Tip #1 : Avoid these 9 common mistakes in your Financial Life

[RAJESH DESAI]

 

We all are trying to make our Financial life better and better day by day and we are ready to do what ever it takes to improve it ! . However more than what you should do, you have to concentrate on what all to avoid ! . So Here I list 9 mistakes which if you avoid can substanially improve financial life 

 

Mistake #1 : Spending more than you should

Sometimes, people spend impulsively, on things which they do not really need. Just because, your plastic card is in your wallet and you "might" need it in future makes you believe that you need to get it right now. A brand new camera, with a 100 megapixel sensor and a 2000 x zoom is available at an EMI of just 1999 per month -- and suddenly you're interested in Photography! An EMI of 2500 a month, for that magical million colour, anorexic Flat Screen TV creates a magical belief in you that your normal TV at home is now really blurry these days (not to mention really fat!) Is there a need, to splurge on Movies and eat out, every weekend?

 

A regular meal at home, with a movie on tv is also a good weekend, at times. With many people, savings occur, only if they are left with any money at the end of the month. This needs to change - start saving first, then spend on what's necessary and then spend on your desires - last. Financial planning does not mean compromising your dreams or what you love to splurge on; it's all about knowing what you need and what you don't, & knowing it well! .

 

Mistake #2 : No Financial Education to Spouse and Kids

 

Most people are more comfortable talking about SEX rather than FINANCE to kids (just kidding.) They dont feel the need to tell their children that they have bought life insurance for them (the kids) should they be hit by a bus tomorrow (the parents, not the kids :) ). Once children reach an age of maturity like 16 or 17; when they can understand things & reason well and can take on responsibilities to some extent... Please start telling them about money and finances. Once you are gone, you can't even regret. Kids should know what your work is & how much you earn. They should be clear on how you are saving money to fund their education, bike , trips etc. Once they know about life t it, chances are they will be a lot more supportive, would be realistic in their demands & stay well within their limits. Kids don't know sometimes, how much pain you take in earning money.

 

Most of the times, kids know your salary and your designation at company and assume the family to be a "higher middle class" one. Once you tell them about Home loan EMI, Car Loan, other liabilities, Retirement Savings, Education Expenses, Marriage expenses and the medical emergencies for which you are saving, they will have a better idea about the current situation and they will act responsibly. Parents feel a little uncomfortable, telling their kids these things, as they feel children are still young and such information will create unneccessary psychological pressure and they would not talk about their demands and be unhappy. Parents feel that children should start learning about finance and applying that knowledge, once they are in a job and start earning. I say, if your finances and spending habits are messed up today, a big reason could be that, your parents never talked about finance with you openly. The same applies to spouses. Imagine, if you had all the knowledge and best practices you have learned on this blog, 10 years ago; or when you started earning? The situation would have been very different today, wouldn't it? Dont let this happen to your kids: Teach them!

 

Mistake #3 : Imbalanced Asset Allocation

 

A lot of people have a tendency to start working and then never look at, or review their finances. Tax Planning is nothing more, than a "signature" on some form for them. Initiatives from their side are limited to just calling an "agent" and nothing more. When they finally look back at their finances, they find that they have 40 Lacs in FD's and 25 lacs lying in Bank. This happens a lot with NRI's working outside the country. These are 35 yrs old who have 90% in debt or Cash, and 3-4 mutual funds and shares bought in recent years just for "trying". This category misses a huge amount of returns which they could have made with just 4-5 hours of planning or hiring a proper investment consultant.

 

On the other hand, there are investors who have no PPF, no FD, no Debt Funds, no bonds; they just do share trading, buy direct stocks, invest in just Mutual funds (pure equity). Their imbalanced Asset allocation is responsible for the huge ups and downs their portfolio takes. One year the worth of their portfolio will be 10 lacs, the next year it will be 7, then suddenly it will be 14 lacs the next year. The numbers dance with huge fluctuations, but at the end of let's say, a decade, they look back & find they are nowhere better than their "High debt Instrument" kind of Investor brothers .

 

Mistake #4 : Buying products from Close One's

 

Will you sell a junk product to yourself if there's a 35% commission and it will be a burden to you all your life ? I don't think so, but if you had to sell it to your friend, colleague, brother-in-law, sister-in-law, father's friend etc, you'd consider it, wouldn't you? That's what happens in real life too. Most times, the "Best plan" comes from one of your relatives or some one known. STOP IT PLEASE! .

 

A simple NO might hurt your relations with said person, but it will save you, your hard-earned money, rather than waste it on idiotic products, which you'll regret for life :) It's just common sense that there are better advisors and consultants than your relatives or a close ones, unless they themselves are known and respected in the field (of finance). Read : "Papa Kehte Hain" problem in Personal Finance Most of the readers here, have shared their bitter personal experiences, where they bought products because it came from their relatives, Uncle's et al. This happens a lot with young guys yet to start working, and their fathers have bought policies for them and then delegated the premium paying responsibility to them once they start earning, it's a real "burden of legacy" .

 

 

Mistake #5 : Unrealistic returns

 

Risk free returns, in our country are amongst the highest in the world. In countries like US, the interest rates are 1-2%. Equity markets in our country continue to provide 12-15% annual returns (Find Why) . But how much do investors expect from equity these days? A lot! No one is ready to settle below 20-25%? 12% is abusive to them, & makes them feel like they are cheated. A reader told me that he earned 100% this year from equity (2009) and he will be happy with even 25% next time! LOL! This happens when you look at short-term returns.

 

Investors who started in 2004 started thinking that they are all "Warren Buffet" and can leave their jobs in some years! Whereas all investors who started in 2007 end or 2008 start compare equity with their mother-in-laws, they just can't stand it. Think long-term, and timing will just not matter much. For retirement and child education, which is 15-20+ years away, just start a SIP in an Index fund and then go into a COMA, come back once in a while and just review it every 6 months to a year. That's all.

 

Mistake #6 : Feeling special when it comes to Life or Health Insurance

 

I'm not sure why, but some people feel that they are god gifted. They feel good health is a good excuse to skip Health Insurance and just because they don't drive carelessly, it makes them "Accident proof". They don't realise that most people die in accidents not because they don't drive well; it's because the other person does not. Probability of dying is almost the same for everyone, but everyone feels that they have better chances, of not being part of an accident or an attack. Be realistic; especially in bigger cities the chances of accident is higher than smaller cities. Most and more casualties happen in bigger cities. Take adequate Life and Health cover.

 

Mistake #7 : Excessive Leverage and careless spending

 

In recent times, we spend like there's no tomorrow. Easy available credit for home loan & the tax breaks available on them, EMIs available as an option for buying almost anything these days; all these easy means for laying hands on money has suddenly changed the way we see "Acquiring Assets" and "Spending". Unlike our parents and grandparents, we are spending money, which we haven't even earned. We buy houses, cars, vacations etc., and then pay the cost for the rest of our working lives. In some cases, it might make sense, but a large section of society just lives beyond their means (See this eye-opener from Subrmoney) .

 

Research shows, that we feel less guilty when we pay with our credit cards rather than cash. When we use cards, we don't see money going out; there's just a consolidated bill at the end. Nothing can be done (or undone) then, you just pay it. Imagine you are paying cash every time you are buying something you really do not need. We buy unwanted clothes, & unnecessary gadgets we can do without. How many of us claim, sometimes that we just can't survive without a certain device, or feel that we can't enjoy our life without certain doodads? Didn't our parents and the old generation live without them or with limited quantities ? Why have we all suddenly shifted to plasma TV rather than the old TV we have used in our childhood? Of course, technological changes should happen and we should always move forward, but buying a Plasma TV just because it looks cool in your drawing-room, does not make sense at all; that too, if you haven't yet planned for your retirement or taken care of all the important goals in life. If it's really your need , then go ahead , I would encourage , but most of the time people buy it out of comparison with friends and relatives. Once your other priorities have been achieved , you can go for it, But not at the cost of something more important .

 

I've heard horror stories of people who have bought homes and are crying today. Their home prices are moving up, but the quality of life has drastically decreased. They suffer horrible amounts of stress because now, even small things in life which gave them happiness, look unaffordable... all because that 2 BHK Flat's EMI has to go through next month (A close look at Real Estate Returns in India). No quality trips & vacations, heavy stress because of insecurities of jobs. Imagine a double income family with income of more than Rs 1 lac, who belongs to top 1 percentile of the highest earners in the country, but not leading a happy life because of excessive debt they have taken on all the loans and not enjoying little things in life because of these issues . Whats the point of earning so well then ? Don't try to be over ambitious at the cost of your current lifestyle and happiness! If you can't manage your life successfully and happily, then the car, and the house, and all that financial planning is just a waste. (Read What is the goal of Financial Planning)

 

Mistake #8 : Short vision

 

Close your eyes and try to imagine your retirement, child education & marriage related expenses, and health care costs after 30 years. Can you predict your grocery bills after retirement? Living in present is great, but planning your future is critical now. Let us do a small exercise to show you what your dietary (food & eating) expenses at home after retirement will be. Consider a 30 years old couple today... How much do they need to eat a decent breakfast, lunch and dinner at home? Even if you consider a meal at Rs 25, that's Rs 150 for 3 meals/2 person a day, thats Rs 4,500 per month. I guess that's what the grocery bill of most married couples in their 30's would look like (I am unmarried, as yet). Now, Rs 4,500 per month today, means 25,000 per month after 30 yrs, which is 3 lacs per year just for groceries.

 

Forget inflation for now, if you live for 30 yrs after retirement (worst case), that's 30 years X 3 lacs = 90 lacs just for your breakfast, lunch and dinner and this, doesn't even consider inflation. Some people think they would need 1 crore for their retirement , LOL !! . You will require at least 10-15 crores, start working on it NOW !! . Pray to God, you don't live longer than that, else it would be really painful!

 

Mistake #9 : Not ready to pay for Advice

 

This is in our culture & our genes, it seems. The very idea of paying for advice is anathema to us. We rely on "free" advice most of the time. If we can get the top 10 mutual funds from valueresearchonline.com, then why pay someone for advice? When we know term insurance is best, and we have a good formula to calculate life insurance requirement, then why do we need a financial planner to tell us how much Insurance we need? If we have so many personal finance websites and magazines then why do we need financial planner, we can do it all by ourselves? We are a DYI (do it yourself) country! . I get many questions over email and comments, Imagine me asking for money for giving personalised advice, How many people will consider paying or will even accept that its fine ?

 

We must understand, however, that there are situations where you just can't match professionals in some areas. The other thing is some advice can be general. For example "top 10 mutual funds" might not work for you, & might not be suitable for your situation. A different set of mutual funds might work in your case and to analyse your situation, an investment consultant can be helpful. You have to take a call on whether its worth doing it all yourself or pay the fees & have a pro handle it. Take large real estate transactions for example; I am amazed to see many people mailing me questions on complicated real estate deals, they are doing themselves, which actually might need a CA attention or professional advice to deal with. But why pay the CA that extra 10k or 15k he will ask for? They then, make mistakes and in long run lose a big amount of money just because of ignorance and not having optimized the whole deal.

 

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Tip in the Next mail :  #2 : Choose Best Term Insurance Policy for your Family [With Charts]

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Manish 

www.jagoinvestor.com

Jagoinvestor Org, B3-9 , Padmavati , Pune Satara Road , Pune , Maharastra - 410007

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CA. Rajesh Desai