accidentally commit some mistakes which lead to the personal finance disaster.
I will discuss these mistakes and the ways to avoid them by understanding their consequences through the method of quantification.
(1) Not having the adequate health insurance or taking it at the later stage
In today's time, the cost of the health is very high and it is very difficult for the normal person to afford the cost of medical expenses and the treatment from its own pocket. Moreover, most of the people living in the metropolitan cities are leading sedentary lifestyles which are one of the major causes of the many diseases. I will explain with the help of an example, say someone is 25 years of age and the medical insurance premium at this age is Rs. 7,500 ($110) per year for the insured amount is Rs. 10,00,000 ($15,000). We will compare the cumulative cost of the insurance which John will pay till the time of his retirement and the insured amount provided to him by the company. For that I am making following assumptions:
(3) Not having the life insurance cover
Remember, the Health Insurance and the Life Insurance are the two sides of the same coin or are independent events. Health Insurance covers health for life and Life Insurance takes care of the things after life (Death). Can anyone imagine a situation of the family after after her/his death?
A mere thought of this gives a whole body shivers. When you are the bread earner for your family, then it becomes important to provide financial support to the family even after you. Therefore, it is important to take the right amount of the Life Insurance for your family in order to maintain their life style after you.
So, how do we calculate the right insurance amount for the family?
Well, I think the present income and age can help me in getting the answer. Let's take the example of John:
(3) Inappropriate use of the credit card
Your credit card can prove useful when you use it in the emergency but the careless and the inappropriate use of the credit card can prove to be the one of the major financial mistakes and paying its interest amount can be quite painful. The credit card companies charge interest on the daily basis. For example, the annual percentage rate of a credit card company is 30%,
you can easily calculate the daily interest by dividing this value by 365 days, 30%/365 = 0.082% on the daily basis. Let me assume that John owe Rs. 1,00,000 (Approx. $1,500) to the credit card company and carried this amount for 30 days. The interest on amount will be calculated as:
(4) Investing in the stock market using exposure
Investing in the stock market is a good investment option, but it takes a negative direction when in the expectation of higher and quick returns, the investor starts using the limit of the exposure. The limit or the exposure is the credit limit which the stock trading company provides to its investors to invest in the stock market. The excessive use of this feature can prove very lethal as â€‹It can even wash off your money in no time.
Let us understand it with the help of an example, John is having Rs. 1,00,000 (Approx. $1,500) of his own and he is interested in investing this amount in the stock market. In the expectation of good returns, he takes 4 times credit that is Rs. 4,00,000 from the stock trading company and invest a total of Rs. 5,00,000 (Rs. 1,00,000 of his own + Rs. 4,00,000 credit) into the stock market. Now I will consider the two cases:
As the company has lend you Rs. 4,00,000, it charges interest @ 24% per year, further increases your overall loss. Now, you can see that investing in the stock market using credit can be very dangerous for your financial health.
Always invest in the stock market with your own money, any credit amount invested in the stock market can lead to the personal finance disaster.
The financial management is a regular exercise which requires your time, patience and common sense. A disciplined approach towards this helps you in managing your finances quite effectively.