28 Mistakes that destroy your Financial Life
In this article, I am not going to tell you how to make money, but I am going to tell you how to ensure not to lose money. Over the years, I have done extensive research on the financial life of Indians and I have identified not just one or two mistakes, but 28 mistakes that destroy the financial life of Indians.
Though this article is majorly focused on the Indians, this would be equally good for everyone else in the world as well as most humans having a similar psychological understanding and knowledge of personal finance matters.
1: buying insurance policies for investment purposes.
Have you invested your money in an insurance policy to get a return in the future? Big mistake. Out of the 100 people I have spoken to, 95 people have made this mistake. When I asked them what is the return they are expecting from their insurance plan? Nobody had an answer.
Have you also mixed insurance and investment? If yes, ask yourself what is the annual return that you would get from your investment. I’m sure you would not have an idea. When it comes to insurance, very few people understand the difference between term plans, endowment plans, Euler plans, et cetera. I’ll make a separate video explaining the different types of insurance.
2: no idea about the power of Compounding
Everyone has come across the formula of compound interest during their school days, but very few people really understand its implication in the real world.
It is the reason people do not start investing early and lose out on the power of compounding. Albert Einstein once said that the power of compounding is the 8th wonder of the world. You don’t need ten times to return to generate wealth. You just need a 10% to 15% annual return over a period of 15 to 20 years to create wealth. Power of compounding will do the wonders for you.
3: buying stocks based on tips without any knowledge
Nowadays, every Tom, Dick, and Harry is given free stock tips over Facebook, WhatsApp, and TV shows. Unfortunately, a lot of people fall into those traps and end up investing a lot of money. What is the end result? They lose everything.
4: becoming a victim of lifestyle inflation.
Moving from 2 BHK to 3 BHK just because you have got a good hike, or upgrading your car just because you have got a bonus, or buying an iPhone worth 80,000, although you make a salary of 30,000 per month are examples of lifestyle inflation. While there is nothing wrong with buying a fancy car or phone, the problem is with spending over and above your means.
5: buying things just because they are on discount
From Amazon’s Great Indian Festival to Flipkart’s Big Billion day sale, everyone is encashing on the Indian’s weakness to buy things when they are on discount.
6: getting tempted to go for unnecessary expenses
A lot of people want to go for an exotic vacation or buy a new car just because their friend has put a post on Facebook or Instagram. Facebook and Instagram were introduced as social media platforms but they’re actually ripping apart the entire social fabric of our society. Facebook and Instagram are now more of marketing platforms where people put posts to get a few likes and companies promote their products and services.
Most people fake a perfect life on social media whereas their real-world life is much different than their social media life.
7: spending a bomb on weekend parties
Five days work and two days party. This is the new culture in India. Pubs are jampacked on weekends where people would spend a lot of money and by the end of the month they are left with nothing.
8: no track of cash Flow
Most people don’t keep a track of their cash flow. What is the result? By the end of the month, they don’t know where the money is gone. I have seen people earning one lakh a month but by the end of the month they are struggling to save even R 10,000.
9: no emergency Budget
It is important to prepare for the rainy days when Jet Airways recently signed its employee. I read somewhere that some of the employees are struggling with basic financial needs.
For example, paying their home loan EMI, their children’s tuition fees, or even the basic requirement. Not having enough money at the time of emergency could even result in embarrassing situations where you need to borrow it from your friends and family or even you need to break your investment.
10: no medical Insurance
I have seen people lose out on their lifetime of saving just because they did not have medical insurance. One incident can shatter all your financial dreams. Better be insured. Healthcare cost is rising in India at a fast rate and it is impossible to manage them without medical insurance.
11: no financial Plan
People don’t know why they need to save money because they don’t have any financial goals. A financial goal could be to invest a retirement corpus of two crore rupees for the next 15 years or save five lakh rupees to buy a car in the next two years.
12: no diversification
some would invest all the money in real estate, some would invest all the money in gold or some would just like to keep money in FD whereas some people just like to invest all the money in the stock market. Very few people understand the right way of diversifying their investments.
13: spending all the hard-earned money on the children’s marriage.
Thanks to our Hippocratic society, people save their money their entire life just to spend it on random relatives who only bother about food and arrangement. A middle-class man saves his entire life for the children’s marriage, making thousands of compromise which gets wiped out in just two-three days. Certainly not worth it.
14: buying excessive gold only to keep it in the locker.
This results in money getting blocked and not generating any return. While it is good to keep some investment in gold, it is not good to keep excessive investment in gold.
15: an extremely conservative approach with investment.
Traditionally, people have been risk-averse. They would keep their money in FD and just get six to 7% return.
While this approach could work for a retired person who does not want any volatility, this is certainly not a good approach for someone who has just started earning and want to create wealth for the future.
16: not able to break credit card mystery
Credit card is like a double-edged sword. On the one side, if you can’t control your spending, then a credit card can rip you apart. On the other side, if you are someone like me who can control the spending and pays the complete credit card bill on time, then you can reap a lot of benefit from it. For example, free airport lounge accesses, huge discounts on purchases, free patrol, buy one, get one movie ticket, et cetera.
17: lack of understanding between real and nominal return.
Money kept in the savings account is actually getting shrink. The reason is simple. The inflation rate in India is much more than the interest rate from the saving account.
For example, if the inflation is 5%, then next year your money worth 100 rupees would be equivalent to Rs 95. A lot of people make the mistake of keeping excessive money in a savings account and shrinking their money.
18: Lack of clarity between asset and liability.
The major difference between rich people and poor people is that rich people invest in assets that generate income and poor people are trapped in liabilities paying loans for the rest of their life.
Moreover, to better understand this financial distinction, you must learn the ins and outs of loans and its term. You must familiarize yourself with the types of interest that apply to different loans and the flexibility of payment terms they can offer in the future. For example, if you want to learn more about reverse mortgages, which can provide insights into how certain assets can generate income instead of becoming long-term liabilities.
19: Consider frugal as cheap.
We Indians have been traditionally frugal in where we spend economically. But this new generation likes to show off their fancy gadgets and think that frugal is cheap. When one of the world’s richest man, Mr. Warren Buffet, can live a frugal life, why can’t we?
20: procrastinating investment decisions.
We keep hearing that I’ll start investing from tomorrow, but the problem is that tomorrow never comes.
21: spending a lot of money on fancy stuff.
While there is nothing wrong with buying fancy stuff, the problem is buying fancy stuff even when you can’t afford them.
22: lack of patience.
A lot of people lose their lifetime of saving just because they don’t have the patience to remain invested for a long duration.
You don’t need a high IQ to generate wealth. You need the patience to remain invested for a long duration.
23: depending on others for investment decisions.
People say that I don’t know anything about investment, please manage my money. Unfortunately, a lot of people are dependent upon others for their hard-earned money.
24: not discussing money matters in the family.
I remember an incident where the husband died and the wife had no idea about the family assets. No bank account details, no passwords, no insurance details. She had a terrible time getting all this information. Ensure that you share this information with your spouse.
25: getting too greedy with the investment.
People blindly invest their money in penny stocks, days trading futures and options. They eventually lose all their money. What is the root cause? Greed.
26: buying stocks on peak and selling on fall.
Most retail investors get over-excited when the market is rising and they end up investing when the market is at its peak. Eventually, when the market corrects, they sell their investment at loss.
27: wasting time on unproductive things
A lot of people end up spending hours and hours on social media rather than learning new stuff and growing their skill set. The skill set need not be about finance only, it can be anything about your hobbies or interests.
28: lack of disciplined investment.
Instead of spending what is left after investing, people invest what is left after spending. This results in an indisciplined investment. Do you know what the root cause behind all these financial mistakes is? Lack of knowledge about personal finance management.
