Since childhood, we have cultivated healthy habits such as brushing our teeth, eating balanced meals, exercising every day, and getting enough sleep, which maintains our physical health. Similarly, from the moment we start earning our keep, we need to develop healthy financial habits that keep our future secure.
To thrive in the present, one has to be financially literate and disciplined. Financial literacy is being well-informed and up-to-date on topics such as personal finance management, budgeting, investing, and so on. Whereas, financial discipline is being prudent and consistent in spending, saving and investing habits.
These traits help in achieving monetary stability and accumulating wealth for yourself and the people who depend on you. Here are some of the poor financial habits that you need to avoid-
- Not tracking your income and expenditures:
It is important to understand your sources of income and your expenses. People often overlook this important step and later are clueless as to where their money is coming from and going to. Keeping track of all your sources of income, be it salary, rent, capital gains and so on… And your expenses, such as bills, rent, loans, fuel and so on… Can help you budget and save money effectively and efficiently.
You can keep track of your income and expenses through apps, spreadsheets or just good-fashioned, writing it down in a book. This helps you get a bird’s eye view, so to speak, of your spending habits and trends, allowing you to plan and budget your expenses, set realistic savings goals, and avoid overspending and debt accumulation.
- Over-saving:
Now, don’t get it wrong. Saving is undoubtedly important and useful but some people have this bad habit of being extremely stingy and cautious with their money. They prefer to sacrifice their basic needs if it means they can save money, which ends up being more detrimental than beneficial. Do not be this person, as it can make your life miserable down the road. You will start to miss out on all the good moments and fun that life has to offer by being overly cautious about where, when, and how much you spend.
Another area of concern is that idle money loses value over time due to inflation, essentially eating away at your savings. There is no need to compromise on your present to secure your future. When else will you have all the fun, trips, vacations, adventures, and so on? Certainly not when you’re in your 70s. The bottom line is that, while it is critical to save, you should also make the most of your health and wealth.
- Overspending:
On the opposite spectrum, we have people who are carefree about their spending habits. Such people live paycheck-to-paycheck, are driven by immediate gratification and make the most of their lives without paying much attention to their expenditures. This can lead to financial ruin and potential debt, as a proper financial plan and budgeting are lacking. Overspending is a slippery slope and you need to tread carefully.
Sometimes people don’t even realise how much they have needlessly spent on products and services that hold little to no long-term utility. But it is important to note that not all discretionary spending is negative, as long as it aligns with your goals. After all, it is your own hard-earned money and you can use it to improve your present and future without anyone giving you a second look. However, unchecked spending can lead to debt accumulation, financial strain, and, in extreme cases, bankruptcy.
It is important to have a contingency fund at all times. But most importantly, it is vital to strike a balance between over-saving and overspending. Re-evaluating your spending and saving habits thoughtfully can help you secure your future without having to compromise on present comforts.
- Paying too much in taxes:
In India, the tax rates are reasonable and the government provides a good number of deductions and exemptions. So there is no reason to be paying excess taxes and not utilising the deductions and exemptions legally provided by the tax department themselves. Efficient tax planning is a crucial part of managing personal finances and can save you a good chunk of money without the taxman eating away at your hard-earned money.
Section 80 of the Income Tax Act offers deductions like 80C for investments in EPF, PPF, NSC, ELSS, and insurance premiums. Section 80D provides deductions on health insurance premiums, while Section 80E covers interest on education loans. Additionally, 80G allows deductions for charitable donations, 80TTA for savings account interest and so on.
These provisions enable taxpayers to reduce taxable income, promoting investments in healthcare, education, and charitable causes, thus saving a lot of money.
- Impulsive buying:
As the name suggests, impulsive buying is a plague in modern society. People are so easily swayed and convinced to purchase a product or service, thanks to good marketing. Emotions and feelings are frequently the driving forces behind hurried purchasing decisions. It is also nicknamed ‘mindless consumerism’.
Such unplanned purchases can lead to expensive binge shopping, thus leaving a hole in your wallet. People often make impulsive decisions to avoid the consequences of thinking about an unwanted purchase decision. When this can be brought under control, you can get rid of this behaviour and avoid falling prey to marketing companies. The best remedy to combat impulsive buying is to be self-aware and develop financial discipline. Identify the trigger points and emotions that make you impulsive and take a moment to reflect and think about whether you require that product/service.
- Comfortably taking on debt
Taking on debt refers to the excessive use of credit cards for making purchases. While credit cards are good for making occasional purchases and paying through an EMI plan, allowing you to spread out payments without immediately depleting your savings, they can also become a financial pitfall. Credit cards accrue interest and if the balances aren't paid off on time, the interest compounds quickly, leading to significant debt and financial strain. The pressure to repay on time to avoid a bad credit score can also cause mental stress.
A good rule of thumb is to avoid purchasing a product or service on a credit card unless your bank balance is equal to or more than the cost of that product/service. To manage debt effectively, prioritise paying off high-interest debt first using strategies like the snowball or avalanche methods. Additionally, maintaining financial discipline by avoiding unnecessary borrowing and focusing on debt reduction can help you achieve financial stability and freedom.
- Having no emergency funds
Having a backup plan never hurts, especially in financial matters. More than anything, it gives a sense of security and peace of mind, knowing that you can rely on it in case things do not work out the way they were supposed to. Similarly, it is critical to maintain an emergency fund for personal financial security. Without backup funds, you are vulnerable to financial crises that arise unexpectedly, such as medical emergencies, job loss, or major repairs. This can also lead to increased debt as you rely on credit to cover these expenses.
To avoid financial stress in emergencies, start an emergency fund and contribute to it regularly. The contributions don’t need to be large or fixed amounts; even small but consistent deposits can add up over time and provide a crucial safety net when unexpected expenses arise.
And lastly,
- Waiting too long to invest
The best time to invest was yesterday but the next best time to invest is right now. Why should you let your money sit idle while you break your back all year to earn it? Instead, make your money work and make more money for you by investing. Waiting too long to invest means missing out on the potential growth that comes from long-term investments. The earlier you start, the more time your money has to grow. Even small investments made consistently over time can lead to significant returns.
Investing is an important tool towards building wealth and the investment world provides a large arsenal of options to choose from. All are tailored to suit the needs of all kinds of investors. Some of the most common investment options include mutual funds, stocks, bonds, debentures, and gold, among others. This proactive approach will help build a strong financial future.
In conclusion
Developing healthy financial habits is key to achieving long-term stability and peace of mind. By tracking your income and expenses, balancing saving with investing, managing taxes smartly, and avoiding impulsive spending, you can build a solid financial foundation. Additionally, staying cautious with debt, having a backup emergency fund, and starting to invest early will help secure your financial future. It's all about finding the right balance between enjoying your life now and being smart with your money in the future. Remember, financial success comes from consistent, thoughtful decisions that align with your goals.
Happy investing!!!
