We all have character flaws. Dussehra is just not about celebrating victory of Lord Ram over Ravan but also about identifying the evils within us and fighting with them. This Dussehra, I am here to talk about how some of our character flaws affect our financial lives based on my first hand interactions with over 4000 people in last one year.
1. Impulsion
Liked that fossil watch while mall-hopping? Found that Zara clutch beautiful? The next moment you are at the counter swiping your credit card :) This is called impulsive buying. Online and offline stores lure you into buying things that you don’t really need by offering discounts. But don’t forget, even if you are getting 50% discount, you need to pay the remaining 50% from your pocket for things that you might not even need. I don’t say that you don’t buy any such thing. Sometimes, it’s good to surprise yourself by buying impulsively and be happy but this should not be done every time you see something fascinating. How about buying something impulsively only 1 out of 4 times that you feel like buying? Trust me, it won’t be difficult. This way, you will also be happy about treating yourself and at the same time, you won’t be guilty about overspending.
2. Greed
Greed is probably one of the worst human virtues. History is full of disasters resulting from greed. Greed makes us do irrational things and sometimes even immoral, unethical or illegal. We have seen so many cases of people investing their money in chit funds/scams like eg: Sharda Group only to see all their money vanishing. The scammers exploit this very nature of human – Greed. They know that if you promise to double the money in a year, people will get carried away and put some money thinking “Thoda to daal ke dekhte hai” (Let’s put some money and see what happens). As it is said in economics, there is no free lunch. As a rule of thumb, if someone promises you more than 15% return, triple check the scheme. More often than not, it will not be true. In terms of doubling the money, if anyone promises to double your money in less than 5 years, you should not trust that person.
3. Baseless Optimism
Just because someone doubled their money in stock markets in 2 years, doesn’t mean you will be able to do it. Just because, mutual funds can give you 15% return, doesn’t mean it will always give you 15% return. This is a common human tendency to look only at the positive side and expect only positive things to happen with us. Even when mutual funds are screaming and telling us that there are market risks, we tend to overlook that and expect our investments to always do well. Risk and return always go hand in hand. If some instrument has potential to give higher returns, there are also risks of having that much loss. If you invest in stocks or equity mutual funds, your money will fluctuate in short term. You have to be prepared for it. It is for the same reason financial planner do a risk profiling for you and take risks with only the money that you can take risks with.
4. Panic
If Ben Stokes had panicked in Cricket World Cup Final 2019, England would not have taken that world cup home [though I believe it should have been shared between NZ and England :) ]. But the point is, most crucial situations ask you to be even more calm and focus on what is in your hands. What is that you can do to overcome that situation?
Stock market keeps on changing every moment. One statement by PM Modi is enough to change the heartbeat of stock markets. In such cases when market goes down, people start panicking. Some people just start selling everything or get too much tensed. Taking decisions with such mental state is not right. In such situations, you really have to be calm and read the situation really well or ask your financial advisor if there is anything to worry about? Many times, you would not need to do anything. Market just behaves that way and if you have invested in markets or equity funds, then you have to stay there for long term. Nevertheless, never panic and take guidance of experts to understand the situation.
5. Measuring depth of water with both feet
I have spoken to many people who invested all their money in stocks or equity funds expecting miracles to happen in 1 year, only to see their money being in 20% loss after a year. I have met people who haven’t even invested in FD, and have ‘preserved’ all their money in savings account.
Investing all your money in just one instrument be it stocks, mutual funds fixed deposits or just keeping it in savings account. Any of these is very bad for your financial health. You should diversify and invest it at different places. Each instrument has its own significance. Based on your financial goals and risk taking appetite, the instrument where you invest varies up to a great extent.
6. Procrastination
1.01 ^ 365 = 37.8 ------ Case 1
And
0.99 ^ 365 = 0.03 ------- Case 2
You must have seen these rules, right? Which says that if you improve yourself by 1% everyday, you will be 37 times better than what you were a year ago. And if you do the opposite, you will be in a worse state after a year.
In the world of money, if you are not investing your money today i.e. Case 1, you are following Case 2 i.e. losing your money. Compounding of your money works in financial world and you must take advantage of it by starting right away. I say this often, the best time to invest was yesterday, and the next best time to invest is today. So, just do it and don’t procrastinate.
7. Trusting based on emotions
We are fundamentally very emotional. We often get carried away and take wrong decisions just because we don’t want to hurt someone else. You might have very good relationship with your bank’s manager and just to keep that relationship secure, you might agree to buy a sub-par product that your manager is trying to sell. You might also buy a LIC policy just because one of your relative is an LIC agent and you trust them. The thing is, even the bank manager or your relative won’t have full understanding of the product they are selling you. They are simply trying to meet sales target given to them by their seniors. You should not simply buy a policy or product just because someone you know is selling it. You don’t need to disrespectful but you should learn to say NO. Before buying any product, ask a lot of questions. Ask about how that product will be suitable for your financial goals? Ask about the risks and commissions of that product. Post this, verify everything by looking at the product documents (which we almost always ignore).
8. Overconfidence
Studies show that many more people die in road accidents as compared to people who die in flight crashes. Yet, many of us don’t even bother to wear helmets. I mean, I see people wearing their helmets everywhere except their head. This is not only a huge emotional risk for your loved ones, but also a financial risk if you don’t have sufficient life insurance (which >95% of us don’t have). When I talk about having term life insurance to cover the risk of your life, some people argue about not getting any return from insurance. The thing is, insurance is not an investment, it is an expense to precisely cover the risk of your life. If something happens to you, no one can bear the emotional loss of your family and friends but if they are financial dependent on you, at least that financial dependency will be covered. Never be in overconfidence that nothing can happen to you as you are still in your 20s or 30s. Have sufficient health as well as life insurance. I talk about importance of life insurance in detail here: What does Term Insurance Do?
9. Ignoring self-learning
As someone has said, the best investment that you can do is invest in yourself. Invest in your self-learning. There is no harm in knowing a bit about everything. Same goes with knowing a bit about financial planning and financial markets as well. I don’t ask you to be an expert in predicting when the stock market will go up and when will it go down. But, you can at-least put some efforts in understanding things like: What are mutual funds? What is debt and what is equity? How to set financial goals? These things won’t make you an expert but will definitely equip you with knowledge to assess if your advisor or agent is working in your interest or not. It is with this objective, we run our Learning Center which should be a good place to get yourself equipped with necessary knowledge .Remember, one article a day keeps financial worries away.
10. Trying to be master of all trades
You might be a marketing manager in your company or a software developer. Just like no one else can do your job, you can’t do anyone else’s job without the necessary foundation. A marketing manager cannot just decide one day and try to write software. Similarly, a software developer won’t understand the nitty-gritty of marketing a product. In the same way, you can’t become a financial planner yourself. Being a financial planner is a separate profession which requires different set of skills which you might not possess. So, let the experts take care of your money. Don’t try to do it yourself just like you don’t self-medicate for anything serious. Google will tell you a lot of things which might make you think that you know it all, but trust me, trusting google for your financial planning is same as trusting google as your doctor.
So, let's take a pledge this Dussehra to fight these evils and take a leap towards prosperity. And yes, a very Happy Dussehra :)
