The Top 10 Financial Mistakes Indians Make and How to Avoid Them

Financial literacy is not very high in India, and many people make some common financial mistakes that cost them money and opportunities. These mistakes can affect their financial well-being and hamper their goals. However, with some awareness and planning, these mistakes can be avoided and corrected. Here are the top 10 financial mistakes Indians make and how to avoid them:

1. Not having a budget

Many Indians do not have a clear idea of how much they earn, spend, save, and invest every month. They do not track their income and expenses, and often end up spending more than they earn. This leads to overspending, debt, and insufficient savings.

The solution: The first step to financial planning is to have a budget. A budget is a plan that helps you allocate your income to your needs, wants, and goals. It helps you control your spending, save more, and invest wisely. You can use a simple spreadsheet or an app to create and monitor your budget.

2. Not saving for emergencies

Many Indians do not have an emergency fund that can cover their essential expenses for at least six months in case of an unforeseen situation like job loss, medical emergency, or natural disaster. They rely on their regular income or borrow from friends, family, or lenders to meet their urgent needs. This exposes them to financial stress and high-interest debt.

The solution: The second step to financial planning is to build an emergency fund. An emergency fund is a separate savings account that you use only for emergencies. You should aim to save at least six months of your living expenses in this fund. You can start by saving a small amount every month and gradually increase it as your income grows. You should keep this fund in a safe and liquid instrument like a savings account or a liquid mutual fund.

3. Not investing for the long term

Many Indians do not invest their money for the long term. They either keep their money idle in low-yielding instruments like savings accounts or fixed deposits, or chase short-term returns in risky instruments like stocks or gold. They do not consider their risk appetite, time horizon, or financial goals while investing. This results in low returns, high taxes, and missed opportunities.

The solution: The third step to financial planning is to invest for the long term. Investing is the process of putting your money to work for you and earning returns that beat inflation and taxes. You should invest your money in diversified instruments that suit your risk profile, time horizon, and financial goals. You should also follow the asset allocation principle, which means dividing your portfolio among different asset classes like equity, debt, gold, etc., based on your risk-return expectations.

4. Not taking advantage of tax benefits

Many Indians do not take full advantage of the tax benefits available under the Income Tax Act, 1961. They either do not know about the various deductions and exemptions they can claim, or do not plan their taxes in advance. They end up paying more tax than they need to, or miss the deadlines for filing their tax returns.

The solution: The fourth step to financial planning is to save tax effectively. Saving tax means reducing your taxable income by claiming the deductions and exemptions that you are eligible for under different sections of the Income Tax Act. Some of the common tax-saving options are:

• Section 80C: This section allows you to claim a deduction of up to Rs.1.5 lakh from your gross total income for investing in certain specified instruments or making certain specified payments in a financial year. Some of the eligible instruments and payments under Section 80C are:
  • Life insurance premium
  • Public Provident Fund (PPF)
  • National Savings Certificate (NSC)
  • Equity Linked Savings Scheme (ELSS)
  • Sukanya Samriddhi Yojana (SSY)
  • Senior Citizens Savings Scheme (SCSS)
  • Five-year tax-saving fixed deposits
  • National Pension System (NPS)
  • Unit Linked Insurance Plan (ULIP)
  • Home loan principal repayment
  • Tuition fees for children’s education
  • Stamp duty and registration charges for house property
• Section 80D: This section allows you to claim a deduction from your gross total income for paying health insurance premium or medical expenses for yourself, your spouse, your dependent children, and your parents in a financial year. The maximum deduction available under Section 80D is:
  • Rs.25,000 for self, spouse, and dependent children
  • Additional Rs.25,000 for parents below the age of 60 years
  • Additional Rs.50,000 for parents above the age of 60 years
  • Additional Rs.5,000 for preventive health check-up
• Section 80E: This section allows you to claim a deduction from your gross total income for paying interest on education loan taken for higher education of self, spouse, or children in a financial year. The deduction is available for a maximum period of eight years or until the interest is paid in full, whichever is earlier.
• Section 80G: This section allows you to claim a deduction from your gross total income for making donations to certain specified funds, charitable institutions, or social causes in a financial year. The deduction is available either at 100% or 50% of the donation amount, depending on the eligibility of the recipient. However, the deduction is subject to a limit of 10% of the adjusted gross total income of the taxpayer.

• Section 80TTA: This section allows you to claim a deduction from your gross total income for earning interest income from savings accounts held with banks, post offices, or co-operative societies in a financial year. The maximum deduction available under Section 80TTA is Rs.10,000.
• Section 80TTB: This section allows senior citizen taxpayers to claim a deduction from their gross total income for earning interest income from deposits held with banks, post offices, or co-operative societies in a financial year. The maximum deduction available under Section 80TTB is Rs.50,000.
• Section 80U: This section allows taxpayers who are suffering from certain specified disabilities to claim a deduction from their gross total income in a financial year. The deduction is available either at Rs.75,000 or Rs.1.25 lakh, depending on the severity of the disability.

You should plan your taxes in advance and choose the tax-saving options that match your financial goals and risk profile. You should also file your tax returns on time and accurately, and claim any refunds or adjustments that you are entitled to.

5. Not having adequate insurance coverage

Many Indians do not have adequate insurance coverage for themselves and their dependents. They either do not buy any insurance at all, or buy insufficient or inappropriate policies. They do not consider their human life value, liabilities, assets, income, expenses, and goals while buying insurance. This exposes them to financial risks and uncertainties in case of any unfortunate event like death, disability, illness, accident, or loss of property.

The solution: The fifth step to financial planning is to have adequate insurance coverage. Insurance is a risk management tool that helps you protect yourself and your dependents from financial losses arising from unforeseen events. You should buy insurance policies that suit your needs and requirements. Some of the common types of insurance policies are:

• Life insurance: This is a policy that pays a lump sum amount to your nominee or beneficiary in case of your death during the policy term. It helps you secure the financial future of your dependents and cover your liabilities. You should buy a term insurance plan that offers pure protection at a low premium and covers at least 10-15 times your annual income.
• Health insurance: This is a policy that covers your medical expenses in case of any illness or injury that requires hospitalization or treatment. It helps you avoid out-of-pocket expenses and save on taxes. You should buy a comprehensive health insurance plan that covers you and your family members adequately and offers features like cashless facility, pre and post hospitalization expenses, no claim bonus, etc.
• Motor insurance: This is a policy that covers your vehicle against damages or losses caused by accidents, thefts, natural calamities, etc. It also covers your legal liability towards third parties in case of any injury or property damage caused by your vehicle. It is mandatory to have at least a third-party liability cover for your vehicle as per the Motor Vehicles Act, 1988. You can also opt for a comprehensive cover that includes own damage cover as well.
• Travel insurance: This is a policy that covers you against various risks and contingencies that may arise during your domestic or international travel. It covers your medical expenses, baggage loss, flight delay or cancellation, passport loss, personal accident, etc. It helps you travel with peace of mind and enjoy your trip without any worries.
• Home insurance: This is a policy that covers your house and its contents against damages or losses caused by fire, burglary, earthquake, flood, etc. It also covers your liability towards third parties in case of any injury or property damage caused by your house. It helps you protect your valuable asset and belongings from unforeseen events.

You should compare different policies from different insurers and choose the one that offers the best coverage at the best price. You should also review your policies periodically and update them as per your changing needs and circumstances.

6. Not having a retirement plan

Many Indians do not have a retirement plan that can help them maintain their standard of living and fulfil their aspirations after they stop working. They either rely on their children or their provident fund or pension schemes to take care of their retirement needs. They do not consider factors like inflation, life expectancy, health care costs, lifestyle changes, etc., while planning for their retirement. This leads to inadequate savings and investments for their golden years.

The solution: The sixth step to financial planning is to have a retirement plan. A retirement plan is a plan that helps you save and invest for your retirement goals and generate regular income after you retire. You should start planning for your retirement as early as possible and follow these steps:

• Estimate your retirement corpus: This is the amount of money that you need to accumulate by the time you retire to meet your retirement expenses. You can use a retirement calculator to estimate your retirement corpus based on your current age, income, expenses, expected inflation, expected rate of return, expected retirement age, and expected life span.
• Choose your retirement instruments: This is the mix of instruments that you need to invest in to achieve your retirement corpus. You should choose your retirement instruments based on your risk appetite, time horizon, and tax implications. Some of the common retirement instruments are:
  • National Pension System (NPS): This is a voluntary pension scheme that allows you to save for your retirement by investing in different asset classes such as equity, corporate bonds, government securities, and alternative investments. You can choose between two types of accounts: Tier I (mandatory) and Tier II (optional). You can also choose between two types of schemes: Active Choice (where you can decide your asset allocation) and Auto Choice (where your asset allocation is decided by a predefined formula based on your age). You can claim tax deduction under Section 80C for investments up to Rs.1.5 lakh in Tier I account and under Section 80CCD(1B) for investments up to Rs.50,000 in Tier I or Tier II account. You can also claim tax exemption on 60% of the maturity amount, while the remaining 40% has to be used to buy an annuity plan that provides regular income after retirement.
  • Public Provident Fund (PPF): This is a government-backed savings scheme that offers tax deduction under Section 80C for investments up to Rs.1.5 lakh in a financial year. It also offers tax-free interest and maturity amount, making it an ideal scheme for long-term savings and wealth creation. It has a tenure of 15 years, which can be extended by another five years at a time. It has a fixed interest rate that is revised every quarter by the government. It also allows partial withdrawals and loans after certain conditions are met.
  • Equity Linked Savings Scheme (ELSS): This is a type of mutual fund that invests at least 80% of its corpus in equity and equity-related instruments. It offers tax deduction under Section 80C for investments up to Rs.1.5 lakh in a financial year. It also offers the potential to earn high returns in the long term, as equity is known to outperform other asset classes over time. However, it also carries high risk and volatility, as equity markets are subject to fluctuations. It has a lock-in period of three years, which means investors cannot withdraw their money before that.
  • Annuity plans: These are plans that provide regular income after retirement for a fixed period or for life. They are offered by insurance companies or pension fund managers. They can be bought either by paying a lump sum amount or by making regular payments during the accumulation phase. They can be either immediate (where the income starts immediately after buying the plan) or deferred (where the income starts after a certain period). They can also be either fixed (where the income amount is fixed) or variable (where the income amount depends on the performance of the underlying assets). They offer tax benefits on the premium paid and the income received.
  • Monitor and review your retirement plan: This is the process of tracking and evaluating your retirement plan periodically and making necessary changes as per your changing needs and circumstances. You should monitor and review your retirement plan at least once a year and check if you are on track to achieve your retirement corpus. You should also check if your retirement instruments are performing well and giving you the desired returns. You should also adjust your asset allocation, contribution amount, withdrawal amount, etc., as per your risk profile, time horizon, and market conditions.

7. Not having a will

Many Indians do not have a will that specifies how their assets and liabilities should be distributed among their heirs after their death. They either think that they do not need a will, or they procrastinate or avoid making one due to various reasons. They do not consider the legal and emotional implications of dying intestate (without a will). This leads to disputes, conflicts, and delays among their family members and beneficiaries.

The solution: The seventh step to financial planning is to have a will. A will is a legal document that expresses your wishes regarding how your property and affairs should be handled after your death. It helps you ensure that your assets are distributed as per your wishes and that your dependents are taken care of. It also helps you avoid unnecessary taxes, fees, and hassles for your heirs. You should make a will as soon as possible and follow these steps:

• Identify your beneficiaries: These are the people or entities that you want to inherit your assets and liabilities after your death. You should name them clearly and specify their relationship with you. You can also mention the percentage or proportion of each asset and liability that you want to give to each beneficiary.
• Appoint your executor: This is the person or entity that you trust to carry out your wishes as per your will after your death. You should choose someone who is competent, reliable, and willing to take up this responsibility. You should also name an alternate executor in case the primary executor is unable or unwilling to act.
• Draft your will: This is the process of writing your will in a clear and concise manner, using simple and unambiguous language. You should cover all the essential elements of a will, such as:
  • Your personal details, such as name, address, date of birth, etc.
  • A declaration that you are making the will voluntarily and in sound mind
  • A revocation clause that cancels any previous wills or codicils made by you
  • A bequest clause that specifies how your assets and liabilities should be distributed among your beneficiaries
  • A nomination clause that specifies who should be the guardian of your minor children or dependents, if any
  • An appointment clause that specifies who should be the executor of your will
  • A residuary clause that specifies how any remaining or unforeseen assets or liabilities should be dealt with
  • A signature clause that confirms that you have signed the will in the presence of two witnesses
  • A witness clause that confirms that the witnesses have signed the will in your presence and in the presence of each other
• Register your will: This is the process of getting your will legally validated and recorded by a registrar or sub-registrar of assurances. This is not mandatory, but advisable, as it helps prevent any disputes or challenges to your will in the future. You should register your will within a reasonable time after making it and pay the applicable fees and stamp duty.
• Update your will: This is the process of making changes or additions to your will as per your changing needs and circumstances. You should update your will whenever there is a significant change in your life, such as marriage, divorce, birth, death, inheritance, etc. You can update your will either by making a new will that revokes the previous one, or by making a codicil that modifies or supplements the existing one.List your assets and liabilities: This is the inventory of all your movable and immovable properties, such as bank accounts, investments, insurance policies, real estate, vehicles, jewellery, etc., and all your debts, such as loans, mortgages, credit cards, etc. You should also mention the location, value, and ownership details of each asset and liability.

8. Not taking professional advice 

• Many Indians do not take professional advice for their financial planning and decision making. They either rely on their own knowledge or intuition, or follow the advice of their friends, family, or media. They do not consider their unique financial situation, goals, and challenges while making financial choices. They also do not evaluate the credibility, expertise, and suitability of their sources of information and guidance. This leads to suboptimal outcomes, mistakes, and regrets.

The solution: The eighth step to financial planning is to take professional advice. Professional advice is the advice given by qualified and experienced experts who have the knowledge, skills, and tools to help you with your financial planning and decision making. They can help you:

• • Assess your current financial situation and identify your financial goals
  • Analyse your risk profile and time horizon
  • Design a customized financial plan that suits your needs and preferences
  • Choose the best financial products and services that match your plan
  • Implement your plan and monitor its progress
  • Review your plan and make necessary adjustments
• You should seek professional advice from certified financial planners (CFPs), chartered accountants (CAs), tax consultants, investment advisors, insurance agents, etc., depending on your specific needs and requirements. You should also check their credentials, reputation, fees, and testimonials before hiring them.

9. Not learning about personal finance

Many Indians do not learn about personal finance and its various aspects, such as budgeting, saving, investing, taxation, insurance, retirement planning, estate planning, etc. They either think that personal finance is too complex or boring to learn, or they do not have enough time or resources to learn it. They do not realise that personal finance is an essential life skill that can help them achieve their financial goals and improve their quality of life.

The solution: The ninth step to financial planning is to learn about personal finance. Learning about personal finance is the process of acquiring knowledge and understanding about various financial concepts, principles, products,
services, and strategies that can help you manage your money effectively and efficiently. It can help you:

• Make informed and rational financial decisions
• Avoid common financial mistakes and pitfalls
• Save more and spend less
• Invest wisely and earn more
• Save tax legally and ethically
• Protect yourself and your dependents from financial risks and uncertainties
• Plan for your retirement and legacy

• You can learn about personal finance from various sources, such as books, magazines, newspapers, blogs, podcasts, videos, courses, workshops, seminars, webinars, etc. You can also learn from your own experiences, mistakes, and successes. You should learn about personal finance at your own pace and level, and keep updating your knowledge as per the changing trends and scenarios.

10. Not enjoying your money

Many Indians do not enjoy their money and the fruits of their hard work. They either save too much or spend too much, without finding a balance between the two. They do not allocate their income to their needs, wants, and goals in a proportionate manner. They do not indulge in their hobbies, passions, or dreams. They do not celebrate their achievements or milestones. They do not share their wealth or happiness with others. They do not live in the present or plan for the future.

The solution: The tenth step to financial planning is to enjoy your money. Enjoying your money is the process of using your money to fulfil your desires and aspirations, while also taking care of your obligations and responsibilities. It helps you:

• Achieve financial freedom and peace of mind
• Enhance your self-esteem and confidence
• Express your personality and creativity
• Experience joy and satisfaction
• Create memories and stories
• Spread love and kindness

• You should enjoy your money by following the 50/30/20 rule, which means allocating 50% of your income to your needs (such as food, shelter, clothing, utilities, etc.), 30% to your wants (such as entertainment, travel, shopping, etc.), and 20% to your goals (such as saving, investing, debt repayment, etc.). You should also enjoy your money by following the SMART criteria, which means making your spending Specific, Measurable, Achievable, Relevant, and Time-bound.

Conclusion

Financial planning is not a one-time activity, but a continuous process that requires constant attention and action. By avoiding the top 10 financial mistakes Indians make and following the steps to financial planning mentioned above, you can improve your financial health and well-being. You can also achieve your financial goals and live a happy and prosperous life.