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A child’s professional or higher education is one of the most important financial goals for every parent. Parents start imagining right from their child’s birth that their baby will grow up to become a doctor, engineer, pilot, or astronaut.

But with the cost of education increasing drastically over the past few years, turning such dreams into reality may require a lot more planning than before.

Many schools in metros are charging fees as high as Rs 75,000 to Rs 1 lakh per annum for a kindergarten student, which is probably equal to the total amount that our parents paid for our entire education. Tuition fee for IIM-Ahmedabad for the 2010-12 batch is around Rs 13.70 lakh, which may go up to Rs 57.23 lakh after 15 years, assuming education inflation at 10% per annum.

Do The Maths Before Investing:

Calculate the amount you will require for your child’s education, considering the current cost of a particular course and keeping the education inflation in mind, which may be 10% per annum. Once you calculate the expected cost for your child’s education, you can start investing monthly to build the corpus. There can be two methods of deciding the amount of investment.

One is investing a fixed sum every month throughout the accumulation phase. For example, if you want to accumulate Rs 50 lakh in the next 15 years, you need to invest Rs 10,506 per month, considering 12% return from your investment. If you feel the amount is quite big, you can follow the growing annuity method, where you start with a smaller amount initially and increase it subsequently with a rise in your income.

For example, if you expect a 10% rise in your income on a year-on-year basis, and decide that you will increase your investment accordingly. You can start with Rs 6,000 per month in the first year and keep increasing it by 10% every year to build the corpus of Rs 50 lakh in the next 15 years with a CAGR of 12% from your portfolio.

Buy An Adequate Cover:

Every parent wants their child to get the best education. Parents should always buy adequate life insurance cover to take care of a child’s education in case of any unforeseen event. The sum assured may not be the amount that is required for education in the future, but the amount that can generate an amount equal to that in the future, considering some returns on that investment. A term plan can be the best choice to get a higher sum assured with a low premium.

Stick To Your Asset Allocation:

Asset allocation refers to how much of the various asset classes you have in your portfolio. The idea of asset allocation is that if one of your asset classes in your portfolio performs poorly, then returns of your other asset classes will balance the returns of your portfolio. Some general asset classes are equity, debt, gold, and real estate.

You can consider equity shares or equity-oriented mutual funds, fixed income instruments like fixed deposits, PPF, small saving schemes of post office, bonds, debt-oriented mutual funds, gold or gold ETF, etc., in your portfolio. The percentage allocation of each asset class in your portfolio may depend on your risk appetite, but don’t avoid equity just because it is more volatile than a fixed-income instrument.

Among the universal options for investment, there is none that does not test the investor on either of the two factors- appetite for risk and gains expected. Like almost every decision one faces in life, investments are a dilemma. Usually, only what is high risk can bear the fruit of high gain and vice versa. However, risk is something that must be calculated holistically before the investor takes the plunge because, in an untoward case, even the losses may turn out to be exceptionally huge. Lower risk, mostly, indicates more stability in the investment option. The appetite for risk and its tolerance are two very different things. Though used interchangeably, these terms define different aspects of the investment.

The appetite for risk in an investment pertains to the readiness with which you might want to take that risk. However, with focused calculation before any investment move, you may become aware of your ‘tolerance’ for the risk that you are thinking about taking. It is much like understanding the shock absorber phenomenon for a vehicle. Though a car has shock absorbers to perform on the road that are not smooth or bump-free, however, there is only as much shock as a particular make of car can take; and beyond that pressure, there may be severe damage to the vehicle. So, while the risk appetite may depend on the personality of the investor, the tolerance level is something that has to be calculated.

The following factors help determine the appetite for risk in the investment:

Depending upon Age

At the beginning and at a younger age, investors are willing to take relatively higher risks to reap greater rewards expected out of an investment. This is done at a stage where liabilities like loans, etc. and responsibilities are at a minimum. The early twenties may be a good time to invest in such a way. However, as one progresses into their 30s, family and responsibilities take higher priority, so the best idea is to form a balanced and diverse portfolio of investments that, while fetching you high returns, must also cover the risks your investment is susceptible to.

In the later years, it is advised that the degree of risk be reduced to a minimum for ease and convenience during the last years of working and the post-retirement stage as well.

Experience and Knowledge

Understanding the money market and investments in general is a big plus point for an investor. It helps if the investor is aware of the upcoming schemes and investments. It is also advisable to stay abreast with the way various sectors are performing so that you know when to act bearish and when to withdraw the money in a bullish scenario.

The risk tolerance is subjective and may depend on the following factors:

• Digestion – According to Income

This is the greatest factor that determines an investor’s tolerance for risk in the investment. The income is calculated by combining the returns in the form of salaries and in any other form, such as rent on the property, etc. Needless to say, the higher the income, the higher is the level of risk tolerance. This is so because the income is always there to cover the sudden losses, if any.

• Expenses

For investors who have great expenses, the net available income is reduced remarkably. This is because even with high incomes, the expenses extract a major part of the income and leave very little behind. In consequence, the risk tolerance is reduced, and the investor must not enter a very risky investment. Keeping financial health intact is the primary objective.

• Financial Objectives

If the investor keeps in mind certain short term goals for which not much financial planning has been done, investing a large amount from the income or savings may not be possible. However, if the very same goals were planned and had not erupted suddenly in the course of events, then the tolerance for risk would have been much higher than in the unplanned situation.

If the goals are long term, even then the tolerance limit for risk may increase to some extent for the simple reason that no liquidity is required immediately.

• Liquid Cash

If the investor has carefully put aside some contingency funds in the bank or has liquidity in hand, he/she would be better equipped to tolerate the risks that the investments bring with them. It’s so since a contingency fund or cash at hand serves as a good cover in case an investment results in losses.

• Insurance

Insurance comes in a variety of forms today. And solely, or in combination, if there is sufficient insurance to cover an individual and his risks in the investment, the investor becomes more tolerant towards risk.

For example, if your car is insured for accidents, it may leave you with excess funds to channelise into investment rather than when the car does not have insurance. Similarly, personal health insurance is also highly recommended. With medical procedures becoming complicated and expensive, it takes off a significant financial burden off the shoulders to be well-insured.

So, before investing, it helps to judge whether your appetite for risk and tolerance are at compatible levels.

Sachin broke his leg while playing football on Sunday with his buddies, which left him temporarily disabled. He has bought adequate life insurance cover on his life and a health insurance plan for his whole family, but has ignored personal accident. You buy a life insurance to cover the risk to your life and a health insurance plan to cover your health. What if, like Sachin, you have an unlucky day in your life? This is where a personal accident policy can come to your rescue. Unlike life insurance, a personal accident policy is not sold aggressively for a simple reason: the premium is low, and the agent’s commission is limited. Most of the time, accident cover is bundled with motor insurance with limited benefits. Ignoring a personal accident policy may become costlier sometimes.

Scope of cover

A personal accident policy provides compensation in the event of injuries, disability or death caused solely by violent, accidental, external and visible events. The scope of cover under these policies is not limited to road or train accidents but includes even snake or dog bites. Standard exclusions like self-inflicted injury or injury due to the use of intoxicants are applicable.

Benefits

Benefits under the policy may range from compensation against death only to permanent disablement or temporary total disablement. Policy may also cover benefits like daily or weekly hospital cash benefits, expenses incurred for carriage of the dead body from the place of accident to the residence or may pay an education fund for dependent school-going children. Full sum assured is paid in case of total permanent disability or death, but in case of permanent partial disability, compensation is limited to a part of the total sum assured under the policy.  All plans don’t offer the same benefits. One has to take care of basics like selecting the right policy as per one’s need and ensuring that the policy is renewed regularly to avail the benefit of such a policy should the need arise. One point of confusion among buyers is the difference between total permanent disablement (TPD) and partial permanent disablement (PPD). TPD means loss of a hand, leg or eyesight, while PPD means loss of a finger or toe in insurance terms. While considering a personal accident policy, it is important to ensure that your policy covers maximum eventualities, including partial permanent disablement.

Who should buy the policy?

Every individual should consider a personal accident policy as it covers the risk of permanent disability, which may be worse than death. Any adult residing in India can buy the policy.  Age at entry as well as at which cover ceases may differ from one plan to another. Some insurers don’t include minor children in the plan. People who are prone to road accidents or engaged in work that requires physical labour, like operating heavy machinery and working in dangerous situations like construction, must buy such insurance cover on their lives.

Tax Benefit

Premium paid towards a personal accident plan is not eligible for a tax benefit. In some plans, selected benefits of personal accident have been bundled with health insurance. Premium paid towards such policies is eligible for claiming deduction U/s 80Dof IT Act, but one should understand that these plans are not a substitute for personal accident plans.

It is always advisable to read the plan brochure before signing the proposal and go through the policy document as soon as you receive it to understand the fine print of the policy. A personal accident policy is strongly recommended to insure personal risk at an affordable cost.

Going on holiday is an important event for many of us. We spend much time, effort and money to plan the most memorable experience during our vacation. With rising income, many are travelling abroad for holidays as well. What happens if things don’t go according to plan? This is where travel insurance comes in handy. Although many consider travel insurance to be an unnecessary expense, buying one can make a lot of sense, whether you are travelling overseas or within the country.

Benefits

Medical Cover

In case of a medical emergency while travelling, a travel insurance policy can cover your liability to a large extent.  Medical costs can be extremely high in foreign countries, and especially so in First World countries.  Most travel insurance policies provide for cashless hospitalization and can be a boon in case of emergencies. Personal accidents are covered as well.

Travel Delays and Cancellations

Even the best-made plans can be disrupted due to situations beyond our control.  Flights could be delayed or cancelled for a variety of reasons, including bad weather, emergencies and technical problems.  Your airline may provide accommodation or make alternative travel arrangements in case of flight cancellation or delay. However, they are under no obligation to reimburse your hotel bookings or the cost of passes and tickets for any event you might have planned. A good travel insurance policy covers you adequately for any such eventualities.

Loss of baggage or documents

Despite the recent advances in technology, the fact remains that airlines lose a lot of baggage every year.  If they happen to lose or delay your baggage, it can throw your travel plan out of gear. Similarly, if you happen to lose your travel documents, like a passport or bank credit or debit cards, while travelling, it can cause a lot of hassle.  A travel insurance policy will cover you in these situations as well by providing you with emergency cash and reimbursing costs.

Missed Departure

A travel insurance policy may cover you in the case of a missed Air or rail departure arising from situations beyond your control.  This normally covers situations where the departure was missed due to failure of public transport, or in the unfortunate event where the vehicle you are travelling in meets with an accident.

Loss of Tickets

You may also be covered in the event that the intended travel could not be completed due to the loss of tickets.  In such situation, the original charges for the tickets are reimbursed.

Hijacking and Political Risk

In the unfortunate event that the policyholder is a victim of hijacking or any other political risks, the travel insurance policy may provide relief in such situations as well.  Most policies will provide a daily cash allowance and/or a lump sum in case of such occurrences.

Personal Liability

A good travel insurance policy will provide you protection against personal liability as well. Suppose the car you drive in a foreign country happens to meet with an accident.  Any liability arising out of the same may be covered by your travel insurance policy.

Costs of Insurance

The cost of insurance will depend on a variety of factors, such as the location where you are travelling, the type of visa, duration of stay, type of coverage, etc., but it is generally not very high. Companies now offer insurance for different geographies like the USA, Europe and Asian countries rather than universal policies. Travel insurance can be bought very easily online from websites of the insurance companies or insurance aggregators, and of course, through insurance agents.

Exclusions

Like any other insurance policy, it is important to read the policy document in detail to understand the benefits and exclusions of the plan.  Coverage and benefits may vary from one company to another or even between two different plans of the same insurer. It is important to go through the policy documentation to understand the details of what’s included or excluded in the policy to ensure it meets your requirements.

Insurance is bought to provide protection for any unforeseen events that one may encounter. Although travel insurance may seem like an unnecessary expense, it’s of immense importance should the need arise. It’s suggested that you always buy travel insurance.

Everyone dreams to retire to a peaceful life when they don’t have to worry about earning money or meeting budgets. They want to do whatever their heart desires without worrying about its affordability. Yet the hard reality is that most people are not saving enough for their retirement. Many will be forced to work till they physically cannot and be constantly worried about finances. This is especially true for a country like India which does not have a social security net like in advanced countries. Here are five mistakes that destroy retirement dreams.

Not having a proper plan

In the words of Lewis Carroll “If you don’t know where you are going any road will take you there”. People do not have well thought-out plan to save for their retirement. They fail to anticipate the impact of inflation on their long term expenses. As a result they wish and pray that everything will work out fine. They realise their mistake when it’s too late. For example, if average inflation remains at 6%, a 30 year old having an expense of Rs 40,000 per month now will need Rs 1,72,000 per month when he attains the age of 60. This will be time when he will not have a job that pays a monthly salary.

Making the wrong investment choices

Everyone wants low risk and high returns. In the real world unfortunately it works a bit differently, higher the risk higher the return. Risk does not mean that one gambles their money. Seasoned investors understand the risk associated with an investment and invest only when they are comfortable with the underlying risk. A common investor however does the exact opposite. They will either take unacceptable risk or lose their money by falling prey to get rich quick schemes. The tax adjusted returns of such investments are often lower than the prevailing inflation. Instead of their money growing, they actually lose value of their money. Another mistake commonly made by investors is to confuse insurance with investment. Investing in a life insurance policy is not the good investment decision, no matter what your insurance agent says.

Poor planning for medical expenses

We seldom fall seriously ill below the age of 35 and hence fail to plan adequately for medical expenses that are more likely later in life. Young people treat their health like a credit card and make unhealthy lifestyle choices without the thought of repercussion later in life. Although medical science has made massive progress over the last few decades, healthcare has become expensive too. A health emergency can put major strain on finances and put other financial goals in jeopardy .It is always advisable to buy a personal health insurance policy at the earliest even if the Company you work for provides the same. The best time to buy any insurance is when you don’t need it.

Inadequate emergency fund

Nothing in life is permanent and emergencies may come in life. You need to switch jobs, get a medical treatment or repair your car. Not having an emergency fund means either taking loan to pay for the expense, withdrawing from your EPF, PPF savings or affecting your other financial goals to fund the emergency. Both of which can negatively impact your retirement planning. It is advisable to keep three to six months of expenses in an emergency fund.

Underestimating life expectancy

Recent advancement in medical science mean less people die from health related problem than earlier. The average life expectancy in India in 1960 was a mere 41 years, as of 2012 it is almost 68 years and rising. There are many more people who will live till the age 85 or 90 years. As a result many people run out of money during retirement and forced to do meagre work to sustain themselves. One should consider their life expectancy to be a 100 years while planning for retirement.

People usually fail to plan their retirement due to lack of financial knowledge and emotional biases in managing their own money. It’s strongly recommended to visit a financial planner to get a comprehensive financial plan made for you and your family.

Balance transfer refers to the process of transferring the outstanding dues from one credit card to another. This is kind of refinancing, and Banks frequently give such offers to acquire clients. The rate of interest offered by the new bank is lower than the interest you pay on your existing card. The offer may be tempting, but it may not always be as good as it sounds because the lower interest rate is only applicable for a limited period.

You can save some money

Whether doing a balance transfer makes sense or not depends a lot on the current interest rate that you are paying and the promotional interest rate being offered. Suppose you have an outstanding balance on Credit card A of Rs 50,000 at a rate of interest of 3.4% per month. Card B offers you a balance transfer for 6 months at a promotional interest rate on 1.79 % per month for 6 months with no processing fees. Assuming you pay off the entire balance during the promotional period, you are like to save Rs 3316 as interest charges (Including Service Tax). All these other details remaining the same if the promotional interest rate on card B if 0.99% per month, the amount of savings will be Rs 4,930.

Should you really opt for it?

One should be careful about doing a balance transfer. If a balance transfer is being done with the intention of paying off the full balance during the promotional interest rate period, then it makes sense to go ahead with the balance transfer. However, reality can be different. Many opt for a balance transfer, expecting less repayment pressure, but end up in more debt than they started with. This happens primarily due to a lack of discipline to pay off outstanding in time. Credit Card companies know this, and that is the reason they offer a promotional interest rate for a limited time. They are confident that very few people will be able to pay off their entire debt during the promotional period, and they can start charging exorbitant interest rates once the promotional rate is over.

Things to be careful off

Any fresh purchases made on a credit card after doing a balance transfer do not enjoy any interest-free period. Interest will be charged from the very day the purchase is made. No fresh purchases should be made on a credit card till the entire amount is paid off.

Credit cards often charge a one-time processing fee for doing a balance transfer. This may look like a small amount, but it will quickly eliminate any savings that you might be making by doing the balance transfer. Continuing with our previous example, if credit card B charges a processing fee of 1.99%, it comes to Rs 1118 ( Including service tax) on the outstanding amount of Rs 50,000. The effective savings for promotional interest rate of 1.79% and 0.99% per month will be Rs. 2,198 and Rs.3812 respectively.

Furthermore, while calculating interest charges, we sometimes forget to account for the service tax that is applicable on interest charges. This currently stands at 12.36%. High interest rates applicable to credit cards also mean high service tax payable.

Credit Score

One of the parameters for calculating a credit score is the percentage of total debt to the total credit line available. Since a balance transfer involves moving the outstanding balance from one card to another, it does not have any impact on the credit score. However, carrying a large revolving debt has a major impact on the overall credit score.

Conclusion

Balance transfers do offer some savings from interest charges, but it may not be as substantial as it’s made out to be. Either way, if one is unable to pay the entire balance due on their credit card by the end of the month, they may be living beyond their means. This is a warning sign that all is not well, and it may be wise to stop and make amends. Although
balance transfers provide some relief from interest charges, it is not be mistaken as a silver bullet to rectify one’s problem about managing debt. Let’s not forget that credit card debt is the number one reason for people to fall into debt.

You work hard and save money to buy a house and household appliances. You take utmost care to secure your dream house, yet there is the risk of a natural or man-made catastrophe. If you cannot prevent it, transfer the risk. Consider buying a homeowner’s- or home-insurance policy.

Scope of cover

A package householders policy provides cover to the structure of the building as well as the contents of the house, which belong to the proposer and his family permanently residing with him or her. In case you are living in a rented house or in an apartment where the building is insured by your society, you can buy a customised plan which covers only your household articles and not the building. Some common risks covered under the policy are fire, earthquake,

flood, burglary, bursting and overflowing of water tanks, breakdown of domestic appliances and loss or damage of jewellery and valuables by accident or misfortune. The sum insured for certain items under contents, such as works of art, jewellery or other valuables, may be subject to a limit. A householder policy also provides cover against the insured’s legal liability for bodily injury or damage to the property of a third party. Some policies also cover rent for alternative accommodation during the reconstruction of a building that has been damaged by fire or other disasters. Risks covered in the policy and premium may vary slightly from one insurer to another.

Guide to choose the sum insured

The purpose of insuring the building is that, in case the building is damaged due to any disaster like fire, earthquake or flood, you should get financial support to reinstate it. So the sum insured for the building should neither be the cost of acquisition nor the current market value of the house, but the current construction cost, because the market value of the building includes the cost of land on which the house is built. Don’t include the cost of land in the sum insured, but don’t forget to add costs for the removal of debris. On the other hand, for the insurance of household items, the sum insured should be the market value of these items, i.e. the value for which these used items could be bought or sold in the market.

If you want to ensure the breakdown of domestic appliances, then the sum insured should represent the current replacement value of a similar item. For instance, if you want to insure your two-year-old, 42-inch Sony LCD TV, the sum insured should be equivalent to the current cost price of a new 42-inch Sony LCD TV. However, the claim amount payable would be the amount required to bring the damaged item to the same condition as it was before the damage, subject to the adequacy of the sum insured.

Points to remember

Unlike a life insurance policy, householder insurance policies are contracts of indemnity, which means it is a cover that only restores the insured to their original financial position, but the insured cannot gain from the policy. It is very important that the sum insured is adequate because if you are under-insured, claim payments will be reduced by applying the average clause, where your claim will be reduced in proportion to the level of under-insurance. For instance, if your property is worth `1 crore but it is insured for `75 lakh, and the loss is `50 lakh, the claim will be settled to the extent of 75% of `50 lakh, i.e. `37.5 lakh, and you will have to bear the balance. You must ensure that your house is adequately insured at all times, taking into account the renovation, enhancement made to your house or some addition to your household items. Do not just send the renewal cheque when it is due; take the time to review your cover. Read your policy carefully. Some risks are not covered under certain conditions, such as if the house is left unoccupied for more than a specified period of time. It does not make sense to leave any scope to lose what you have invested in your home. After all, homes are not built every day.

Behavioural finance identifies and explains biases that detract from our ability to make rational financial decisions. Understanding these human biases can help a financial advisor better understand a client’s choice and is an important step toward developing a financial strategy that meets the client’s investment objective. Behavioural biases can be divided into two broad categories: cognitive and emotional.

Cognitive biases

Cognitive biases are challenges in processing the available information correctly. An example of a cognitive bias is when investors are overconfident in a judgment about the future and give undue importance to the past performance of an investment. This is a big issue for clients as well as for financial advisors. Human minds like to see trends, even amidst randomness. Anchoring and Sunk Cost are examples of cognitive bias.

Anchoring Bias

Anchoring refers to an over-reliance on the first piece of information available. For instance, if an investor thinks that a CEO of a particular company is a successful person, they may be too confident that the stocks of that company are a good bet. This preconception may be incorrect at some point in time. To avoid this trap, investors need to remain flexible in their thinking and open to new sources of information.

Sunk Costs fallacy
The sunk cost fallacy is just as dangerous. Investors psychologically think that they are correcting their previous incorrect decisions, which is often disastrous for investments. Such investors are not ready to accept the fact that they made the wrong choices. If your investment is no good or sinking fast, it is wise to get out of it as soon as possible and get into something better. It’s far better not to cling to the sunk cost and to get into other investment options that are performing better. Emotional commitment to bad investments just makes things worse.

Emotional biases

Emotional biases relate to the excessive influence of emotion on our decision-making. Though humans cannot avoid making emotionless decisions, advisors can focus on areas that can control clients’ emotions rather than supporting them. There are various factors, such as short-term thinking, loss aversion, and herding, that may influence investment decisions negatively.

loss aversion

Loss aversion is an emotional bias. Study confirms that investors feel the pain of even small losses significantly more than the pleasure of larger gains. The implication of loss aversion is that it prevents individuals from selling underperforming assets, even when significant evidence indicates that there is no prospect for improvement in their holdings. The pain of realizing a loss by selling is so great that often investors remain invested in hopes the investment will turn around. Rather than evaluating performance relative to a reference point, where they first bought the asset. advisors can focus attention on the investment value of alternative investment options and their relevance to a client’s financial goals.

Herd Behaviour

Another common investment challenge is herding behaviour. Some investors tend to mimic the action of a larger group. This action may be rational or irrational. The pain of social exclusion for most clients is too great to bear. Though these investors may know that the decision they are going to take doesn’t sound correct, yet they believe that the decision on such a large scale could not be wrong. In case the decision goes wrong, they know that they are not alone.

Michael Pompian, author of the book Behavioral Finance and Wealth Management, identifies eight investor personality types and their biases. Pompian suggests that once the investor types have been defined, the advisor can design an asset allocation strategy to mitigate the biases. However, there are challenges in following that as the client’s behaviour can be situational. For instance, a risk-averse investor can become risk-seeking in a different situation. Though behavioural finance does not have all the answers to wealth management, it is, however, extremely helpful in developing productive, long-lasting client relationships that help a client as well as a financial advisor to avoid common and predictable investing mistakes.

It is not the income that brings financial freedom, but it is the balance between income and expenses that helps you attain it. Managing money is an art and a science. People work hard to fulfil their aspirations, but a few mistakes may jeopardize all their efforts. Despite having adequate income, people find it difficult to save for their future goals. Anxiety steps in when they face a sudden, unexpected expense.  Here are the most common mistakes which become an obstacle in achieving financial freedom.

Poor cash flow management

Cash Flow Management refers to managing the inflow and outflow of money. People simply earn and spend without looking into their future financial goals. If you are poor at managing your cash flow, then chances are that your bank balance may become zero much before the end of the month.  Lack of discipline may lead to overspending. Cash flow can be managed to a large extent by writing a monthly household budget. Once you write your household budget, you will be able to identify and control your not-so-important expenses.

Living beyond means

People tend to live in the present rather than worrying about their future. Although enjoyment is an integral part of life, it should not be achieved by jeopardizing our future. We buy things which we may not specifically need. Human beings are susceptible to societal pressure, which makes them do things which can adversely affect their money management. We seek acceptance from society, leading to impulsive purchases, which will give you instant gratification but may be the cause of financial dissatisfaction later on. This behaviour can be controlled by differentiating between needs and wants. Money should be judiciously spent on satisfying wants only after all needs, including saving and investing for the future, are properly met.

Overburden of EMIs

A loan is a necessary evil. In the current economic conditions, with rising inflation and stagnant income levels, loans have become a necessity to meet certain needs. Loans should be taken only to satisfy needs, not wants. Home loans and even vehicle loans to some extent can be deemed as a necessary loan, whereas personal loans for utilization of going on vacations should be deemed as unimportant. The interest rate on personal loans is much higher compared to secured loans, leading to further strain on cash flow.  How much you borrow, it should be determined based on your repayment capacity. EMI should be such that it does not cause unnecessary strain. Use a credit card only if you can pay the bill before the due date. Any outstanding on a credit card may become a financial burden for you due to the high interest rate applicable to it.

No efforts to increase income

Inflation causes a dent in our cash flow management. Inadequate funds are the major reason for not saving and investing for the future. In the absence of adequate inflow, we have to compromise on our savings and investments to take care of our fixed and discretionary expenses. We must think of improving our income if it is not adequate. We must upgrade ourselves to earn more. Upgradation can be in terms of upgradation of job, upgradation of knowledge, or exploring new avenues to earn money. The advent of technology has opened new doors for earning income. We can explore new opportunities while still carrying on with our primary job.

Improper asset allocation

Asset allocation is the implementation of an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investor’s risk tolerance, goals and investment time frame. Financial goals, if realistic, can be achieved through proper asset allocation. Poor Risk tolerance and inadequate knowledge of financial instruments cause improper asset allocation. Overexposure in traditional saving schemes like fixed deposits and small savings schemes limits the scope of wealth creation. Improper asset allocation is the major cause of jeopardizing our financial freedom.