5 emotional mistakes, just 5, induces most people to commit some common financial mistakes in their lives. Can you believe it? I bet you can’t. Let us analyse these mistakes one at a time:
- Guilt and Gratification
- Social Strata
If you are prone to these mistakes then I would request you to read till the very end because no matter how frivolous this may sound, BUT there is a solution to it.
Who does not want to be rich in their life? You, me or anyone for that matter. But keeping some exceptions aside, do you think you can be rich in a gap of 2-3 years? It takes abundance of hard and smart work to reach the top and stay there. Even Warren Buffet took 75 years to reach where he is right now but we want to beat him in mere 75 days. The greed part in you sets motion from here.
Stocks – My friend, Rohit, had no clue about stock investments and he is a conservative investor. One of his friends told him how he doubled his money by investing in a particular stock in a span of 6 months. His friend gave him an advice and said- Rohit, if you want to be rich in a brief time frame, you need to invest in stocks. Rohit was in a dilemma whether to invest in safe instruments like debt mutual funds, where the money will get doubled in 8–9 years or stocks where it will double itself in 6 months?
He plunged into stocks.
Result- The stock value was half in next 6 months. 2 years down the line, the value was 1/10th of the money invested.
Rohit made a financial mistake here.
Reason – Greed
It is completely fine to invest in stocks but only if you have adequate knowledge about how this market works. But if you are going to shoot arrows in the dark, you are bound to get nothing in return.
Mutual Funds– Ajay is a moderate risk-taker. He invests in large cap mutual funds and his investment returns are 12% per annum. One of his friends asked him to invest in small cap mutual funds where the returns were up to 20%. Who would want to let go of extra 8% returns? Now, Ajay, shifted half of his investments to small cap mutual funds. Since there were elections next month and the ruling party lost, stock market crashed. Small cap funds crashed in the range of 60% wherein large cap funds crashed by only 25%.
Ajay wanted to earn extra money. But, he failed.
Another common financial mistake.
Reason – Greed
Now, there are many examples like investing in
- Non Convertible Debentures
- Investing in some ad-based instruments where returns are promised as high as 20% per annum.
I would love to read about examples in the comments section. Let’s move on to the 2nd point.
This is a real life scenario wherein my wife was sold a money-back policy in 2008. Markets were crashed. Portfolio returns were in negative. Everybody was running towards safe investments. One of her distant relative knew that this was the right opportunity to sell a traditional policy. It was sold with an annual premium of Rs. 40,000. Though, I suggested her not to buy it but she was thoroughly convinced about the market crash.
Although she had no clue about investments at that time but fear of loss was instilled in her mind. Why she bought that policy?
Reason – Fear
I had to surrender that policy after 4–5 years, suffering a loss of Rs. 90,000.
I will tell you how fear works. Most people who are actually very conservative investors enter into stock markets or mutual funds when market is at its peak(greed factor). When market crashes suddenly, it takes another 2–3 years to recover the capital. As soon as the markets recover, they withdraw their principal amount fearing the market will crash again. All investments turn into debt instruments.
Not 1 but 2 financial mistakes have been committed here
- You should not have invested in stock market/mutual funds if you are too scared.
- You should have given reasonable time to your investments if you have taken the plunge.
Do you now realize, why most of the traditional insurance policies like LIC Jeevan Anand, Jeevan Labh etc. are sold? Fear of not losing money.
Guilt and Gratification
My friend, Suresh, works in Mumbai where he was recently transferred and his family stays in Delhi. He can not move his family to Mumbai as his wife is also working. Therefore, he travels to Delhi on a fortnightly basis for a weekend. Normally, Suresh used to go to a restaurant along with his family once in a month or two months. Now whenever he comes to Delhi, they go out for dinner. His son asks him for an expensive toy whenever he visits Delhi and he buys it despite knowing that his son will hardly play with it for 2 days.
What is Suresh doing here? Suresh is reducing his guilt factor.
How – By spending more money.
How Suresh is breaking financial rule here?
He could have maintained the same routine and invested the extra amount for his child’s need. But, he spends extra just to reduce his guilt factor, right?
His son would still be missing him when he is back to his job.
Reason – Guilt
Do you realize, most uncles who sell insurance policies are known to your parents? They come, convince your parents and sell you the insurance policy.
And why did you buy the policy?
It’s a gratification to your parents. Though you know that the product is not right for you and will give the worst return but since your parents have asked you, you end up buying them. Actually, it is a mix of guilt and gratification. I do not think I need to explain the gratification part in details here.
You have a childhood friend who has recently started a mutual funds agency. He asked you to invest in regular plans through him. Though you know direct plans are better than regular plans but you still invest.
Reason – Gratification
Let us move on to 4th Point.
My friend moved to Mumbai 3 years back. He joined in as an AVP in a big corporate. When he moved to the city, he was happily staying in a 1 BHK rented house. One day, there was a get-together at his house. People came, enjoyed and left. Next day, in a normal discussion, his friend asked – Why are you living in 1 BHK when you are the AVP of the company and earning well.
Within a span of 6 months, he bought a flat by taking a home loan of 60 Lakhs. Now, his flat is 60 kilometers away from the office and he is forced to travel 3 hours on a daily basis. The best part is, he is not even sure if he would settle in here for the longest time.
His financial life in addition to happiness is destroyed. Why?
Log Kya Kahenge (What will people say?)
Car Loan – Same goes with the car loan. My neighbor has Honda City, I have Santro. Even the manager, who is working under me, has an i20.
Guys, I need to buy a bigger car though I do not have money 🙂
Children Marriage– I do not understand why most people want to spend more on their child’s marriage than on their education? I am not accusing them of not spending enough money on their academics but why are they willing to spend more on their marriage.
What will people say? Right?
Think about it– Your child is 25 years old and you are planning to spend 25 Lakhs on his marriage. What if you spend only 5 Lakhs for his marriage and invest 20 Lakhs in equity mutual funds.
You know what will happen if your child works till 60 and stays away from the amount invested till his retirement?
Value of this 20 Lakhs would be 10.5 Crores assuming a return of 12% per annum. He may retire early like at the age of 40-50 and spend the rest of his life peacefully which might have been something you wanted to do.
But you will still spend on marriage. Right?
I understand you cannot be perfect in everything in life. If you are a software engineer, your area of expertise is coding. I am a financial planner, hence, my area of expertise is personal finance.
But when you buy a mobile phone, don’t you research about it? Don’t you seek advise from your friends first?
You may be ignorant when you decide to buy a smart phone but by the time you buy it, you must have already done some background-check. You will never stay ignorant about the mobile phone which you plan to buy. This hardly happens when you buy a financial product. Many times, people research about it after buying it and they are left with no option to go back.
Being ignorant is not a crime but staying ignorant when buying a financial product is.
Solution to Common Financial Mistakes
If you are also doing some of the emotional mistakes, it is better to hire a fee only financial planner. Financial planners help you to take an informed and unbiased decision which in turn help you to avoid common financial mistakes.
That’s all from my side. I would be delighted to add any additional point that you guys come up with by sharing your experiences in the comments section.