Six Mistakes You Must Avoid

Many middle-class families struggle to manage their finances effectively, often finding it difficult to make ends meet. It is prevalent because they do not manage their cash flow properly. With limited incomes and higher expenses, or even with higher incomes and little control over spending, they often find themselves in challenging financial situations. These individuals are typically found in Money Quadrants 2 and 3, as described below. It is crucial to identify which money quadrant you currently belong to.

The stress of financial difficulties can lead to a lower quality of life. To gain better control over finances, it is advised to consciously avoid these six common mistakes.

1. Emotional Buying and Lack of Negotiation Skills:  You should avoid emotional buying. You should negotiate well before buying. Many people feel that bargaining is beneath their dignity, especially in today’s world where shopping often takes place in malls. However, these same individuals might hunt for bargains on e-commerce websites. Developing the habit of bargaining is recommended, as it poses no risk of loss—only the potential for savings. These small savings from effective bargaining can significantly contribute to securing a better financial future.

Emotional buying is another pitfall to avoid. It not only creates financial strain but also leads to feelings of guilt once the initial desire to purchase fades. It is not a healthy emotional state.

A few decades ago, impulse buying was less of an issue. This was a time before malls became widespread, and before e-commerce apps were accessible on every mobile device. Reflecting on childhood experiences, when sent to buy a kilogram of sugar, one would visit the local grocery store, purchase only the required sugar, and nothing more. Transactions were made in hard cash, and there were fewer temptations to buy unnecessary items.

Avoiding these six mistakes can help individuals, particularly those in Money Quadrants 2 and 3, to manage their finances more effectively and reduce the financial stress that impacts their overall well-being.

In today's world, there are no salespeople in malls or on online shopping platforms, yet people are purchasing more than they actually need. If you observe individuals leaving any shopping mall, you'll notice them pushing carts loaded with items that no one actively sold to them, but they bought voluntarily.

The situation is similar with online shopping apps. Here, you don't even have to move from your seat, and nowadays, you don't even need money to make purchases. Various facilities like credit cards or pay-later options are readily available.

Whether we admit it or not, all of us are addicted to impulse buying to varying degrees. In our view, it is the worst kind of addiction. If someone is addicted to alcohol or tobacco, it will cause harm in the sense of health. However, shopping addiction keeps you feeling good without any immediate physical impact. It may take years before you realize the effects of this addiction. It ensures that you get a "feel-good kick" every time you shop, keeping your pockets empty regularly, like a cycle. You end up thinking that more money will solve the issue, but the real problem lies within you—specifically, your money habits.

In my first book, 25 Habits That Make You Rich, I discussed in detail the money mindset that controls your life. This blog will help you re-arrange your mind and guide you toward a good wealthy life.

Now, I'll share how you can break free from this shopping addiction. You need to apply this in real life and observe the impact yourself. It requires self-discipline and consistent effort.

When you're out shopping, make it a habit to ask yourself one question. Before buying anything, ask yourself by heart & mind too, "Do I require it, or do I just desire it?" Then practice postponing all your wants for as long as possible.

Most of the "nice-to-have" things in life are the root cause of long-term financial stress. As Warren Buffett said once, "If you buy things you don't need, you'll eventually have to sell things you do need." Another mistake to avoid is making large purchases before you're financially ready. Many middle-class families buy big items like a house or a car before they can truly afford them, often due to social pressure to appear successful. Such major spending early in life can lead to a financial downward spiral because the expenses are high and there isn’t much money left to invest.

Major expenses, especially those exceeding your annual income, should be avoided at all costs. They should only be made with careful planning and adequate financial backing.

One of the mistakes is to avoid having sufficient insurance. When it comes to purchasing enough insurance, many middle-class families act "Pennywise, pound foolish." They perceive the insurance premium as either unaffordable or an unnecessary expense, which leaves them vulnerable to major financial emergencies. A serious illness can easily wipe out 10 to 15 years of savings, or the untimely death of the primary earner can jeopardize the family’s financial security. One such event can financially devastate the family. Therefore, it is advisable to acquire adequate insurance after thoroughly understanding the risks that need coverage.

It is highly recommended to consult a subject matter expert when purchasing insurance. This step can safeguard your family during medical emergencies and prevent hard-earned money from being wasted. One of the significant mistakes middle-class families often make is relying on a single source of income. Even if there are multiple earners in the household, their combined income might barely cover the essential expenses. This lack of financial flexibility can lead to borrowing, resulting in compulsory EMIs that further strain the family's finances.

To prevent extra financial pressure, it's advised to be on the lookout for extra opportunities to generate extra additional income. Families should consider how they can utilize and monetize their existing skills in better ways. Finding avenues where these skills can be turned into a source of income should always be a priority.

Another common mistake is the poor choice of assets. Many middle-class families struggle financially due to a lack of financial literacy. Although they may be educated by some degrees/diplomas, they often lack the knowledge to make proper financial decisions. Security is a major concern for them, leading to decisions driven by fear of losing money. As a result, they often park their money in low-return assets like bank fixed deposits (FDs) or Public Provident Fund (PPF) accounts, and they might be inefficient in tax savings by relying on life insurance or PPF for tax benefits. Seeking professional advice in investing and asset selection is highly recommended, as many may not be equipped to handle these complex matters on their own.

Another mistake that commonly occurs is the failure to plan for the long term. Unfortunately, many middle-class families do not plan their financial lives effectively. While they see the value in seeking professional help for health issues, they often perceive professional financial planning as an unnecessary or unaffordable expense. This "penny wise, pound foolish" attitude is prevalent, yet professional financial planning is crucial for creating a meaningful balance in life and achieving financial goals and dreams.

If you care about your family's future and want to provide them with a prosperous life, it’s essential to reflect on these common mistakes and take steps to avoid them through proper planning and professional guidance.