Jagoinvestor

April 20, 2010

Common Mistakes in Personal Finance [Part 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! . Read : Can you live with 90% of your Salary

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 SavingsEducation 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!

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 .

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” .

Read Part 2 of Common Mistakes in Personal Finance

Comments please , Any other mistakes you can think of ?

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Vinu Vishwanath
Vinu Vishwanath
12 years ago

Hi manish,
i m an employee with one of the logistics company in pune and would like to seek your advice in financial planning, especially investment that would help me and my family ( 2 children) in next 10 / 15 /20 years for child better education and their marraige etc and thereafter for me and my wife at retirement age. i am 34 at present.

thanks vinu

Sonal
Sonal
12 years ago

Hello Manish Sir,

Thank you for your constant support for providing financial education to investors. I have some queries. Is investing all the savings in mutual fund advisable? How is liquidity achieved?

Regards,
Sonal

Prashant
Prashant
13 years ago

Hello Manish,

I have been trying to learn about how to make my money work for me.

I always felt I never had control over my money even though I earn a decent package.

I have been in learning mode about Personal Finance recently and your blogs have been a great help. It had help me to put my financial goals in perspective.

Thanks and keep up the great work.

Regards,
Prashant

Amit
Amit
13 years ago

Hi Manish,
Just thought to take this Forum as an platform to appeal most of my Indian Friends that we spent so much efforts on earning money …but how many of us knows “How much is this hard earned money is earning of us”…….

I think very few….I would appeal ..request all…. to follow Manish Blogs…… Its an True Eye Opener….Great work Manish..!!!
“Papa kehet hain”….”My dear LIC Uncle Sam”….all this stuffs i would say part of most of Middle higher class Techie………

Neverthiless…I feel really myself lucky that i came across this Blogs and now started giving 2nd thought for my investment……

..A true web title..Jago Investor Jago….its never too late…take professional services/advices and make money work for you (till you were working for money)…..

….Amit

trackback
14 years ago

[…] invest in. We also were chased by individuals who would specialise in selling a particular product (Common mistakes in Personal Finance). It could have been insurance, tax planning products, loans etc. In most events there was […]

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14 years ago

[…] Read Part 1 of Common Mistakes in Personal Finance […]

siva
siva
14 years ago

I am planning to take insurance SBI Life – Unit Plus II Child Plan to my child who is 7 years old .i have wasted so many years without taking insurance, after going throu ur site i had awareness. please suggest me right plan by comparing various insurance plan,because i am new to this comparison. hope u guide me right plan. i am very much impressed by Ur other suggestion. i want a corpus of 30 lakhs i can invest only 10000 per month.I am eagerly waiting to see your tips on financial planning thank u

dr kishan
dr kishan
14 years ago

dear manish
i think u have hit the bull’s eye by this article. financial education and literacy is what is lacking in india and therefore the innocent indians are being looted by these companies by misseling their products. lots of people have praised u above and therefore i shall not do the same. i really feel u should start a “financiology” lectures series as a distant education program. u have the spark for bringing the financial revolution in india and the earlier u do the better. is there any way we could include this subject as a part of the education program in india? i really want that my children should not suffer as i did due to the lack of financial literacy. we can all be ur army for the this struggle.
truly speaking u are doing a great job. just keep doing it

dr kishan

Ashish D'souza
Ashish D'souza
14 years ago

Hi, since we on a discussion about personal finance here’s a little brief about a Personal Finance Magazine, Moneylife i work for, and our new venture a Non-for-profit organization called Moneylife Foundation

Moneylife Foundation is non-profit organization for education and protection of consumers and investors
Moneylife Foundation supplements the efforts of regulators and companies
In spirit, Moneylife Foundation is an extension of Moneylife magazine spreading financial literacy.

We have a weekly free workshop on “How to be Safe and Smart with Your Money”

Based on unique Content developed by Moneylife editors and researchers which includes the tips and tricks of

– Avoiding Blunders
– Smart spending
– Sensible Borrowings
– Smart Investing
– Right Insurance

The session will be conducted by Ms.Sucheta Dalal, Consulting Editor, Moneylife and Mr. Debashis Basu, Editor & Publisher of Moneylife Magazine

Registration to Moneylife Foundation is absolutely free..

For registrations, workshops and details on Moneylife Foundation and Moneylife magazine visit http://www.moneylife.in. Also interact with us on Facebook at http://www.facebook.com/?ref=home#!/pages/Moneylife-Foundation/370944962452?ref=ts

Do help us in our mission and spread the word.

Cheers.

Ashish D’souza

Ashish D'souza
Ashish D'souza
Reply to  Jagoinvestor
14 years ago

Hi Manish,

Thank you so much. Moneylife Foundation intends to conduct workshops in other cities as well. We have had a great head start and surely looking forward to expand soon. Please help us by spreading the word and let us know if we can conduct our workshops in other cities as well, and reach our goal to spread financial literacy.

Cheers

Ashish

Jagbir Singh
14 years ago

Just met a 26 years old guy 2 days back. God! I was stunned after hearing his views towards financial planning. He is working in IT, here at Bangalore, studied in UK and earning very well. He invested and always invest (that’s what he told initially) only in NSC and Insurance (endowment/normal policies etc.). Last year, he has invested 1 lac in NSC and around 3 lacs in Insurance. I must say the agents he is dealing with are having a fortune.

He is strictly against stock market or related things (MFs) and after seeing Satyam fiasco, he is not going to invest a paisa in these instruments. I spent good time arguing with him about his approach. Referring him to your blog and gave so many examples to prove that there are better approaches. He is working hard to earn money and I just told let money also work hard for you. Phewww! at last he seems convinced and told that he is going to read article on jagoinvestor and to call me soon to discuss further to overhaul his portfolio. I felt so relaxed after hearing such words. But I must say there are lots of such people who are working day/night to earn money and unintentionally laying it unused or misused by investing in so these instruments which even not able to beat inflation sometimes.


Jagbir

rajivahuja
rajivahuja
14 years ago

Well Shubha is right when she says that you have brought about a change in people’s thought process (financially) which is very important.Please keep up the good work.May God bless you .

Shubha
Shubha
14 years ago

Hi Manish,
I’ve been reading your blogs from a few months though this is my first comment on your blog…i bet everyone’s lives have changed after reading your blogs!!! You certainly have changed ours! Keep up the good work.
The most common mistake people make is that they dont want to change or learn something new. They’ve see their parents/relatives/friends investing in endowment policies/ULIPS , so its good for them to0! Expecting our parents to help us on these issues are irrelevant as there were no term plans or ULIPs(nor they had internet:) to educate them)….the only insurance they ever knew was LIC!!!! A few people would have been a lot better if they had followed their parents on “NO LOAN-NO CREDIT” policy!!!! The only way the future generation can be made aware is by introducing personal finance as a subject in 9th/10th grade OR there are millions of Manish’s around!!!!!!
What do you say Manish?

partha iyengar
partha iyengar
Reply to  Shubha
14 years ago

Shubha/Manish,

Manish is always obviously doing great job at educating and empowering investors to take informed decisions on their personal finance/investing..

Good show, Pal..for the great work you continue you to do..

thought would want to share an interesting thing that’s shaping up..
Shubha..you are absolutely right..savings, finance and investing should be added in the curriculum at a very early age..

Infact, our regulators RBI and SEBI through NISM[National institute for securities and markets] have already initiated programs to reach out kids and teens in schools and colleges..
http://www.nism.ac.in/index.php?option=com_content&view=article&id=55&Itemid=59
http://www.rbi.org.in/financialeducation/BasicBanking.aspx

In fact, for the record RBI is probably one of the very few central banks which have initiated programs to educate kids at a very early stage on the merits of saving and banking through simple videos/stories through cartoon characters..

These programs are gradually gaining momentum [ since currently these are pilot projects] and very soon we would see a very concerted effort by our regulators to educate and empower our younger generation to manage their personal finances better..

These initiatives in the next 20 years would in all likelihood ensure that we don’t get into a debt trap like the western world citizens are going through now..

Shubha
Shubha
Reply to  partha iyengar
14 years ago

Partha Iyengar,

Good to know RBI & SEBI’s are trying to educate the students..Thanks for letting us know such sites do exists!

Rakesh
Rakesh
14 years ago

Hi Manish,

As always great article. Just want to share something though might not be the appropriate thread. I had just been to State Bank of Bikaner & Jaipur to get account opening form for PPF for my spouse. The staff mentioned that inorder to open a PPF account we would have to have a savings account in the bank. When i said that few years back i had opened a PPF account without any savings account, she said that now savings account is mandatory. Can individual banks have their own rules. Is this not daylight robbery wherein we would have to keep minimum balance in savings account and then open a ppf account.

Rakesh

Shiva
14 years ago

Excellent Post and a great eye opener for many who tend to mostly overlook these mistakes!

kapil
kapil
14 years ago

Is Taking money out of the EPF account while switching jobs can be considered as a mistake ? 🙁

Pavan
Pavan
14 years ago

No manish not at all ! Thats too much even for me.. 😉
I just meant u can do with Nokia E 71 or 63 no need to buy blackberry for example (not to consider those ppl who actually have a business need for blackberry).. or a digi cam of 10K instead of 15-20K..

mukul
14 years ago

hey great article as usual Manish,
Great points you have mentioned, increased salary then increased expenses. very less people put that new income aside for investment.
Also when you say no policies from close friends. WEALTH PLUS, had a very nice genuine uncle suggesting (rather confidently) that this is UNIQUE/GUARANTEED product and I shud-shud go for it. I refused rather gently but with a firmness. i have other plans for same money.
introducing money to kids, started that for my lil gal. she will know it all(just like i plan to teach swimming,cycling etc)
I was aware of Asset allocation but learned different classes at this very blog. So I will be eternally thankful to you for that. Completely agree with Can you live with 90% of your salary. Well I can and I am doing it for quite some time now.
Thank you Manish. I keep visiting this blog for the reason that it reminds me the value of my hard earned money and how to make my money work for me.

Pavan
Pavan
14 years ago

@ Roopesh
Yes its a dirty rat race.. where show off spoils life of many in the long run!

@ Hemant
OMG 43 Policies… he must be so proud of having those policies till the time u share the reality ! LoL


Yea spending more than necessary/afford is defi true. But somehow I feel present generation spends too much on such things.. Even if they can afford I wish if they save the same amount at an early age they could benefit more in long run..

Sai
Sai
14 years ago

Very nice article as usual Manish…….waiting for Part 2…..:)….ur articles r very informative…..In todays world, not only earning is important…managing our hard earned money is also critical…..ur articles has boosted my confidence that I can manage my own finance….

Kaushik
Kaushik
14 years ago

Hi Manish,

Wonderful article. I did start on planning for my finances late in my life, as usual, and now I know how much I missed in saving money. One very prominent mistake that I remember doing is when I listened to my neighbour uncle to have a endowment insurance policy with a huge yearly premium 3 years back. I still repent doing it in the high of that moment. If only I had access to your article :(. Now I have paid the mandatory 3 premiums and planning to either close or make it a paid up policy. Thanks again for the great articles. Keep writing.

Kaushik
Kaushik
Reply to  Jagoinvestor
14 years ago

You guessed it right 🙂 it is an endowment policy of 500K for 16 years. Not sure of the IRR part. I would get somewhere around 700K – 800K after 16 years. In fact while taking the policy I was told by the agent that I would get around 16 lacs after 16 years. And as usual I was excited seeing the return! Later when I enquired myself I could know the actual figure, but only much after paying the first premium :(. As you mentioned, if the surrender value is less then probably I would leave it without paying any premium for 16 years. What do you suggest?

Kaushik
Kaushik
Reply to  Jagoinvestor
14 years ago

Manish

I did some calculations and on second thought I see that surrendering the policy would be benificial than retaining it for 13 more years, here is how.

If I keep the policy without paying any more premium (paid up) then on completion of 16 years I would get around Rs 96000/- + bonus (I am not sure about it ???) lets say another 3000/- (assuming Rs 30 as bonus for each Rs 1000). Total should come to around 1 Lac.
If I surrender, I would get the surrender value of Rs 24000/-, then putting it in a good mutual fund for 13 years for 15% annual interest (compounded) would fetch me around Rs 1,67,000/-.

A cool difference of 67K if I surrender the policy! What do you think?