Category: Psychology and Wisdom

4 amazing things you can learn from Cricket

Posted on by Jagoinvestor

Does cricket have anything to do with your financial life? I say, Yes!. Cricket and Financial life have some amazingly common things! There is much,  we can learn from cricket and implement in our financial life. Both cricket and Financial life involves achieving goals. Let’s see what we can learn from cricket, to use in our financial life.

Personal Finance and Cricket
1. Chasing a big score is easy, if you have a good start!

In cricket, making a good score within the first 10-15 overs helps a lot. It’s much easier to score 300, if you’ve already made 80-100 runs in the first 10 overs. However if you make a very bad start; losing wickets and not making enough runs, you will have to work much hard later to reach a good score. We see this in every match. Once the first 15 overs are, well over, we have fielders placed well, all over the field and everyone is warmed up. So, a good start in the start of the match compensates for the slow run rate later, and at the end you get a good score.

In the same way, your time, at the starting years of your financial life is like a precious “wicket”. Dont lose it. The longer you have in your hand, more is the risk you can afford to take. Saving more in the start helps a lot in building corpus. For example if you invest Rs 10,000 per month for 30 yrs , you will build a huge corpus at the end. However if you decide to save additional 4,000 per month and invest 14,000 per month for first 10 yrs , you can then stop your investments and leave that accumulated corpus to grow for 20 more years to reach the same corpus. So an extra saving of Rs 4,000 per month makes sure you don’t have to take on a much larger load later. The assumption is that you get 12% return on your investments.

2. Each team member has his place in the team

What will happen if you decide to have 11 Sehwag or 11 Zaheer Khans in the team? Will India win? I doubt it! A good team has a good batting line up, great bowlers, a wicket keeper with really safe hands, and quick, sharp, athletic fielders. Having a team that is extremely dependant on one single ability, would mean that we ignore other areas and leave big wide gaping holes which in turn lead to failure… big time.

Having 11 Sehwag’s would mean we can theoretically score 400-450 in 50 overs, but then we won’t be able to stop the other team by chasing, because we will not have a great bowling attack. In the same way, if we had 11 Zaheer Khans, we might bowl out the team under 150 runs, but won’t be able to chase that tiny total either. So a balance within a team is required.

In the same way, our portfolio is a team and it has different team members like mutual funds, direct equity, ULIPs, Insurance, PPF, other debt products and of-course – cash. Each of these have different functions and are useful in different ways. You can’t afford to have your team always stuffed with a single kind of financial product unless you are super-expert in that. You can definitely favor one product or strategy, more than others, but only if you know what you are doing. This can’t be the case in general for a common investor. One cant have only equity all his life or only debt products all his life ,you need to have balance and their comes asset allocation.

3. You can’t hit sixes & boundaries every time. Just make sure your run rate is awesome!

This is my favorite! If you look at any match, 6s and 4s are always there and that what most of the viewers like to watch, but you can’t deny that the actual score comes from 1s and 2s; runs which players make consistently. It’s the core of the score. There are bowling deliveries which has to be identified well to hit boundaries, but if one tries to smash every ball out of the park, failure is almost certain! All the wickets will fall sooner rather than later. A team has to make sure that they keep taking singles and doubles consistently, and hit boundaries on weak deliveries.

In the same way, in our financial life, some years can be awesome with 50% or 100% returns like 2010-2011 or worst like -50% return in year 2008 , However dont get disheartened by these extreme years, you have to make sure you make average good returns consistently each year and keep moving towards your target. Its much easier to get 12-13% return on yearly basis compared to getting 40-50% year over year. There will definitely be times when you will make amazing returns from your money. It could be stocks, mutual funds or real estate. But don’t get used to it!. Look for a good average return overall, with great returns once in a while. Having said that, don’t feel bad if there are some years which are bad and your money does not grow a lot, because even in cricket, there are some maiden overs! . If you didn’t score any runs in an over, it does not mean that you have lost the game; it just means that you are facing a strong bowling attack.

Don’t lose your sleep over it. If you look at the world cup final between India and Sri Lanka, you will appreciate the fact that India maintained its run rate till the end and made sure they preserve the wickets till end and that’s the reason it become very easy to chase the score and finally play some winning shots with the backup of our wickets in hand. In the same way, you need to ensure while chasing your goals, that you maintain a good run-rate year after year. There will be good years and bad years, but don’t let them weaken or slow your run-rate.

4. Things can go wrong! You need to be nimble & re-evaluate your strategy

A lot of unexpected things happen in a cricket match. For example there can be a bad start with very low run rate, fall of important wickets, excellent fielding by the opposing team etc., which might make you feel as if the game is all over, but there are many occasions where the losing side has won. It all happened, due to focus, being calm, reevaluating the situation and finding the strategy of what’s to be done “now.” With slow and steady progress, and some calculated risks there are many matches where losing side have won.

In your financial life, there can be many issues like losing the initial years of your life without investing any money, loss of income, change in taxation rules which affect you badly, many bad years without any good returns etc., and all this can make you feel that you will not achieve your targets on time. It’s true, that situations get tougher and reduce your chances of getting closer to your goals easily. It does not mean however, that things are over! You can always take charge of your financial life and really fix it. You can spend good time over your financial life and be extremely committed to make it awesome. Learn personal finance, find out how to get better returns from your investment, be more aware of what precautions can be taken etc. You need to be more alert and keep evaluating your strategy for improving your financial life.

Can you share more learnings from cricket which we can relate to personal finance ? Also, share if you like the analogies in this article ?

Goal Visualisation or Goal Setting ? – Which one is better ?

Posted on by Jagoinvestor

Do you know how to write your financial goals? How many lines or words does it take? Think about your retirement goal for a moment. Now if you thought, “I have to generate a corpus of 5 crores in next 30 yrs” is a goal, you are mistaken… to a really large extent! While this way of defining goals is better than not defining a goal at all, this is not how you’d do it if you want to be inspired each moment as you work towards that goal. After a point, you’d just be lost again in your daily life. There is another way of writing financial goals and today, I show you how to do just that.
 
Goal visualization

Let me ask you a simple question. When are you excited about watching a new upcoming movie? What if I tell you that there is a new movie out soon, called “Kuch Log”? Will this tiny bit of information do anything in your mind? Does it excite you any? Does it inspire you to go to theatre and watch the movie? No! .

But what if I show you a trailer? Some exciting snapshots of the actual movie that give you a feel of how it will look like? The best tantalising glimpses?  Won’t it then, create a shift in your mind and motivate you to actually consider watching the whole movie?  I’d say Yes! . In the same way your financial goals defined in just one dry, boring line, with a target amount & date can not motivate you enough. It can motivate only those people who really are disciplined and committed in life .

In this article, I’ll share something very personal about us at Jagoinvestor. This process, is what we do with our clients. The way we work with them, goes way beyond traditional financial planning. Instead of just goal setting in the traditional way, we do something additional called Goal Visualization! . Goal Visualization is converting your target amount and target date into a more descriptive paragraph and see how your life will be in future . It gives you more clarity and what you actually want your goal to look like .

Here’s an example…

Year : 2040

I am retired now, and living in my native town of Bangalore. My house is a little far away from the city because I like to spend most of time in nature related activities like hobby farming and some social causes like consulting with poor farmers on how can they use today’s technology in their work.

I am trying to get back to my routine work, these days, as I’ve just returned from Australia , where I spent a month-long holiday. Next year’s destination is South Africa which recently got added to my list as the next world cup is there! I have all the time now, to go watch my country win there. It will also give my wife a chance to explore various historical sites of that country, which she loves a lot. Its part of my “30 countries I visit before I die” target that I had set for myself.

It gives me immense pleasure and satisfaction, when I teach mathematics to a group of 30 poor students who can’t afford a fee! That’s exactly I am doing these days. As I am retired now and really love the subject, I want to help in sharing my knowledge any way I can.

Me and my wife go for a daily walk in the morning; we have been doing it for years now, the last 20-25 years in fact. We have made sure that we won’t be victim of deteriorating health which will make all the money we have saved, all our lives fruitless! We have always done our best to keep ourselves on the move and now we have joined one the biggest health clubs in the city. It’s cost us more than 70 lacs for a lifetime membership, but it’s been worth the cost and it gives us all the time and resources we need from it, whenever we visit it.

I have generated enough wealth in my life which takes care of my basic needs and luxuries in life. I never have to think twice, before buying  something important. Money does not come in the way of my leading the kind life which I always dreamt of! I have achieved this! While I like to live simply, I have created a situation where money is the last thing which I have to worry about, as far as my life is concerned.

I have spent most of the time working for software giants across India and US, and  I never felt as if “This is exactly what I want to do!” Now I am free of those worries, which came in the way of  my desired life. I feel I am really spending each day of my life the way I always wanted to, not the way I am forced to because of various reasons in life. I am happy!”

Goal Visualization is not Dreaming

Goal visualization is not dreaming ! . You need to have a visions in life and this goal visualization is looking at how your vision will look like in future . Remember that Dhirubhai Ambani never had a goal of have 5 crore in retirement , He had a vision and that vision inspired him each moment in his life to move forward. To do anything which makes his vision true .

Goal Visualization gives you the power, it inspires you ! . It makes you crave for your financial goal which you create for yourself. You will not believe but most of our clients discover themselves and are amazed to find out how they themselves wanted their future life to be , and it happens only after they approach us to work on their financial life. There is less of number crunching here and more of human activities which connect to a person , motivates them and fills them with energy.

Your Action today after doing Goal visualisation

When you do goal visualization, go into the future and see yourself – Are you are happy? Excited to see yourself getting what you really want?  Then, come back to reality (come back to NOW). The next step is to answer a bigger and important question. You now, have to write what commitments are you willing to make, what efforts are ready to do today which can lead you to the goals you want for yourself.

It goes a little like this…

Year : 2011 ( Today)

I was actually thinking of upgrading my car from Santro to Honda as my salary has gone up by 100% in last 3 yrs, but If I look closely now, I feel that it was a “wish” created out of nothing. It’s not actually a  “need” !.  If I ask myself whether it’s really required, I see myself answering “Not Really”. I can actually continue with same Santro for next 3-4 years. Better that I, use my increased income to reach my retirement goal at the earliest.

My wife has subscribed to a gym membership but her trips to the gym are very limited. On second thoughts, we will stop paying 3,000 per month fees and better use Rs 150 per day pass every time she goes. Anyway she goes about twice a week, so it would save 1,800 bucks without compromising what we are doing right now. It’s just that we have to relook things and restructure them.

I save around Rs 5,000 a month, but after doing the goal visualization exercise, now I am committed to achieve it at any cost. I am not just committed, reaching my financial goals is my sole focus now. I will car-pool, I will cut on my smoking, I will limit my outings (at least the ones that do not matter), & I will cut down wherever I really can.  I will not compromise on things which I love or add to my family lifestyle and happiness, but I will be really merciless when it will come to things which I truly don’t want in my life. I will be now committed, on finding a better opportunity to work, I will get out of my comfort zone and take some hard decisions in life to make things happen now. I am going to start my SIP next week, Wait… why next week? What’s stopping me from doing it today?  What’s keeping me from doing right now? I will call someone right now and find out how its done! I will not let “I don’t know” kind of excuses come on my way! I’ll use “I just want it at any cost, no matter what” kind of energy to reach it.

This is the new mantra of goal setting which we are trying to incorporate in each person we meet or each person we encounter at Jagoinvestor. We give them food for thought, we make them connect to their own financial life and show them the power of doing Goal Visualization and not just scribble some numbers. If we were just computers, it would have worked! .

We make them write these things down. We do more of listening and less of instructing, because we make people instruct themselves!

Goal Visualization is not a replacement of Goal Setting

Note that goal visualization is not an alternate of traditional goal setting , rather its a supplement and additional exercise to make your vision stronger , make your commitment more strong and a reason for you to look at your goal with high priority and seriousness.

I hope you appreciate the fact that this way of goal visualization is better than fooling yourself with something like “I want to create 5 crores in 30 yrs for my retirement?” . It only gives you a short-term orgasmic happiness and then you start you day next week in the same manner as if nothing happened ! , unless you are high on discipline to save for that goal . Only then it can work ! . If you mix goal visualization with traditional way of goal setting , it can be much better than just goal setting and finding a number which you need to save monthly .

If you don’t take action after reading this post, it would be waste of your time truly speaking. So now, is the time you start writing down your goals in detail and visualize it. Do it right now! Not later, not after dinner today, not on the weekend and definitely not when you are free!

It has to be today, right now at this moment.

Send your goals visualization to me (A strong exercise)

What about this ? Download this Goal visualization sheet, Take two prints, You fill one of them and let your wife fill another (incase you have). Goal visualization is a joint family exercise, not just yours. It has to be taken by your spouse separately. You will be amazed to see how much it differs for you and your partner even if the target amount and date was same. You two, might visualize it very differently.

Once you are done with the goal visualization, send the filled sheets to me at  manish [at] jagoinvestor [dot] com. I’ll do my level best to look at them and give my comments if they are of any help to you. I don’t guarantee that I will get back the next hour, but I will try to get back as soon as possible . This exercise alone however, will give you some power to take action which you are missing till now in your life!

Comments ? You can also pick up a goal and do goal visualisation on the comments section too. See if you feel it is strong enough! , Do you feel it helps you to generate some commitment and leads you one step closer to taking action ?

Disclaimer : The examples given in this article for goal visualization are created just for article and it’s not a real example of some person.

11 Faces of Investors : Which one is yours ?

Posted on by Jagoinvestor

What kind of investor face do you have ?  Each and every one of us leads our financial life in a different way and we have an internal design, based on our beliefs about money. In my interaction with thousands of readers and dozens of paid clients, I can see each one of them with a face and I am sure you would be able to identify yourself with your face today. You will enjoy it 🙂

Cribbing Investor : This investor always find problems with the system, he keep on blaming Regulators, agents, companies and everyone else but not himself! He cribs at every one and about every thing around, from how he was mis-sold an endowment policy 8 yrs back to how IRDA never responds. The biggest mystery is how the agent “forced” him to pay! Did he shoot him or what! You can find him on all the reviews site complaining about some product and how he was cheated.

I-want-everything-Free Investor : This one needs everything for free or at throwaway price. He’ll say “It’s very expensive,  Will get back to you later” to a financial planner after hearing their fee, and then he’ll buy a ULIP with 100% allocation charges in first year! . He won’t find this expensive enough! You might be the right advisor for him and they badly need your help, but the moment you tell them it would actually cost something, they would say “Ohh .. Tab to nahi chahiye” ..

Lost Investor : These are the investors who have literally no idea about anything! He gets confused between Filing Tax returns vs Paying Tax. They get confused between IRDA, SEBI and RBI! If an agent comes to them and shit jargons on their face, they will most probably buy it as they feel bad to admit that they are dumb in the area of personal finance. This guy also thinks that 80C is compulsory and keeps buying unsuitable products every year with personal loan.

Fun-Making Investor : These investors are very naughty. They are experts and make fun out of situations. If they get a sales call, they ask tough questions like “Can you tell me IRR of this product?”, which leads to a call escalation to the senior manager and fills the trainee with guilt! This guy also records the call and posts it on youtube and facebook (example). For them, sales call they get is nothing but a way to practice english speaking, its free and no one points out their vocabulary mistakes!

Virgin Investor : These are fresh entrant in the area of money, who don’t even know what’s CTC and Take-home salary and choose the jobs based on CTC figures and cry later. When it comes to personal finance, they have no idea of how customer cares irritates, why disclaimer is written in small fonts, how agents look at them as targets! . They also feel that CFA or CA are great in personal finance.

Not Interested Investor : They are just not interested in Investments. Only at the gun-point you can force them invest and even then, they will start an SIP of Rs 1000/per-month and start skipping their breakfast ! . They dont claim their LTA, medical bills & even HRA, it’s too much of documentation and you have to physically move from one place to other, not worth the effort! And why take term insurance for spouse, they can always re-marry.

Fantasy Investor : These investors live in fantasy world when it comes to money. Even in today’s world their aim is to become a “crorepati” (calculate). Misselling a product to them is an easy thing, make product illustration with unrealistic numbers & present it to them, make sure you have cute children pictures on it, it helps!. They also learn Forex/Currency trading or Future & options and think they can do it part-time. They also have many investment books with bookmarks !

Pissed-Off  Investor : These investors get pissed off with everything. If Insurance company increases the premium because they are smoker, they get irritated . If their demat account charges him a yearly fee, he is irritated. He is also irritated because his mutual fund now ranks 3rd, which was a top performer when he bought it. They get pissed off at ICICIDirect site for not opening at right time and they are forced to sell their stock at Rs 156 instead of Rs 157 sometime back ! .

Informed Investor : Tele-marketers really cut their name from their lists, as they get embarrassed each time in front of these investors by talking something non-sense. These investors happily let their SIP’s run irrespective of markets. They were able to conclude that term plan is the only insurance product they should buy and not Endowments, as they know maths and are open to use their common-sense.  They dont go for the free coffee mugs at investment seminars conducted here and there!

No-Idea Investor : These are investors who have no-idea about things in their financial life. they often find their insurance policies and other important papers here and there. They struggle to mention the funds name in their portfolio . Their Policies get lapsed often,They have no idea why they are saving, Their demat accounts are active from years and they have no idea that they are paying yearly charges . They never match the actual spending and their credit card bills, ever!

Tax-Saver Investor : These investors are really mad about tax-savings!. Their financial life is at mercy of tax-saving products. You can suddenly see a new energy in them after Jan 1st each year. If you need blood, you can get it from these investors provided you convince them that they can get a tax exemption on that. Mention a section like 80K or 80Z for faster response. His last wish in life is to find out everyone involved in designing Direct tax code and then kill them to death one by one, slowly!

Read these 7 tax saving tips with Video

Mirror exercise to change your financial face

I am sure you were able to identify which face above resembles yours 🙂 . Do you think you were born with that face ? No ! . We all are born with same face and while we were growing up and finally entered this stage , something happened ! and we got a face and there are many factors which resulted in it . Starting from our upbringing , our relationship with money and how kind of memories we have about money .

Lets do a short exercise which would help you change your face and give you a new direction. Make sure you do this exercise seriously, else just skip it.

Step 1 : Look into a mirror and think about all the situations like investing , thinking about hiring a planner , when you got to find out those hidden charges in the ULIP , when customer care does not entertain you etc . Note down what are your expressions.

Step 2 : Go back and see which faces above resemble your expressions , It can be a single face or mix of some faces , which is fine .

Step 3 : Now look at your own financial life closely. If you look deeper I am sure you will be able to identify some things in your financial life which would are just not working, you feel stuck at it . It can be “not able to save more” , “Fear of loosing money” or something like “I keep delaying taking actions” .

Step 4 : Now ask yourself, how do those financial faces which you are carrying from years is helping you to in solving your financial mess ? How do you use the energy from your current financial faces to transform your financial life ? I am sure you will not have any clue because that the blocking point ! . You financial face which you are carrying from long time , would not help you in coming out of your stinking financial life.

Step 5 : You need to change your face, now ask yourself which is that face/faces above which if you had would help you ? Which would make sure you slowly change the way you look at your financial life . Try to change your face soon , slowly , but do it !

Note that this small exercise is for you to realise that its only you who is responsible for your current financial face and your financial life . So let me know which expression will empower you as an investor?

Conclusion

When it comes to your financial life, Have a good face. Go for a facial. Hire a financial counsellor or mentor in your life, who can guide you and show you the possibilities which you have never imagined. Read some stuff which would help you transform your financial life . So which face resembles yours out of these 11 faces ? Which one do you think are negative faces and which one’s are positive? Share your thoughts ?

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Why every investor should create a Personal Finance blackbox ?

Posted on by Jagoinvestor

How many different types of information, do you have stored in your head, relating to your financial life? Your PAN? Your policy details and where they are stored? That fixed deposit, which you opened up some years back? Maybe, you’ve kept the documents in the top cabinet of the red almirah, but no one has any clue about it! And if someday, God forbid, you die suddenly, and your family needs information in a hurry, where do they look? Where do they go? Yeah, eventually, they will figure it all out, but only after a whole lot of time wasted (weeks, months, even a year!) and a lot of heartburn! Why not create a better situation for them ?

Personal finance emergency kit

How about spending a few hours to make an emergency kit which has all the info, they might need at any point of time, so that they don’t have to get frustrated every time, they figure each investment / insurance policy, home legacy? Isn’t that a great idea? Here’s an example. Just to find out how to get the insurance claim settled, they have to start from scratch. They will start enquiring with others, search the internet (if they know how), and various other means. They might not have a clue that whom to contact and what options they have. Won’t it be the better, if they can find everything directly from you? TODAY? The kit is a kind of ready-to-use first aid box, only it relates to your overall financial life. Handy dandy for your family, if you’re disabled or immobilized or… dead! What normally, would take many months for them to find out – by playing connect the dots – can be given to them before hand, ready made & beautifully packaged! 🙂 This might seem embarrassing to many, but bluntly out, you choose!. Minor shyness / embarrassment now, or huge problems & inconveniences to your family later. Note that this whole emergency kit making will not help you today much, but a lot to your family at some later stage, read this article

What all details you can have in that kit?

  • Important Details of your life
  • List of important documents and their locations, eg.,  Passport, Driving licence,  PAN etc.
  • Important instructions for them to carry out, once you are dead. Eg., insurance claim process, steps to selling off some property, claiming the bank account, investments etc.
  • Important contacts, like the CA , lawyer, your stock broker and their details.
  • List of all assets and liabilities you have
  • All your investment and bank details

Following is the sample of how you can store that information in a tabular form.Personal Finance Documents for emergency

Who should make this kind of Document ?

If your spouse and parents are financially literate and are from this generation who surf internet, know how to find out information somehow, you won’t fully appreciate the beauty of this whole exercise. I’ll bet my hat however, that that isn’t the case :). Most of the spouse do not take much interest in these financial matters . Ergo, you can see, how important this document can be for your family! This can turn out to be one of the best gifts you ever make them.

Ideally, you should make your spouse aware of this. However many wives/parents don’t want to hear about death and deliberately don’t pay attention. This document is especially for those situation.  We must print it out and give one copy each to wife and one to your most trusted friend or relative. Also you can have this document stored in a Bank locker and tell a trusted friend about this fact that there is a location which has all the information which your family might need some day.

Important Instructions in the Document

Make sure, you mention all the things which you wish your spouse/parents/children to do or carry out.

It can be things like

1. Life Insurance claim procedure

Give them detailed instructions on what they should do to claim your Insurance amount from the Life Insurance company. It can start from contacting the agent, filling up the forms, making sure all the documents are in place, constant follow-up with company etc.

2. How to use your life Insurance money for future


Once they get money from your Life Insurance, suggest how they can channelise it into different instruments based on their understanding, risk-taking capability and the amount of ease you want them to have in dealing with those.

3. How to Break FD’s or redeem Mutual funds in case of emergencies

Put some details in, on how they can break the FDs or redeem the mutual funds, in your name, in case of emergencies.

Sample of an Instruction for Life Insurance Claim

Ajay has taken Amulya Jeevan Term Insurance policy for Rs 50 lacs cover. Ajay lives in Mumbai . He would write something like this.

Steps you should follow for claiming the Life Insurance cover money in case of my death.

I have a life insurance policy “Amulya Jeevan” with Sum assured of Rs 50,00,000. In case of my death, you should follow this procedure.

  1. Meet our Agent named Mr. Funsuk Bangdu and ask him for the claim settlement forms , incase he is not able to give it to you , you can download it from LIC website
  2. You should make sure you also have original policy document which I have kept at ________ .
  3. Make sure you have you proof of title like PAN , Driving Licence etc AND marriage certificate copy .
  4. Make sure you have taken my death certificate from ____________ which will act like my proof of death , this is Important ! .
  5. Incase I die in accident, also have a proof of accident, this you can get from police station or hospital.
  6. I have stored all the Medical treatment at ___________ , also keep with you just incase its required.
  7. Incase LIC asks for my employer’s certificate, I have kept it at __________ or you can also ask my friend Robert who works with me and can help you on this , See this article to understand how someone you trust can help you .
  8. Incase you face any issue in getting claim settlement, take help of Ombudsman whose address is as follows .

Shri S Viswanathan

Insurance Ombudsman, Office of the Insurance Ombudsman,

3rd Floor, Jeevan Seva Annexe,S.V. Road, Santacruz(W),

MUMBAI-400 054. Tel : 022-26106928, Fax : 022-26106052
Email :  [email protected]

Note : Worst case scenario — try to get help at jagoinvestor.com or contact Moneylife.com who can help you further in this regard!

This was just an example! You too, can mention detailed instructions for key things, which you feel can create issues for your family or where you feel they might get stuck because of lack of knowledge .

Download a Template

Now, this whole kit & caboodle won’t take more than a day, and it’ll be extremely helpful to your family and loved ones. And, to save your time and as my small New Years gift to you, I have created a template for you, to use 🙂 Just download it in any format (pdf , doc or image ) and fill it up .

Take Action today! Unless you take action, reading this article is worthless!. Share what you feel about this idea of creating a master document which would help your family in case of crisis. Do you want to add some more points which you feel i have left out? How much value do you feel one will add to his/her financial life by doing this? And aah… one more thing. Don’t forget to update this document every year 🙂

Bonus : Do you want to look at how our questions and answers Forum is helping VidyaSagar take his frist steps in personal finance ?

3 categories of Investors, which one are you?

Posted on by Jagoinvestor

Suppose you have 3 buckets, and you have to put each kind of investor into those buckets!. What would be the criteria you will use?

In my experience of dealing with hundreds of readers and dozens of clients till date, I can categorize them in a very interesting manner which shows their knowledge and attitude towards personal finance. I call it “I know” or “I don’t know” model. If you look at all kind of investors, at a broader level, you can put them in 3 categories.

Lets see each of them and you can identify which one you fit in.

Categories of Investors

1. I know that I don’t know

The first category of investors is very basic and large in number. They are not very much familiar to personal finance concepts and how to manage their financial lives and mostly they have no idea on how good or bad their financial lives are.

These people are mostly careless in this area and don’t give sufficient time to manage their financial life. They take it as it comes. Many a times they are great in their respective fields, may be one of the best performers and very smart in what they do, but when it comes to personal finance or managing their own money, they are clueless.

People in this category are aware about the fact that they are not good at personal finance and they need assistance when it comes to recommendations, calculations or any kind of basic planning in area of money. They are lost in this overloaded world of information.

Who falls under this category?

Most of the salaried class people fall in this category. Software engineers, doctors, media personals, defense-personals and even self-employed. At times people related to finance like CA, CS, MBA finance also fall in this category!

Whats common in each of them is that they are modest enough to realize and accept that they don’t know. If you ask them simple question like “Does term insurance make sense compared to Endowment Policies ?” (read this and this), they would be very confused and might not come to a strong conclusion on their own. They will not have much idea on how to start.

Anyways, the point is not whether they know how to do it or they don’t, the point is, if they are aware about this fact that they know or they don’t!

People in this category get mis-sold by agents and often take wrong decisions because of tricks applied by marketers and often they feel that the other person is smarter and knows better than them. That’s the reason they fall prey. Most of the readers here I think would be falling in this category and they are constantly trying to shift to the 3rd category which we will discuss !

2. I don’t know that I don’t know

This is an interesting category. Just like first category, even people in this category don’t have much idea or have wrong concepts in area of money, But the main difference in this category is that they are not ready to accept the fact that they do not know things, but they feel that they know enough, and live in their own world with their own understanding which  in reality is incorrect.

They have their own way of looking at things and suffer a lot in their financial life because they have no idea what they are doing. They are actually not very smart in personal finance, but they “feel” that they are.

Finance is just some math’s and number’s game

Ironically, some of these people are very smart and intelligent in other areas of life. So much, that intelligence now comes on the way to their financial life. They assume that they know everything very well and are not open to listen to other views and learn from that.

They consider personal finance as something which they can excel easily, just because they have been successful in other things in life. After all its just some maths and numbers game, as they feel so ! . Interestingly not just investors but lot of agents and advisors also fall in this category. A lot of misselling which happens is accidental at times and not intentional. These agents/advisors do not have any idea that they are actually misselling.

They do it thinking that they are doing a great job. They themselves are not aware that they have missold accidentally, believing in what they were told in their sales-meetings.

Let me give you a personal example:

I used to talk a lot about Insurance commission and how insurance agents make huge commissions compared to Mutual funds. At that time I was not aware of the fact that mutual funds commissions are paid on AUM basis.

argument on insurance and MF AUM commission

I used to make my own theories based on calculations for some hypothetical examples. Even I use to argue with many Insurance agents on the commissions structure, some of them told me that even mutual f‌unds have high commissions, but I used to think that they are referring to the high ticket transactions only, and trying to cover themselves.

I was in this category because at that time I was not accepting that even mutual funds have AUM linked commissions and I used to just argue with them based on my ignorance. So I didn’t knew some important information and I didn’t knew that I don’t know.

In the same way, people in this category do not have proper understanding of basics, but instead of accepting it, they have some other kind of knowledge or wrong knowledge and notions and based on that they mess up their financial life.

3. I know that I know

Last section but a very small one is of people who understand truly what they say and suggest in personal finance. If you ask them some question, they would be very confident in what they tell you. This comes from the confidence, which is result of experience and deep self-learning in personal finance.

These people use their mathematical and analytical ability to understand what is right and wrong. You can find many of these people on this blog and our helpline Forum :). A lot of people from “I know that I don’t know” category get promoted to “I know that I know” in some months or years.

An experiment:

Try this!. If you ask a question like “Does term insurance make sense compared to Endowment Policies ?” to these people, they would eventually come out with the right answer even if they do not know.

They would not need any guidance or very little guidance and they would take this kind of problem as a pure logic based comparison questions and will try to compare both term plan and endowment plan from different points and would come up with a conclusion that Term insurance is the best way of Insuring one’s life and it makes sense to invest the rest money in some other product.

Also, if you don’t tell them how much return one can expect in long run, they would still find out somehow how to look at historical returns and equity is less-risky in long run ! . They are like a new-born baby who was not told anything, but they just start doing what needs to be done somehow.

What category are you in and What should you do ?

Which ever category you belong to, your final goal should be to get into 3rd category where you are aware of everything yourself and you can guide even others.

To eventually reach 3rd category, you have to do just one thing, whenever you are in conversation or debate with anyone, have an open mind of discussion and be open to accept that you can be wrong and might not have some information. Be ready to learn things from other person. With time you will slowly reach 3rd category .

These 3 categories are not just for personal finance, you can categories people in these categories for any area of life and solution to reach 3rd category is still same what I suggested above. Do you think there can be other categories than these 3 discussed above ?

Which category are you in currently ?

Did you shift from one category to other by reading this blog ? Share ! . Also have a look at these unansweed questions on forum Incase you can help in answering them. And if you are wondering why there is less activity on comments section, I am on vacation for your info !

How you can create huge wealth by small savings?

Posted on by Jagoinvestor

Small is Big? Are you worried, about how will your financial goals be achieved, because you are not able to save more? Do you feel that small savings will not help you much to reach your big goals in life? If that’s the case, you are mistaken!

While it’s true that small savings won’t be able to help you much in short run, they can impact your financial life in a really big way and contribute significantly in long run.

wealth creation through small savings

In the tribal villages of Cameroon, there is a community called “Mofu“, who grow and eat millet’s all year. They store their entire crop for the whole year in their store houses made of mud and wood. Unfortunately, in some bad years, termites attack these store houses and no matter what the villagers do, termites destroy just about all the crops in a short span of time.

The only creature which can now save these villagers, are driver ants which they call “Jaglavak” in their native language. They search the village and try to find those ants. Just a handful of driver ants, kill all the half-million termites in a few days!

How are these ants able to destroy a big army of termites? The answer lies in their strategy and their team work! If they are not disciplined in their approach, it would not be possible to defeat the big army of termites. It’s not the power of a single ant which makes them winners, its numerous ants working together and following a few simple rules.

Small Expenses can help us grow wealth

Just like the story above, we in our financial life have a lot of small/medium expenses which keep rotting and destroying our wealth and many a times, our health too.

Some of them are smoking, drinking, too much eating out without any reason or out of sheer laziness in cooking at home, spending on items which give us instant happiness, but in reality we don’t need them, buying things just for ego-satisfaction (My neighbors bought it, so we should also have it!).

Small pains taken today by saving money and investing properly will help you generate enough money in future (read this story). Most times, we keep thinking about bigger problems in life and do not value or think about taking care of small things. We ignore them because we see them in isolation a lot of time.

My friends case –

One of my really good friends works in a finance company and earns around Rs.25,000 a month. Just graduated from college and found a decent job in Delhi. He lives a great life! Movies with friends, eating out, smoking and drinking.

His credit card bill keeps piling up month after month, but the instant gratification of paying “Minimum due amount” is much higher than the pains which will follow years later when banks will deny or ask for a very high interest rate when we will need a Home Loan or a Car loan.

I asked him his financial goals in life, and got this answer –

1. Retirement corpus of more than a crore by the age of 60

2. 40-50 lacs to open a restaurant once he retires

3. 6-7 Lacs for a vacation in Europe after 10 years with his wife.

How cutting some bad habits helps in long term

He was expecting a big laugh from me. He expected me to tell him, that he is living in fantasy world. With a salary of Rs.25,000 per month how is it possible to achieve these financial dreams in a situation where he was not able to save even Rs.1,500/month?

To his surprise I told him that if he is ready to compromise on bad habits and have discipline in investing from today, it might just be possible to get closer to his dreams! He thought that my advice and plan for him would be tough, complex, and full of jargon and he will have to spare next some days to understand what I was going to show him.

Here was my plan for him.

Small savings can build wealth

Goal 1: Retirement

His retirement can be taken care of, by just investing the money which will be saved by quitting smoking. I don’t know how much a quality smoker spends on his daily quota of smoking, but I guess I can safely assume Rs.50/day which turns out to be Rs.1500/month.

Instead of using this money to deteriorate his health every month for next 35 years, if he invests it in equity mutual funds regularly through SIP. Assuming a 12% return, he can make around 97 lacs (calculate). Note that this amount is without taking into consideration any inflation, if we incorporate inflation of 5% (in cigarette price); it would turn out to be 1.2 crores in 35 yrs.

Equities in long run might give excellent returns and a 15-18% return can be expected from equities if the time horizon is 30-35 years, especially from Indian Markets (Read why)

Goal 2: Restaurant

My friend’s plan for opening a restaurant in retirement can easily be achieved if he controls his drinking and starts investing that money. I have some idea on how much it costs to booze per week (no, I don’t drink, I actually thank my friends in college), I assume it to be around Rs.200/week. Let’s consider Rs.800 for a month.

If he invests part of this in PPF and rest in balanced funds, he might be able to generate 10% returns , and with 35 years in hand, it would be Rs.48 lacs assuming that he also increases this investments by 6%/year (come on, alcohol prices also increase!)

Goal 3: International Vacation in 10 years

My friend spends a lot on phone with his 10 “best friends”, eating out, shopping gadgets and clothes every month/quarter. Not sure why he keeps flying from Delhi to Varanasi every quarter when he can take an overnight train! And save thousands.

Cutting a bit on all these habits I mentioned, it should not be a big deal and he should be able to save few hundreds from each of those and save another Rs.2,000 in total months.

If he saves this money in balanced funds, he should again be generating 3-4 lacs in next 10 years and if not Switzerland, he can go on a vacation to some near-by destination :).

Small savings can create wealth

Conclusion

A bit of restructuring and prioritization in your spending habits can give you a good idea on what all things can you saves on. If you are disciplined in your approach, over the time these small savings if invested with proper plan can help you in a big way in your financial life.

Just like my friend in above example, we have many areas in our life where we can cut our expenses or stop them. If we use it and invest systematically for some goals in our life, slowly it can turn out to be a very big amount. If you are still confused and can’t think of where to cut expenses, another alternative for you is to live on 90% of your salary. It works!

Assumptions : It’s assumed that all the spending might have continued for all life which are saved and diverted to investments. Also the investments are assumed in Equities.

Can you think of anything similar in your life and how it can help you in saving some money? It can be asking small as Rs.100 or Rs.200. Please share! Also share how it can help you in achieving something, use our calculators to find out.

World’s Simplest Money Management System – A habit that works for everyone

Posted on by Jagoinvestor

Most people have such a fear of (lack of) money that they almost equate money to oxygen.  Cover someone’s mouth and nose and watch how they fight you to get their air back.

I came across T. Harv Eker’s book “The Secrets of the Millionaire Mind” it says “Rich people manage their money well. Poor people mismanage their money well”, I read this & my first reaction was, “As a Financial Planner I know that!” Trouble was I didn’t really know the effective system to manage money. I just thought I did.

Money management system

If you want to get rich, focus on making, keeping, investing & managing your money. I had been managing my money for years but not in a systematic way, I paid price for the same (by not following any system). This Money Management System is very simple to understand & implement.

If you want Financial Freedom you got to follow a system for achieving it. As a financial planner people, I meet believe managing money will take away their freedom. They hate the idea of Budgeting. They believe managing money will not allow them to be free and enjoy life to the fullest.

I have been implementing this “Money Management System” for over a year now & it has given me tremendous freedom in the area of money.

Most of the people I meet say, “I will start managing my money when I have enough money”. As a planner, I tell them “if you aren’t managing your money now then you may not have any money to manage in the future”.

Worlds simplest money management system

The Single biggest difference between financial success and failure is how well you manage or mismanage your money. People mismanage money in different ways (By not having a financial coach in life, by not having a financial plan in place, by not organizing their finances, by buying ULIPS, by not taking financial Literacy, etc)

To master money, you must manage money through this effective Money Management System:

  • 50-% Necessities Expense account (Your Day to Day Expenses Account)
  • 20% Financial Freedom Account (FFA Account only for investments. Never spend only invested)
  • 10 % Education Account (Invest in skill development, Personal Development)
  • 10 % Long Term Saving for Spending Account.
  • 5 % Fun & Joy account (balance out the investing for fun % joy(nurture yourself – fine dining, etc)
  • 5 % Give Account (To a lot of people wealth is how much you have. But if you truly want to create wealth, you might want to change that viewpoint. Try thinking of true wealth as how much you give.

– Read about GFactor and Try out JagoInvestor Calculators

A Brief Definition of Financial Freedom

You are financially free when your Passive Income (Income from your investments, rental income, etc) is more than your desired lifestyle).To win the money game, the goal is to earn enough passive income to pay for your desired lifestyle.

One should design its Financial Plan with a context to achieve financial freedom. Having a Money Management System is equally important as having a financial. Always remember The real secret of successful wealth management is that your financial future is truly in your hands.

This one is dedicated to all the readers of JagoInvestor.com, their families & to Financial Freedom.

This article is written by Nandish Desai , who is a financial planner based in Ahmedabad

Women & Personal Finance in India

Posted on by Jagoinvestor

Today, we’ll talk about Women’s involvement in Personal finance, especially in the Indian context. How many of us remember when our ladies at home took any decisions regarding banking, Insurance or Investments?

Their role has been always limited to household work and as caretakers of our homes & hearths, for decades and centuries now. Even in today’s world, when women are at par or even above par with men in all areas, they fall behind in this one.

Decisions (as far as finances go) are primarily made by men, & not women in general. In this article, we’ll see why it’s important for women, to know about Personal finance .

Women & Personal finance

Women not accepting their Responsibility in Personal Finance

One of the big problems, with women, is that they do not treat Personal Finance as something that’s important for them. For ages, they have not participated in Personal finance, regarding it as the man’s domain, just as they felt cooking was theirs.

Obviously, this isn’t true now, in this day & age. Cooking is as much a guy’s activity as Personal Finance ought to be a woman’s. Women, in general, don’t show real eagerness for these activities, for some reasons like

Women treating their earning as time pass activity : The biggest reason for this, is that, since the dawn of time, Man has been the main provider and the primary bread-winner of the Family .

He was responsible for earning and managing money and taking care of financial goals, Women, on the other hand, were mainly responsible for raising children and taking care of household activities and to a big extent, maintaining relationships outside the house and in the community.

Many women in spite of being qualified enough, and having skills to earn money, view their earning as secondary compared to men. They “feel” that they are not at the same level, even though its not true; most of this is psychological.

Everyone handling her money but her: From centuries women’s financial decisions were taken care of, by their fathers, then their husbands and then their sons. They never got involved & were never encouraged to do so, because they were not considered smart enough!

Men have always shown dominance over women in this space. One reason, which could be responsible for this, is that women, hardly ever ventured outside house for these activities and never got time enough from their household chores.

Current Situation Women Knowledge in Personal Finance [ Statistics ]

Personal finance literacy and Women in India

Poll Link

Why It can be trouble for Women to not Know Personal Finance

Sudden responsibility

A lot of women never learn about Banking , Insurance, Investments , how to grow money well and related topics throughout their lives .

They are smart, have a good job,  high earning , but they never learn about Money and some day when sadly, things go wrong eg., they lose their husband because of accident or some other reason; apart from emotional pain, there comes bigger pains in life , i.e. taking care of your children and overall finances, that day she has no idea on how to invest money for making sure of child education , her retirement , her Insurance etc .

She suddenly finds herself in very tough situation and will have to rely on others, (relatives , friends etc.) This is not a good situation. Girls! Ladies! please learn about money, even if you don’t like it… Learn a bit, at least up to a level, where you can take charge of things and no one is able to take advantage of your situation .

More Divorce rates

Gone are the days in India when Women would keep compromising in a relationship! Women these days, are independent, and have a say in every decision. Because of this, they have more flexibility to move out of a marriage, if things don’t work out. Divorce rates are on rise in cities from last decade.

Women who get divorces, have to, at some point in life, look after themselves and take charge of their finances.  So learning about money is important from start.

Women live longer so need a better Retirement Planning

Think Long Term! What does’t seem to be important today, might be very important tomorrow. Women worldwide, have a higher life expectancy than men, and hence have to live more than their male counterparts .

Women generally rely on their children, but they should be better planned and hence learn about things .

“On average, Women live 4-5 years longer than their husbands and over three-quarters of all women are widowed at an average age of 56. Women comprise a horrifying 87% of the impoverished elderly”.

Some Psychological Myths Women Face

women's personal finance

  • Somebody will manage my money for me : Yes, but only up to a certain age… If there is no well-wisher, don’t rely on relatives or friends! When it comes to money, no one is truly yours, and even if they are, you better learn things and manage things on your own. It’s not that tough!
  • I don’t know enough to do this myself : This is patently false! If you can be an Engineer, Doctor, House Manager, then you can definitely  understand and learn anything you set your mind to! There might be some topics which might scare you away, but there are always blogs like this and people like me to help you with doubts.
  • I will make too many mistakes : So what? Everybody does! We make mistakes to learn in life. I would encourage you to make mistakes and learn from them, because, “Making mistakes is a privilege unsuccessful people don’t get in their life” . Computers can never become more intelligent then human beings , because computers never make mistakes, only humans do .
  • I don’t have money to invest : There can be two things here… One is that you might not be saving enough. Do review your income and expenses, and find out where can you save without compromising your lifestyle. Try to live with 90% of your salary .The second point is that you have little money which is ok! Doing investments, does not mean you have to invest lots of money; every body starts small, & slowly we progress! So what, if it’s only Rs 500? Make a start, at least!  Develop self-discipline and start learning things. Tomorrow, when you have more money, you will already be way ahead of the curve .
  • I don’t have time to plan my money : This could be due to lack of interest. Review your monthly schedule and manage your time well. Even if you take out, couple of hours each month, to learn about money, its enough. Once you start learning things, you will enjoy it. If you make yourself believe that you don’t have time today, then you will never have it ever 😉

Women’s Personal Financial Dreams

For time immemorial, women have been dependent on their father or husband for money and to fulfill their dreams. If they want to go for some trip or buy some jewelry or anything else, for that matter, they have to ask (or demand) their husband for money.

Many times women have their own dreams, which they want to fulfill on their own, but they cannot . Women are good savers, but never good investors like men (even men are not for that matter.) Women diligently save money at home, but do not make best use of those savings.

That money is mostly lying idle, in the bank or at home. By learning about investments and how to invest well, women can grow their money and reach their goals. There is no need to always rely on men for everything.

I know many women readers on this blog who are excellent thinkers; they ask questions, get involved in discussions and given a chance, they’d give serious competition to their male counterparts in financial planning!

They have learned lot and can beat many women outside this space on Personal finance. Credit goes to their willingness to learn, and the time they take out in order to learn things . Here is a excellent Short Video from Manish Thakor ,  Personal Finance Expert for Women .

Even though its made for American Audience , everything applies to India Women .

Extra Benefits for Women

There are many Women only benefits like :

  • Generally Lower Education loan by 0.5-1% for Women
  • Lower Income tax for Women compared to Men
  • Premium for Insurance Policies is lower compared to Men  :  Compare at Apnainsurance .com
  • Lower Stamp Duty for Real Estate Registration in Some States

Role of Women in Personal Finance at Home

There are many men who do not involve ladies at home in the decisions regarding Insurance,  investments , retirement planning, banking , budgeting etc , and it’s not a right. Women have better understanding most of the times, about the future goals of the family, especially child education related expenses.

We men, sometimes can not understand, long-term expenses like how our expenses will be at retirement and what kind of situation we would be living in. However smart we feel we are, there are many things that women outsmart us at. We should involve them in every decision we want to take in our life.

So next time when you think about insurance, talk to her about her needs after you are gone. Don’t shy away, feeling that this is taboo in this country. You have to plan things well and understand her needs.

Also while planning for retirement, take her advice and her views on what your standard of living would look like at retirement, what are your (and hers) post retirement plans are. She will give you many suggestions and it will help in planning.

Women are the queens of Budgeting and they are the real help in making the budget and what is needed and what is not . So you can’t do without her. They also save lot of money compared to men. When we men, go out to buy vegetables and if the Vendor tells us Rs 20/KG price, we buy it!

Whereas women, tend to bargain and bring the same stuff at a much lower cost. So whatever we bring for Rs 100 , the same thing Women bring at Rs 90 or Rs 85 .

Respect and Confidence

We men, have to make sure that we encourage our Wife / Mother / Sister / Daughter to learn about money. If they understand money well, your children will also learn about money from early life!

Just imagine how many mistakes you’ve made financially… Your children, will at least not make stupid mistakes, (hopefully) you have been doing all these years before learning better. An educated Woman means an educated Family. We have to make them confident that they can learn things very well, and involve them.

When you learn about something on this blog or anyplace else, try to teach them those lessons. Ask them questions, and see if they can answer them, and if they fail, then guide them gently.

I see a day, when one of the major reasons India will outpace other countries in, is financial literacy among women of this country. Also if women learn about money they can share the financial work of men and also do it themselves. We have to respect our ladies in this field .

There are many great women personalities, like  Suze Orman and Monika Halan Personal Finance Space and each of our ladies can get there to that place, at least up to that level.

So if you are a Man and a true Jago Reader, make sure your Wife / Sister / Female friends / Girl Friend read this article and get motivated to learn about Personal finance. If you are a Woman, make sure more and more women friends of yours get to read this article .

Comments , Please suggest other tips to help Women increase their Financial Literacy levels , Any good links , websites for them ?

Myth Three: I will make too many mistakes

Prevention is better than Cure even in Personal Finance

Posted on by Jagoinvestor

“An ounce of prevention is worth a pound of cure” I see that most of the people these days have bought wrong products like ULIPs, ULPPs, Endowment Policies and unsuitable Mutual funds (which they are not aware of most of the times) and then when they do come to know about it, they don’t have much choice left.

They either have to live with it or they have to lose a lot of money to correct the situation.

In this article we will see some thoughts on why we should focus more on “Prevention” and not “Solutions” for a bad situation from Financial planning perspective.

personal finance

A Small Story

There once was a little boy who had a bad temper. His Father gave him a bag of nails and told him that every time he lost his temper, he must hammer a nail into the back of the fence. The first day the boy had driven 37 nails into the fence.

Over the next few weeks, as he learned to control his anger, the number of nails hammered daily gradually dwindled. He discovered it was easier to hold his temper than to drive those nails into the fence. Finally! The day came when the boy didn’t lose his temper at all.

He told his father about it and the father suggested to the boy that he should now pull out one nail for each day that he was able to hold his temper. The days passed and the boy was finally able to tell his father that all the nails were gone.

The father took his son by the hand and led him to the fence and said, “You have done well, my son, but look at the holes in the fence. The fence will never be the same. When you say things in anger, they leave a scar just like this one. You can put a knife in a man and draw it out.

It won’t matter how many times you say “I’m sorry”, the wound is still there. A verbal wound is as bad as a physical one. Friends are very rare jewels, indeed. They make you smile and encourage you to succeed.

They lend an ear, they share words of praise and they always want to open their hearts to us.”

The Story is encouraging and gives an important message. We all make decisions in life. Some of these decisions can prove very unhealthy. We make mistakes and then when we come to know about it, we try to figure out ways to fix the problem.

Making mistakes is not a wrong thing, we all do it at some point in life and taking measures to cure it is another great thing. But it will some times have drastic impact on you and your money.

Some of the mistakes we make are

Watch this video of 4 biggest financial mistakes related to personal finance that every investor should avoid :

ULIPS

A lot of readers of this blog were sold ULIPs (they didn’t bought it, it was sold to them) without telling them the costs involved and sometimes promised with wrong returns (it was just an illustration and dependent on market condition, agents just said it was guaranteed).

Now when they come to know about it, they stop the premium payment and get out of it at right time, this getting cure for the problem but the damage has happened. You might not realise it, but the damage is big, some people have lost close to 80,000 – 1,00,000 in premiums or in costs.

One of the person I know has paid 4-5 lacs in premium and 60% was the cost in first year. Now he stopped the policy, that’s a loss of 2.5 lacs. If that same money is invested in some good Mutual funds for next 20 yrs and if we expect a return of 12%, it’s 24 lacs at the end.

This is opportunity cost. RS.2.5 lacs might look like a small or “chalta hai” kind of amount, think again, it’s opportunity you have lost. The amount can differ for different people but the lesson remains same.

Insurance

Another case can be of Insurance, most of us are still under-insured, even now!! Even after we know that Term Insurance is what we should take, still we are underinsured, that’s the risk. Once the disaster happens, it will be too late, you will never get the chance to cure it.

In fact you will not be there in this world to cure it and the outcome will be very horrible which you might not want to imagine.

Endowment Plans

Same with Endowment Policies, Investors who have taken Endowment Policies and are paying 50,000 per year for next 25 yrs. They do not realise what they are missing. You get 5-6% returns, that’s all! forget what agents promised or what was told to you. Endowment and money back plans are world-famous for “not able to beat the inflation” kind of returns.

So you are missing long-term equity returns of 12% at the least. So you are loosing 6% worth of returns. That’s loss of 45 lacs for the example I just gave you in long-term, what is the reason you lost that much, just simple laziness of not taking the action of “change” and restricting your mentality of “Equity is Risky”, that’s incorrect at least for long-term.

Late Investing

No matter what you always have some money to invest when you start. If you don’t want to invest, there will always be enough reasons to not have savings. Almost 99% of the people can live with their 90% of salary, whether they believe or not. Earning less is not a crime, it’s part of life, save what ever you can save, even Rs 100 is ok, but do something.

Some people can save more than 30-40% of their salary, but they are not doing anything about this! Don’t underestimate the power of early investing, Early investing is so powerful that it can compensate for big mistakes in investing later in life. If you are a 25 yr old person who needs 2 crores at retirement at age 60.

Assuming 12% return, you just need to invest  Rs.6,000 per month to reach your retirement target. Imagine what happens if you feel that you can do a little late, how does it matter and all and actually start 5 yrs late, with the same saving of 6,000 per month, you will have just half of your retirement target, that’s 2 crores.

Imagine the cost of saving late by 5 yrs, You have to but down each of your retirement thing by 50%. That can be a big hit!!

What is the Solution

Taking measures to fix your messy situation is worth appreciation and we all should do it if we get into it. But on the first hand why to get in a messy situation. You don’t need to do fancy things to be in healthy financial condition.

A simple 5 things can save you from disaster

Just practice these 5 Mantra’s and almost all of mistakes you make will go away.

Comments, what do you think about this? Please share your views.

What is 80/20 rule and how it applies to Financial Planning

Posted on by Jagoinvestor

Let us first understand what is 80/20 Rule? It means that 80 percent of your outcomes come from 20 percent of your inputs! It’s also called “law of the vital few” or Pareto principle. This rule applies to almost all the areas of life, even though it’s called 80:20 rule the main idea of this principle is that a large part of outcomes are result of a few number of actions and 80:20 was the best fit for most of the things. A very simple example of this rule is that 80% of the world Wealth is owned by 20% of population. Let us see some example to understand this rule:

  • Look back at your exams, 80% of your marks came from the studies you did on 20% of the days 🙂
  • If you are coder, you will accept that 80% of the execution time is taken by roughly 20% of the code.
  • Even on this blog, 80% of the comments are written by roughly 20% of the readers 🙂
  • Also 80% of the total comments are from 20% of the total articles.
  • 80% of the recognition you get is for a small amount of work (20%) that you do.
  • 80% of sexual satisfaction comes out of 20% of total time spent.
  • Most of our worries (80%) are a result of small number of problems (20%).
  • 80% of the Assets under management is with 20% Mutual funds.

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Some Examples from Financial Life

The same 80:20 rule applies to our Financial Life as well…

  • 80% of the good returns we get is from 20% of good investments we make or 20% good decisions that we took.
  • 80% of the money lost or opportunities lost are result of the 20% small things we didn’t took care of.
  • 80% of the money we could have made in Stock markets are due to those 20% of the times we didn’t take risk.
  • 80% of the Financial Planning clients are handled by 20% Financial planners (individual or companies) in India.

How to change our way of thinking

There are many small things in our financial life which looks very small but we don’t concentrate on them neither do we appreciate the impact it can have on our financial life. Some of the 20% things which we don’t take care of are:

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These are 20% part which if taken care properly can greatly improve the performance or your returns (at least mental satisfaction) by great deal . We concentrate mostly on things like strategies , “finding best funds” , “finding cheapest plans” , “finding the easiest way to maximize the returns” , but these are 80% part of process which accounts for less than 20% of the success .. Just ask yourself

  1. How many times have you made money from the best stock tip or best Mutual funds for the year
  2. If finding the best plan (term plan , ULIP , or any other product) was so easy and clear , why is there so much competition and confusion.

You have to understand the real goal of financial planning first and then identify the areas you really need to concentrate on .

Here is a 1 hour talk on “Behavioral Finance : Role Of Psychology” from Yale University . Have a look

Comments , please share your views about 80:20 rule . Can you give some other real life example ?

Upcoming Next article : “How to Choose a Financial Planner”