Why “Forced Investing” is really good for your financial life ?
POSTED BY ON July 8, 2013 COMMENTS (49)
A big reason why some financial lives are messed up is because there is no “accountability” factor in those financial life, you are not answerable to anyone, you are not required to report the progress of your financial life to anyone like you file your income tax returns each year. Because of this fact, most of the investors have to depend on their “will power” and “commitment”, but truly speaking – in real life it does not work! . Just promising yourself that you will “stick to your plan” fails like anything. Whats the solution here?
In my opinion, the solution is simple and amazingly astonishing – you take decisions which “forces” you to invest from time to time, you surrender to a situation which makes you pay due to some fear and compulsion, where you cant come out of it so easily.
There are various decisions like Buying a House on EMI, Starting a SIP in a mutual fund, opening a Recurring Deposit, Buying a Policy which forces you to keep paying premium or installment over the years/months help you save money by “compulsion”. The product design is such that you get into a structure or an arrangement that makes you feel – “I have no option” . Most of the people will not be able to save any money if they do not rely on these “compulsive” investments and each month their money from saving bank account keep reducing the same way I saw audience disappear every minute while watching “Lootera” movie this Weekend (It really looted my Rs 400 bucks) .
Let me point out some scenarios which will make this point clear.
1. Forcing your brother to pay for Education Loan
Imagine, you have a spoilt brother/sister, whose mindset is not designed by God to “save” . Now you or your father have the money to fund the education cost for college. But instead of that, you tell him/her that there is no money and education loan is the only option, which he/she will have to pay back later once he gets a job. Now there is “compulsion” to pay this EMI, there is no escape from it. Out of whatever he/she earns, they will be forced to pay away with the EMI part and only the rest money will be there for them to “enjoy” and you can be sure that it will all vanish by the end of the month, which would have happened anyways even if there was no “compulsion to pay EMI”.
2. Taking Home Loan
This is Interesting , A lot of people are afraid of committing themselves home loan because they feel the insecurity of jobs or no potential salary hikes in future etc and because of this risk factor, they have not taken a loan till now, and the worst part is they neither have any money left with them over the years (which they might have paid in EMI, where has it all gone ?) .
A lot of people who took courage in the start and took home loan even if it meant stretching their financial life, would be able to confirm that because it was mandatory for them to pay the EMI each month, they did everything and anything to make it possible. The compulsion of paying the EMI over years brought some discipline and seriousness in them about their financial life.
3. Recurring Deposits & SIP’s
Try opening a Recurring Deposit of Rs 1,000 per month (option 1) and try to drop two Rs 500 notes in a piggy bank at home each month at the end of the month or the start of the month (option 2) and then see the results after 1-2 yrs. The compulsion and automation which a Recurring Deposit brings in your financial life can never be achieved by a piggy bank, simply because of the passive nature of recurring deposit or a SIP in mutual funds (the money goes and you are not even asked for it and some times you are not even aware that it happened). However, with the Piggybank model, each time you have to consciously take that action, and since you are Human, you fail at it. Any decision where “you” have to take “manually” take some “action” eventually have very high chances that it will not happen (on a consistent basis).
4. Investing in Child & Endowment Policies
I was arguing with a Certified Financial Planner on how one has to avoid those endowment policies and child plans which they feel are amazing financial products. He asked me – “Manish, I know that these policies are not going to give the best returns, but do you know most of the investors want some short term pleasure to invest. These endowment/ULIP/child policies give tax benefits and because they have penalty for discontinuing – there is a compulsion to pay each year and that makes them invest each year.”
Just saying – “SIP is better and Mutual fund is amazing” will create short term excitement for them, but at the end of the day they will not take any action because Mutual funds and other powerful products are highly liquid and investors fall to this and can not control themselves in front of short term requirements which comes in front of them”.
This made me realize , that most of the time policies which are illiquid can be good for investors (who are weak in controlling themselves) because they need some compulsion and fear to continue. You can see people redeeming their Mutual Funds to upgrade the car, but hardly anyone does that with an LIC policy. Right?
Try to incorporate “Compulsion” with every decision
The biggest take away from this article for you is that wealth gets built over years only when you are consistent and disciplined and there are financial decisions which can bring that “compulsion” element. It’s in your interest to take decisions which bring some kind of compulsion in your life. So next time you decide to save some money at home in a piggy bank or in your almirah, ask yourself will it bring any accountability, compulsion, and automation (where you are not involved manually), or should you open a Recurring Deposit or a SIP which will help you on those factors. You might want to have a look at our full-fledged paid video program on “Automation in your Financial Life” on our Wealth Club
If you are still wondering why these compulsive decisions help you grow wealth, understand the advantage of bringing compulsion in your financial life is that it changes your financial life equation from “Saving = Income – Expenses” to -> “Expenses = Income – Saving” . You first “save and invest” and then spend !
Let me know your views on this topic?
Dear Nandish/ Manish ,
Can you please explain me what is national pension scheme? how is it different from PPF ?
Regards,
Kahnu
Explained here – http://jagoinvestor.dev.diginnovators.site/2009/05/nps-new-pension-scheme-detailed.html
Please show me any one good , sound and genuine Financial planner who can take up the assignment. Ultimately its your money and you need to put hardwork to learn, unlearn and go about it. You just cant rely on any one. Yes of course lots of free tips are plentily available. No concrete solutions though :(. If any one has come across really good and genuine planner / firm , please share. It has to be a degree advance then just basics.
Thanks for sharing your views . True that its tough to find good financial planners . However we have been always striving to create wow experience for our clients.
Very good article again..! I guess the best example to substantiate the article could be the EPF investments..
Most people by default / forcibly go for EPF investments.. and the corpus that this builds in years is remarkable…. For bad savers, it is actually advisable to increase the contribution beyond the basic 12%..
True . Its an amazing example, but its something even not in your control . Its the best thing . But I am talking about those decisions which you take yourself and force yourself like home loan or say a policy !
Well, coming to think of it – Those who want to inculcate a habit of forced investing into Mutual Funds should go for ELSS since MF investments in ELSS can’t be redeemed atleast until 3 years. Double bonanza of high return Equities and tax efficient too.
True . If you understood this fact, you are above 99.99% investors !
Hi,
Another great article. I was just wondering if you could write an article about real estate companies offering assured returns to investors who buy units in their proposed projects, ranging from 100 sq units to 1000 sq units. These companies promise returns of 20-50%, after 1-2 years. If the future buyers (those that buy an apartment) are given a higher quote per sq ft, you as an investor are given a lower quote, you do not own the property, but merely invest. What are the pros and cons? Anybody on your blogs who have gone for this and if they got duped or made profits?
Its a simple thing Ashwin
They cant get loan from banks at even 16-18% . So they ask you to invest your money (kind of loan – at 10-12%) and they project that because the psqft rate of property will rise you will anyways make 20-25% return , which is never guaranteed in any agreement. On top of it , builders are known to have liquidity crunch all the time, so even if he is legally bound to pay you back , what will you do if at maturity he does not have money to repay you back and asks you to wait. Then you do police case and all that, is it worth extra 4-6% return ?
The presence of an authentic financial planner changes the equation totally and can bring about financial discipline in people over a period of time. But if certified financial planners also hide behind the excuse of indiscipline and start recommending inefficient solutions, we can see through the intentions clearly. Make quick bucks and blame the investor himself! In the absence of a planner, a bit of forcible saving is welcome though..
True .. We are talking about cases without presence of CFP’s or someone externally helping Chenthil 🙂 . 99% of cases 🙂
But u have mentioned in the article itself that a CFP friend of yours was giving the same ‘reason’, and so my comment. In any case forced saving is definitely a good idea for people who don’t have any knowledge/awareness of money and the options available. But an individual who has the basic sense of reading your articles can definitely gain sufficient knowledge to deploy his money appropriately. I’m sure this article of yours is just fodder for the existing financial intermediaries to justify selling inefficient financial products. For instance, when the new Irda regulations came restricting the charges in Ulips, the insurance agents had just one solution, sell traditional plans!
Yea Chenthil
Agree that learned readers should not depend a lot on external factors , but take charge in deploying their money in better way. Forced Investing is for those who are not stronger than their willpower 🙂
Manish
Hi Manish,
This is a well known fact that human psycology is to work under fear and compulsion. So its always good that they do some investments like endowments (though forcefully) to atleast save that way for their hay days. Also most of the people feel imp to have ‘Capital Protection’ as one of the imp factors thereby going for debt funds instead of MF’s. They also like to see a Lumpsum money as returns + trust is an important factor. Reasons why not many people vying for shares and MF’s as no one wants to loose hard earned money in these tough times.
Rgds,
True . Agree with you !
There are different ways to look at it. Good, Not so good and somewhere in between.
However, the issue is, one has to take control of one’s financial life. For this one has to reconcile the needs on one side and resources on the other and make a strategy to balance both in the long run.
Once one gets to understand the nuances, i feel, one can control the needs and resources to reach one’s goals.
I know a person, who was not knowing much about finance. Over the period of last 5 years, he took interest and started balancing his financial life. Now he is in a position to plan well into the future and he planning to retire by 50(now he is 42). As per him, he spends only about 40% of his salary. Balalnce after deuctions(about 30-40%) will go into some tax efficient investment.
Great to hear that . ONly when a person is present to his situation , he can do something about it !
I agree that forced investing is great necessity . But getting your child to TAKE A LOAN IS NOT AT ALL A GOOD IDEA.
WHEN PARENT HAS MONEY, WHY MAKE THE CHILD FALL INTO LOAN HABIT. WHY PAY INTEREST ?
A parent would do well to inculcate the habit of compulsory saving.
1 My wife called a frinedly ” Financial Advisor ” home to educate all of us , including our two children. He was actually an LIC agent but wih financial expertise. He educated us on the inflation criteria and convinced us that after 20 years at current inflation what will be the money required after say,10,15,20 year .
You guys wont believe . Son took LIC Policy for Rs.ten thousand per month and daughter for rs.4,000 per month. This has made them future-proof with protection to “their future family ” Tax saving , +++++ peace of mind to all. This real compulsory saving beats whatever you have written man.
OMG..another fool invested in LIC plans
Thats your way of looking at it . One can take a loan if your child is not of that saving mindset . It might be to make sure he develops habit of paying dues first .
hi manish,
what a coincident, past few days, i was discussing about misselling, forced investment. and your article came….really sometimes (very often) forced investment is required. what prompted me to think on this line when one of my friend, who is an agent, was trying to sell endowment plan to my one of my friend, whose wife is also working. i thought to intervene, but i stopped myself since both husband and wife are financially not savvy. so i thought atleast if the couple buy the endowment plan..they will investing somewhere.
Not in relation to this post. but it would be of importance to our jagoinvestor readers (be cautious while signing cheque). a pubic sector bank transferred erroneously huge sum of money to my account. and i gave it to them again all the money that they had transferred. Here is the story (http://goo.gl/JdWW3)
Thanks for the link , will look at it !
If one gets 40,000 monthly tries to save 50,000/- monthly taking 10,000 as loan from others, How many month can he pull on…Perhaps for years .He says… How? take loan from RDs. 90% you will get ….make a corpus…and from that corpus go on paying the instalments…One of my friends idea ? will it really work I do not know?!
You go ahead if it works !
Hi Manish,
Yep. This is true. I was kind of knowing this so I started making things automated quite early in my financial life. I started with the ULIP plan even before I got a regular job. (started investing during my internship, just to check myself up.)
Then I got a job, started thinking about other investment avenues, tax savings etc and regretted that I invested in a ULIP !!! But at least I started saving and this plan is still going on without missing a single premium.(tht feels g8 to write.)
When I read this article I actually realized that unknowingly I incorporated a good habit long back and it helped me build my financial life.
The latest addition to this is NPS scheme investment. I have automated the payments for this as well.
Thanks for this revelation. I am feeling somehow better now abt investing in ULIP plan also !!!
Great .. it was nice feeling to know that you are already practicing this !
A great article…
Infact a co-incidence happened with me with regards to your fourth point titled “Investing in child and endownment policies”.
I was in a training today for entire day for term plan/mediclaim/pa policy. During the training, the training explained us about one endownment wholelife plan as well and he said that “agreed, although IRR of these plan will be around 5%” but the USP of these plan is that these are savings plan and not investment plan. In case of emergency, client will liquidate mutual funds, fd, recurring deposit but will never liquidate endownment plans. and the same thing has been highlighted in 4th point of your article.
To certain extent, i also agree with this .
Note: in my career spanning 9 yrs in financial service industry, i have never sold an endownment plan.
Good to hear that Dinesh . To some extent I agree with that, but over doing will spoil one’s financial life .
the artical is very good in pratical life.
Hi Manish,
Nice information as usual.
everytime you refresh us.
Welcome 🙂
Yes in some cases force investment is beneficial but not for all. In my case, it was beneficial, i was planning for invest in a property & had reviewed lots of projects. At last one of reputed property broker came & literally force me to invest in a project of reputed developer. Although i’m aware of the project & the price but i didn’t go directly, it was broker who forced me to invest in it. And i think it was right investment. But in the flip side you can see, there are lots of mis-selling happening in insurance, ULIP, mutual fund section by the agent. So one have to be very careful.
True . But misselling is not forced selling , I meant a consious and learned decision taken by self !
Great Article Manish!
I definitely need to get into ‘Forced Investing’ mode.
One thing to note: Recurring deposit will fetch interest on it whereas piggy bank will not.
I’m trying to schedule a call for my financial planning but when I click on below url to schedule the final call with you, I am getting a blank page. Please help.
http://jagoinvestor.dev.diginnovators.site/schedule-appointment
You are getting blank page ? Are you sure ? Try again now !
Manish
Check again , it should not happen !
Hey Manish,
A nice article indeed !
Thanks
Sahil
Thanks Sahil !
superb article Manish!!!
A much needed practice that is slowly fading in an era of consumerism
Cheers
Sankar Iyer
True !
I can relate to the article from my own life, and yes can say for sure that compulsive investment has changed my life.
GOod to see that its your story !
Indeed a wonderful article.
I have tried saving 1000-2000 a month and was very skeptical of it, thinking if i can atleast reach 5000.
But, once you have the cash of 5000 in hand and start dropping more and more money into Piggy Bank, you have a sense of relief and i have never touched that money and wanted to it to grow to 10,000 and started dropping more into piggy bank. After 1 year i managed to get 25,000 out of it.
Always spending with Cash in your hand make you feel like you are spendng more, and that will help to maintain unnecessary spends.
@ Manish, Regarding taking a House Loan – i might not agree (My own view), what if the person really looses his job and not able to pay out the EMI’s, i understand it will b nice to think that my rent will go into my EMI, but if he looses his job, he has atleast the option to rent a smaller house until he is financially fit enough.
But, that doesn’t happen with EMI’s, above all it will be a Mental Tension for him to think of the EMI’s 24*7.
May be an ideal person, who has 6 months enpeses taken care can think of this option but just i have written this for people who will read and right away go for a Home Loan.
Thanks for all your views.
-Sunil.
Sunil
True .. thats the risk you need to take when you want a house. I am not saying that any one goes and take that risk , but a lot of people are too safety concious and when they can take calculated risk, even then they do not move !
A lot of it depends on the background one person comes from. If children see their parents save money for future, they will automatically learn to save. I personally know some one who earns reasonably well, but has habit of spending lavishly on movies, restaurants, dramas, travel / tours, etc. He would be reaching his retirement in next 5-7 years and still has responsibilities of his two children’s education. One would be surprised to know that he has almost no savings for his retirement and he is now forced to take loan for his children’s education. I believe, spending habits have been inherited to him from his late father who was equally lavish in spending. The problem is, the person is not willing to change his financial life even after realizing he is fast nearing retirement and has little savings left.
True . Agree with you Mehul !
“Expenses = Income – Saving” is the best mantra for great living. You are absolutely right about it, Manish.
Yea .. correct ! . I live with it !