Four financial planning mistakes you should avoid in 2024-25

The wisdom goes, "The best time to plant a tree was 20 years ago. The second best time is now." As financial year 2024-25 arrives, a fresh start beckons. We often resolve to tighten our budgets to reach financial goals, but even the best plans can hit snags. Financial decisions, sometimes due to a lack of knowledge or unplanned splurges, can lead us astray.

Let's resolve at the start of FY 2024-25 to avoid these common pitfalls and become financially smarter.

1.  Failing to review your financial roadmap

Imagine taking a road trip without a map or GPS.  Chances are you might get lost or end up somewhere unintended.  The same is true for your finances.  Your financial plan shouldn't be a one-time creation; it should be a living document that evolves with your circumstances.  The new financial year is a perfect time to revisit your plan and make necessary adjustments.

Here are some points you should consider during the review.

● Changes in income and expenses: Have you received a raise or started a new job? Have your expenses increased due to a growing family or new lifestyle choices? Updating your income and expense figures will help you determine if you need to adjust your savings strategy.

● Goal progress: Are you on track to achieve your short-term and long-term goals? If not, what adjustments need to be made?

● Life-stage changes: Did you get married, had children, or experienced any other significant life events? These changes might necessitate adjustments to your financial plan, such as increasing life insurance coverage.

Also read: Lifestage financial planning: How to manage money in your 20s

2.  Investing without a plan

Suppose you threw a bunch of random ingredients into a pot hoping for a delicious meal.  The results might not be what you expect. The same goes for investing.  Investing haphazardly without a clear strategy can lead to suboptimal returns and missed opportunities.

The key, therefore, is asset allocation.

Asset allocation is the process of dividing your investments among different asset classes such as stocks, bonds, and real estate.  The ideal asset allocation for you will depend on your risk tolerance, investment goals, and time horizon.  For example, someone saving for retirement in 20 years might have a higher allocation to stocks compared to someone saving for a child's college education in five years.

Also read: How to make the best use of NPS investment choices and withdrawal options

Here are two common asset allocation mistakes to avoid:

● Ignoring risk tolerance: Are you comfortable with the possibility of losing some money in exchange for potentially higher returns? Understanding your risk tolerance is crucial for choosing the right asset allocation.

● Focusing on just one goal: Many people have multiple financial goals with different time horizons. Your asset allocation should consider all your goals, not just the nearest one.

3.  Tinkering too much

The stock market can be volatile in the short term, but history shows that over the long term, stocks tend to outperform other asset classes.

So should you make adjustments?

There are some situations where making changes to your portfolio might be necessary:

● Rebalancing: Over time, the value of your investments in different asset classes will fluctuate. Rebalancing your portfolio helps you maintain your desired asset allocation. Ideally, this should be done periodically, perhaps once a year.

● Significant life changes: As mentioned earlier, major life events might necessitate adjustments to your asset allocation.

● Investment performance: If a particular investment consistently underperforms or no longer aligns with your goals it might be time to re-evaluate.

4.  Neglecting insurance needs

Life, like the changing seasons, brings new chapters with evolving needs. Similarly, your term life and health insurance can also benefit from a periodic review.

Carry out annual reviews.

Taking a moment to review your insurance coverage can be a wise practice, perhaps alongside your annual financial check-up.  Here are some important reminders:

● Milestones: Did you recently achieve a big goal like buying a house or welcoming a new addition to the family? These milestones might necessitate adjusting your life insurance coverage.

● Financial shifts: Changes in income, like a promotion or career change, could impact your insurance needs. Reviewing your coverage to ensure it aligns with your evolving financial situation might be beneficial.

● Living with confidence: Having a secure safety net through adequate insurance allows you to focus on what truly matters - cherishing moments with loved ones and embracing life's journey with confidence.

By taking a proactive approach to your insurance, you can create a safety net that empowers you to navigate life's chapters with peace of mind.