Today, let us take a look at the important dos and don’ts of personal finance to avoid losses and make more money safely.
It’s a dream to earn like Warren Buffett did from his personal finance investments. While we try to achieve that, we end up making mistakes which could have been easily avoided.
Following these dos and don’ts of personal finance will reduce our risk of suffering from losses and race with time to make more money.
In this article
- Must Dos of Personal Finance Investment
- 5 Don’ts of Personal Finance Investment
Must Dos of Personal Finance Investment
1. Start investing early
- By starting early, you will have the most scarce resource in today’s world which even money can buy – TIME. This will help you in accumulating enough wealth for the future. The Magic of Compounding can only be seen when you have time by your side, they both move hand in hand. Here’s an example for the same
Two person X and Y investment details
The investment objective is basically “Why are you starting your investment?” It can be anything from future contingency, retirement, marriage or buying a house. If you can define your investment objective then trust me, half of the job is over. Now, you can easily quantify your risks, can decide how much investment do you need to fulfill the requisite objective.
Take a look at sample investment objective for better understanding.
There is a saying in the investment world that,”Don’t put all eggs in one basket.” It states that you should always allocate your capital in such a way that it diversifies into a different asset class, mutual fund schemes and sectors. In this way, you will reduce the risk associated with your portfolio. The returns are above because if any scheme under-performs, it is offset by another.
Here is an example for the same.
The former is a scheme while the latter is a portfolio of different schemes. The former has a high risk with low returns while in the latter, the risk is comparatively low and high returns.
4. Review your investments periodically
One should periodically review his/her portfolio to check. The review should be either in 6 months or 1 year depending upon the portfolio. Check this blog to learn how to review a mutual fund in 5 minutes.
5. Estimate and plan the tax implications
Before starting any fresh investment, you should check the tax implications of the particular investment option. You should gauge your future tax liability with that particular investment option like your taxable income after the investment reaps the desired results. Check this blog to know more about the tax on mutual funds.
5 Don’ts of Personal Finance Investment
1. Don’t take risky bets without full knowledge
Many people take risky bets like trading in future and options and even writing options(Unlimited Loss and limited profit game) without even understanding the whole concept and the risk associated with these asset class. Hence, one should not go for any investment option unless and until he/she completely understand it.
2. Don’t try to time the market
Warren Buffett once said that “even I cannot time the markets“. It’s next to impossible for anyone to time the markets i.e. buying at lows and selling at high. By doing this, you also don’t invest regularly which will not help in the long run. SIP helps you in avoiding this kind of mistake as it invests in both the phases-Bull or a Bear market.
Check out the High Growth SIP for long term
3. Don’t take leverage
People sometimes take loans(leverage) in order to invest. This should be avoided as you never know how your investments are going to shape out. This is more like a Debt trap wherein you will end up paying for the rest of your life if your investments go wrong.
4. Don’t mix emotions with money
FII’s have bought $154 billion of Indian equities in last 23 years from 0% Stake to 23% of the markets. While in the same time period of 23 years Indians have bought Gold worth $245 billion. We (Indians) have sold 17% CAGR asset to buy a 9% CAGR asset. Always think twice while making any investment decisions with an unbiased mind which is free from emotions. The worst mistakes are made when emotions are mixed with investment decisions.
5. Don’t get greedy and carried away with initial gains
People sometimes get overexcited with initial and short term gains and then forget their investment objective by either taking the profit or increasing their investment objective. Both these options can backfire in the long run as you yourself get deviated from your objective.
Everyone has heard the famous phrase,” prevention is better than cure.” The same rationale works with your personal finance where prevention from capital is the above points.