Common financial traps you must avoid
1. Needs vs wants
When you create your budget, the first thing that you have to consider in your list are your needs. Needs are the basic necessary things for your survival. Wants are the things that are not necessary but it will improve your standard of living. The expenses that come under needs have to be fulfilled first and a certain budget has to be set out for wants. For instance, 10 per cent of the income can be set out for wants if it’s for a family of four. But if the person has started out earning, then he may set a lower budget for wants and invest more at an earlier stage.
2. Credit cards
Credit cards help us a lot to manage finance and give us free rewards. But with the use of credit cards, we forget how much we are supposed to spend. Like we buy things which are not necessary just because there is an offer, which may be availed by using a credit card on it. Later we end up having more credit than we can pay. Credit cards have interest around 20-40 per cent without exception, which we have to pay every month.
3. Insurance as investment
Insurance is something that will help us if any sudden problem occurs to us or our family. But you can’t expect your insurance to give you a good return. Let insurance do what it is supposed to do and invest the money saved in proper investment products.
4. Jewellery as investment
Jewellery is often considered as an investment. However, it is not a good investment. Jewellery is worn by a person, but it gives you a low return. Therefore, owning plain or paper gold is better than having jewellery as it gives good returns.
Anchoring means when we set a value to a stock and keep using it as a reference. With the past information that we have about it, we falsely assume that the price will increase, even if it was overpriced. Therefore, no past performance can guarantee the future result.