5 common financial traps you must avoid

It’s very important to manage your hard-earned money with utmost care to ensure growth of your money through savings and investments. For this, you need to inculcate good habits of reducing wasteful expenses and saving money.

However, despite of your good habits, you may end up investing your money unproductively due to lack of knowledge about the financial products available in the market.

“It’s easy for investors to get into traps because finance and investment involves incomplete information and a wide range of possibilities. There are many aspects that can go out of control while investing or managing your finances,” says Prashant Sawant, Co-Founder of Catalyst Wealth.

Sawant lists the following financial traps that you should be aware of:

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. Anchoring

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.

3. 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.

4. 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.

5. 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.