Key mistakes to avoid making in finance

Finance can be a friend or it can be an enemy. Understanding finance and it's implications is not difficult. What is difficult is finding out what mistakes to not make and taking those learnings and implementing those in your life .

Here are a few of these that need to be taken care to ensure that you dont make them

1. Ignore starting early

This is the biggest and most critical thing to learn. Save as much as possible and as early as possible. The power of compounding enables the multiplier effect that brings out incredible increases in ones wealth.

Let's take an example. If you are getting a return of 9 % , that means using the power of 72 rule your money will double in 8 years time (72/9).

Let's assume two people .. one who starts at age of 20 and the other who starts at the age of 40 but with double the savings...so Rs 1 and Rs2 . Both save till retirement which is 60 years

Person 1
I
At age 28 the value  is 2
@36 the value is 4
@ 42 the value is 8
@50 the value is 16
@58 the value is 32

Person 2

@ 48 the value is 4
@56 the value is 8
@ 60 the value is 10

For the second person to earn as much as the first person he would need to save around 6 times more than if he had started when he was 20!!!

It's a heck of a lot of difference

So understand the power of compounding and ensure you make use of it.

2. Use a good mix of equity and debt

Dont be ultra conservative at your early stages of life. Take the higher risk.. that will bring you higher returns.

3. understand the product you are invested in.

I in 1998  invested in a money back policy for a period of 20 years. Rs 6000 a year. I rue the day I went for it. At that time, it was my first start to a saving .. from that point of view it is still a good decision .. on hindsight it was a wrong product. Of course at that time we did not have the boom in equity. The equity market was very difficult to get into.. multiple paper work etc.

But the point being understand the market .. don't have over exposed risky positions but don't also take a very conservative approach

4. Automate your savings - pay yourself first

Ensure you first pay yourself and then you spend. Try and save upto 30% of your income.. that's what the country saves as of today on an average . Dont be below the average

I think these are four main things to ensure you don't make mistakes...

Understand them... it's simplefinancialsense