to afford the payment is not the same as being able to afford the car. Furthermore, by borrowing money to buy a car, the consumer pays interest on a  depreciating  asset, which amplifies the difference between the value of the car and the price paid for it. Worse yet, many people trade in their cars every two or three years, and lose money on every trade. We Indians are ok with riding the bikes, scooty or activa. It actually saves partol, and saves money as well as it saves time for traveling also.

The same rule applies when you buy a house. Don buy 2 BHK if you really needs and can afford 1BHK. Dont buy it because your friend bought it, dont go for costly interior decoration so that your friends/relatives like that and praise that. Remember, the praise will be for few minutes, and you may end up paying for years and years.

Mistake No. 5: Living Paycheck to Paycheck : Don't spend all you get as paycheck. Invest some part of your paycheck religiously. Make it as a discipline a habit..At lease 30% of your pay check should be invested in different investment vehicles.

Making a Payment Vs. Affording A Purchase
To steer yourself away from the dangers of overspending, start by monitoring the little expenses that add up quickly, then move on to monitoring the big expenses. Think carefully before adding new debts to your list of payments, and keep in mind that being able to make a payment isn't the same as being able to afford the purchase. Finally, make saving some of what you earn a monthly priority.

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