10 Fatal Mistakes in Financial Management – Getting Rid of These Mistakes Means Making Money

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Condition 1: Strong tendency to follow the crowd – people start investing just because others are making money. During the boom in the stock market a couple of years ago, it was easy to make money either by trading stocks or by purchasing funds, which led many people who had no real understanding of these matters to get involved in the capital market as well. 　　Mr. Liu, who was consulted by Liu Jing, a financial advisor at Industrial Bank, saw a friend make money from stock trading two years ago; not knowing anything about it himself, he invested all of his savings of over 200,000 yuan in the stock market, thinking that the amount could double in just half a year. However, at that time the Shanghai Composite Index was already above 5,000 points. As the stock market crashed, Mr. Liu’s stock portfolio lost two-thirds of its value at its lowest point, and it is still down by one-third today. 　　Prescription: After fully understanding one’s own situation, develop a long-term financial plan; be especially careful not to engage in anything that you do not understand. 　　Condition 2: Forgetting the most basic financial strategy – saving money. A citizen who consulted Li Mengjing, a financial advisor at Minsheng Bank, had an annual family income of over 200,000 yuan; yet the couple spent money recklessly and had almost no savings. Their philosophy was that \"only by spending money can one earn money.\" 　　Prescription: Accumulating assets is very important, and saving money is the simplest and most practical way to manage finances. 　　Condition 3: An excessive tendency to buy houses, resulting in a high proportion of fixed assets. Many people consider buying houses to be a safe investment option, so they purchase houses as soon as they have some money available. One family purchased five houses, which accounted for 95% of their total assets; another young person bought four houses and ended up with a mortgage loan of over 800,000. 　　Prescription: Financial advisors suggest that although fixed assets have a strong function of preserving value, their potential for appreciation is limited, and their liquidity is poor. Therefore, the proportion of fixed assets in total household assets should preferably not exceed 60%. 　　Condition 4: Insurance covers children only, not adults. Modern people adore their children and are willing to give them everything the best. There was a family that purchased various types of insurance for their 1-year-old child, with a total coverage amount of 200,000 yuan. However, the child’s parents hardly purchased any commercial insurance. 　　Prescription: The breadwinner of the family should be the primary target of insurance. Furthermore, there are regulations regarding insurance for children: if a teenager under 18 passes away, the maximum coverage amount available is 50,000 yuan, and it’s pointless to purchase more coverage than that. 　　Condition 5: Delusion of getting rich overnight. Many people do not have a clear understanding of financial management; they think that it simply means investing to make money. Some even believe that only by doubling their assets within a year can one truly be said to be managing finances well. 　　Prescription: Financial management involves analyzing a family’s asset situation and financial goals in order to develop long-term, scientific plans that will help improve the standard of living, ultimately leading to financial freedom. Getting rich overnight is not proper financial management; adhering to the concept of long-term investment is the correct approach. Condition 6: Underestimating the need for insurance due to youth. Le Honglu, a financial advisor at China Life Insurance, met a young couple who are a typical example of those who neglect insurance. They have high incomes, own two houses, and have a mortgage of 400,000. But in terms of insurance, they only have social insurance; there is hardly any commercial insurance. The woman’s employer provided some commercial insurance for its employees, but she has no idea what the specifics are. 　　Prescription: Le Honglu suggests that young people should not overlook the importance of insurance, especially since they are in the early stages of their careers; illness or an accident can deal a severe blow to their families. 　　Condition 7: No long-term planning, only focus on the present. Jiang Kun, a financial advisor at Hanhe Financial Advisory Company, met with a citizen in his 40s who owned assets worth over 5 million. However, Jiang Kun found that these assets were mainly storefronts and factory buildings, and this citizen had not given much thought to insurance planning or retirement plans. 　　Prescription: Many city dwellers only know how to work hard to earn money, planning to rest once they have enough, but they don’t think much about the future. Therefore, a long-term plan should be established starting from now. 　　Condition 8: Insufficient emergency cash reserve. Both Huang Hongli, a financial advisor at Huaxia Bank, and Tang Yawei, a financial advisor at SPDB Bank, pointed out that many families overlook this issue – they have stocks, funds, and houses in large quantities, but very little cash set aside for emergencies. 　　Prescription: Although keeping money in a bank account with a demand deposit account doesn’t yield much in terms of growth, it is still advisable to set aside 3–6 months’ worth of income as an emergency fund for the family, just in case. 　　Condition 9: Failing to keep track of one’s expenses and income. A customer met by Huang Hongli, a financial advisor at Huaxia Bank, spent money recklessly without any idea of his income and expenses, resulting in little to no surplus at the end of the month. 　　Formula: From a financial management perspective, income – savings = expenses, and it is by no means income – expenses = savings. One should save a certain percentage of their salary in the bank as soon as it is received each month; this can be done through regular small deposits or by investing in funds on a regular basis, with the remaining amount being used for expenses. Additionally, keeping accounts is a very basic yet effective way of managing finances. 　　Condition 10: Limited investment options. This is a common issue among those who come for consultation. Some people invest 80% of their money in the stock market, while others buy several houses and still want to buy more. 　　Prescription: Establish a scientific asset allocation based on one’s own risk tolerance. If most of the money is invested in stocks, the risk is too high; whereas if it’s all invested in real estate, it will also reduce the liquidity of your assets. Also, when configuring assets, be sure not to forget to buy insurance.