Last Modified on March 24, 2020

We are all in the continuous pursuit of creating and building wealth. The key to building wealth and preserving it is to plan before you act and back your decisions with solid research. Despite knowing the right thing to do, why do some people get there faster and are able to build a reserve for themselves while others struggle their entire lives? Financial experts believe that some common mistakes can slow down your wealth creation process. Read on to know if you are making these mistakes and how you can avoid them.

6 Financial Mistakes to avoid when Building Wealth

1. Having no spending plan 

When you spend your money without thinking where it goes, it ends up controlling you; whereas, it should be the other way around. Having no spending limit can drain your resources and come in the way of building wealth. It is essential to have a plan for spending and formulating a concise budget that takes care of your needs. It will stop you from spending your money on unnecessary things and help you live a frugal and comfortable life. Calculate how much should you be saving. In case, you find your needs exceeding your financial capacity, you can always lookout for a secondary source of income to help you out. 

2. Putting off high-interest debt 

Sometimes, taking loans to fulfill your needs is inevitable. But you should understand thoroughly the type of debt you get yourself into. While home and car loans are easier to pay off, debts from credit card and medical expenses have high-interest rates. They are more likely to hit the roof with the original amount doubling in a few years. It is advisable to consult a financial advisor and develop a strategy to pay off all your high-interest debts as soon as you can. Better yet, refrain from taking one in the first place. 

3. Investing before understanding 

The only thing worse than not investing at all, is to invest without proper understanding and knowledge. It is important to understand the pros, cons, returns and risks of every investment sector. There are tons of ‘risk-free’ schemes being marketed nowadays but understand that there is no such thing as a risk-free investment. Learn the importance of diversifying your portfolio and invest in different sectors like equity, stocks, bonds, real estate, and even gold. Some investments give you a frequent rate of return, while others grant higher yields but have greater risk rates. Before investing, make sure you do your research and understand the business model of a company. Do not rush to over diversify your investments and review your portfolio from time to time. 

4. Living without Insurance

As costly as insurance may seem, it is actually a lifesaver in times of natural or financial crisis. With a monthly premium, you can expect insurance companies to take care of your financial needs during emergencies. Insurance policies work as a financial cushion. From renters insurance to disability covers, you can pick a variety of plans to back you up in your hour of need. Insurance terms and types differ as per the insurance policy and understanding the loopholes requires full disclosure of information from the insurer as well as the insured. Make sure you understand the benefits and terms of an insurance policy before availing it.

5. Hurrying to purchase Real Estate 

Owning fancy properties is a dream for many but it is important to take a reality check and assess your financial standing before venturing into real estate. On the surface, it seems like having a permanent home would be a cost-cutter. However, purchasing real estate is most likely to take a heavy financial toll if not done carefully. Timely payments towards utility bills, closing costs, inspection fees, monthly home maintenance, and even the cost of furnishing can be a huge financial burden. 

6. Not having an Emergency Fund 

Living without an emergency fund is like living in constant vulnerability. With negligent or little savings, you increase your risk of financial instability and loss in the future. It is essential to always be prepared for the inevitable and unforeseen.  Untimely death, accidents, family emergencies, job changes, etc. can bring a need for immediate cash. Make sure to save a part of your income in an emergency fund like a savings or checking account. Strive to build an emergency fund that can cover up to 3 to 6 months of your living expenses. 

To sum it up 

If you have a financial plan in place, chances are that you may have made one of these mistakes at some point. But as long as you learn from these mistakes and figure out how to tap into your resources, your long- term goals should be attainable. Remember that even the most successful people have made their fair share of mistakes. At the end of the day, remaining active in your pursuit to expand your income is the only way to build a reliable corpus of wealth.

Are you worried about making these mistakes in your financial plans? Reach out to financial advisors and leverage their expertise in the field.