All of us, at any point of time in our lives, have made financial blunders. In a research, it has been found that 2 out of 3 Americans have said that they have made at least 1-2 really bad financial decision. The median cost of these bad decisions was $5,000, but the average cost was $23,000.
Here is a list of 7 fatal financial mistakes which you should try to avoid:
1. Not maintaining adequate emergency fund: Try and avoid this mistake. Once you start off earning, emergency reserve fund should be your first goal. You should maintain an emergency fund of 6 to 12 months of living expenses. This will allow you to come out of a financial storm without using your retirement assets. Those who are retired should have an emergency reserve of 12 to 24 months of expenses.
2. Giving importance to emotions than financial choices: Fear and greed highly influence our financial lives. Greed kicks in when market is high and we tend to take on too much of risk. However, when the market falls out, fear takes over and we sell off everything. In order to avoid this, create and stick to a diversified portfolio. This helps in spreading out the risk.
3. Optimistic financial plan: Don't make too many plans depending or relying on expectations. A conservative outlook will help you face fewer surprises than compared to an optimistic outlook.
4. Paying excessive fees: You should put yourself in disadvantage by going for investments which carry high fees. It should be noted here that those investors who stick to no-commission index mutual funds start each year with a advantage of 1-2% compared to that of funds that carry a sales charge.
5. Taking on big risks: When you are going for a risky investment, only allocate the amount of money you are willing to lose. It should be such an amount which won't affect your financial situation even if you lose the amount.
6. Inadequate or too much insurance: In any kind of financial plan, insurance plays an important role. But it has been commonly noted that people shift from one extreme of not having enough coverage to buying more insurance than they require. You can use a good life insurance calculator in order to know your insurance needs.
7. Not taking help of financial experts: Hiring a pro always makes sense as not everyone can handle their financial lives on their own. However, it is true that you should know what services you're paying for. It is always better to hire a fee-only advisor who adheres to the required standard and acts in your best interest.
Hope the above list will help you in deciding what financial decisions to take and which ones to avoid.