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.
Tip in the Next mail : #2 : Choose Best Term Insurance Policy for your Family [With Charts]
Manish
Jagoinvestor Org, B3-9 , Padmavati , Pune Satara Road , Pune , Maharastra - 410007