Category: Psychology and Wisdom

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”

How much Time should you spend for managing your Personal Finance

Posted on by Jagoinvestor

Some months back I wanted to find out how much time a person would spend on his Personal Finance? So I did a poll which asked them this question and gave them some answer options to choose from. Around 180 people participated in the poll. Let us find out what most of the people think about spending time on their Financials.

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Results of the Survey

So the survey asked them a simple question “How much time you would like to spend managing your Personal Finance” and gave them following 5 options

  • 1 Hour/Week
  • 1 Day/Month
  • I would rather like to hire a trusted Financial Planner
  • 4-5 Days/Year
  • I have other important things in life

Any Debt funds and Stock Market experts here? Please step in our Forums and help in answering questions like “Best Investment theme for future in Indian Stock Market” and “Debt funds?”

Here is the pie chart which shows all the results

Important Learning’s and Insights

  • Around 60% people say that they would like to spend around 1 hr/Week. Another 18% said 1 day/month, which is again some how same as 1hr/week in some sense. So I can say that people are interested in spending around 4-5 hrs per month. Personally I feel that 3-4 hrs a month is more than enough. Choose last weekend of month and sit one Sunday or Saturday evening for 3-4 hrs after lunch and look at overall your portfolio. Find out  how everything in portfolio is performing, how your mutual funds are performing, track if your investments are growing as per your expectations and plan.
  • Very small percentage of people said that they have other important things in life than managing their personal finances. This shows that everyone somewhere in their heart recognizes that Personal Finance is an important part of their life. But may be because of ignorance or because its too boring. We don’t get into managing or understanding it and try to ignore it to a level when its too late 🙂
  • Only a small percentage of people think that they should hire a Financial planner. There are two reasons for this: First, that they don’t feel a need to hire a financial planner and they think that its an easy task which they can do themselves, they think like “why to pay Financial planner?”. Second, that people don’t yet understand what is the goal of Financial planning and don’t appreciate it’s importance in life.

Please put your comments and involve in discussion, What do you think is the best way and time to manage your money?

Note: I feel that I will not be interested in writing a review for any product now onwards. One of the reader feels that I have received Money from Aegon Religare and reviewed iTerm Insurance, see the comment . I don’t say that it looks very unbiased and yes my word seems to be very promotional may be because of my trust in the company and their philosophy.

I am not an emotional person at all but it has hurt me as a writer.  I would love to hear your comments on that. If most of you feel the same way feel free to put your comments there without hesitation. If most of the people feel the same way. In that case I will have to refrain from writing such articles, so that it does not put wrong impression. Miss-trust is the last thing I want from readers. If people are not happy, I should also think about removing the ads I put on this blog if it makes people uncomfortable and feel like I am biased. Please accept my public Apology if I have hurt your Trust 🙁

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Ability to take Risk vs Willingness to take Risk

Posted on by Jagoinvestor

A readers tell me : ” I invested 4 lacs in Sectoral Funds and now its down by almost 45% in one year. Now I need the money for my Sister Education in next 1 month, Should I withdraw it or wait for 1 month ? Manish , please advice ..”
I asked “But why did you invest in Sectoral Funds or even Equity” ?
Reader :  “Because I am a High risk Taker, that’s why”

I call it breach of trust with your common sense. My hands were literally itching to slap this idiot when I heard this. We have to re look “Risk Taking” all together again . I have already talked about Risk here at How much risk you should take and Understanding your Risk Appetite .

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What are the two elements on Risk Taking?

In our country most of the people are willing to take risk.  They will say that they are risk takers , they have high Risk appetite , they love challenge, and all kind of nonsense. But they forget to consider their “Ability to take risk”. Its not important enough whether you are willing to take risk or not , your situation should also allow you to take risk. Ignoring your “Ability to take risk” can lead to situation like above example.

So mostly there are two components of taking risk .

  1. Willingness to Take Risk : This depends on our inherent nature, our attitude towards life, finance domain , Knowledge of financial products etc. Our whole upbringing will contribute towards this, because our willingness to take risk will depend on our inherent self , who we are from inside . So you can either be extra cautious by nature and may not be willing to take risks or you can be a big risk taker who is willing to sell his pants and bet money on anything. This is answer to “Can you take risk ?”
  2. Ability to Take Risk : This is the next Important part in Risk taking. Does your situation allow you to take risk or not ? It has nothing to do with your willingness to take risk , you can be very much a risk taker and dieing to bet on the next multibagger or invest in that 100% return a year mutual fund , but you have to consider a worst case at the end. You have to visualize the worst case as if it has happened after you take that risky decision . This is answer to “Shall you take the risk ? “

Let us have a close look at definition of RISK .

\text{Risk} = (\text{probability of event occurring}) \times (\text{impact of event occurring}).\,

Boom !! .. So Risk is composed of two parts .  Probability of Event occurring should be the secondary thing one should look at and Impact of event occurring should be primary. See the picture below to understand it visually .

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Probability of Event occurring : Most of the people unconsciously think about this. It happens a lot in case of Life Insurance , a general argument is that the probability is very less for them to die and hence they take the risk of not taking adequate risk cover through Term Insurance because they loose money if they don’t die ,  idiots! (See this post to understand the reason) . Same case with buying a mutual fund which has no credit to itself apart from a 100%return in last 1 yr even though its 8 yrs old fund and have a return of 8.7% since inception. The probability of these mutual funds giving return may be high, but in-case they fail, the impact it can have on your investments can be fatal , especially if you have not considered its impact on your short term goals. So the person in the example above never thought of the impact on his short term goal of Sister Education . He only considered that chances of event happening, which was low  (mutual funds going in losses) and if he is a risk taker or not , but he never considered how it will impact his goal. Even though the chances of something bad happening is low and he is personally fine with it mentally by taking risk, the right decision was to better not take that risk because the goal associated with it was very important and the impact is severe overall .

Impact of Event occurring : This is the primary thing one should look at and then take a decision. Until an event happens its very tough to imagine it, that’s the reason you should literally close your eyes and try to visualise a situation and try to feel about it . So if you want to avoid a Term Insurance just because you never get your money back and you want to settle down with a money back policy (Like Jeevan Tarang from LIC) which gives you 10% of the insurance cover you actually require for a premium you can really afford,  try to visualise a situation that you died and now your family needs the money after you are gone . Visualise how are they managing , Visualise how your dependents are already emotionally terrified and how they will fulfill their financial goals without you ?

Does it mean we should not take Risk ?

I am not against taking Risk . I love risk taking personally (but my ability to take risk is limited) . We are only talking about taking calculated risk here and being aware of what is the outcome of what we do. Risk comes from not knowing what you are doing. So take calculated risk. Know what can be the impact of taking a decision and be ready to face it when it happens. if you are not happy with the impact, don’t do it . “Not taking a risk” is another very severe risk people do. “Not taking a risk in your life if you are ok with the impact” is equally bad . So not taking risk can also have a drastic impact in your life . Below is a nice video i found for you to get motivated to take Calculated risk .

Conclusion

Recently I came to know that one friend of mine met with an accident while crossing road in Bangalore. He used to cross roads in hurry, because waiting wastes time and meeting with a small accident was not a high probability event ever. Though he was a probability genius , he forgot the impact part of this event . He is safe after this accident but impact could be much worse. Mathematics can never win infront of logic .

Finally at the end I would like to summarize this article in short. We take all sort of decisions in life regarding money , relationship , marriage , health and all of those decision have two parts, First is our willingness and how we feel about it and second is the impact its going to have in our life. This post is to build your FPQ (Financial Planning Quotient , I coined this term 😉 ) and that’s the most important thing. Taking a decision is last thing , understanding what you are doing is of utmost importance . So now their are some questions unanswered , which i will leave to you if its applicable to you .

  • If you have a Endowment policy , its totally safe and secure , but have you thought of its impact in our life when they mature at the end ?
  • If you are avoiding Health Insurance of your elder parents because of high Insurance premium , Do you also understand that the Probability of them getting some health problem is very high and the Impact is pretty severe . So when it actually happens you will wonder why you were foolish earlier.
  • Is the travel Insurance of around Rs 110 worth when you go for air travel within India from one city to another or for that matter from one country to another (charges are not Rs 110 in this case)  ?
  • So if a mutual fund has given 150% return in last 1 yrs, has it happened without taking any risk? and are you ready to face the other side of coin ?

Don’t forget to put your Comments  !!

How Career affects our Financial Planning

Posted on by Jagoinvestor

“When you grow up, What do you want to become ?” , and the general answer is Doctor, Engineer or Pilot . That’s the story of 99% people . I just wonder if some kid today says “I want to become a Financial Planner” , how will his/her Parent React ?

They will either think he is an alien or they will find fault in their DNA .

How career affects financial planning

So here is the main question. Where are we in our Life, in our Career? I bring this important question because one of my client 2 days back told me that He is not happy with what he does and he is looking forward to do something which really satisfies him and therefore he cant make long term commitment.s of doing SIP , Paying Regular Premium Payments etc etc, because he is not sure if he can take it anymore.

He is a well earning Software professional , but he actually never enjoys his work and actually wants to be into something like Education or Music which he loved always but had to give up because His parents wanted him to not waste his Life .. LOL . Now I am not a Magician who can fix all the problems like these .

Relation between different aspects

We are today going to talk on how your Career affects your Financial Planning . Lets see how things are related and dependent on each other .Our Goals in Life are important to us, We need money to fulfill them , at least most of them .Money comes from our Jobs and Jobs come to us from our Education (most of the times) .

And Our decision of what we get in Education , from where do that come ?

Here is the root cause . Ask any MBA aspirant why he is preparing for MBA ? What kind of answers do you get ?

  • My friend is also doing it
  • What else can i do ?
  • Good money in MBA

Same problem with Engineering and others Jobs . How many people do you know who say “I love what I do” .. “My day is amazing everyday at work and I am so happy to be at work” . Lets see a typical situation of an average Indian which is happening from Decades and needs to be changed .

“Borrowed dreams don’t make for happy realities”

What happens with average Indian in Career

“Dont let your Schooling come between your Education”

How Career affects our Financial Planning

Finally I come to the point . So for acheiving our goals and satisfying our needs of daily life , we need consistent flow of money from our Jobs , Consistent money can come in two ways

1#. You don’t truly love what you do in your Job , but keep doing it no matter what , and get your Salary every month

I don’t need to explain much here , but you smart to understand and picturize the situation , these people do not like what they do , but are dragging

from years in the same company or same profession.

These are people who make decent money from their jobs , but they are internally never satisfied from their career and somewhere unconsciously are afraid of the fact that If they loose the job or leave it themselves ,from where will cash flow in to meet the expenses .

Life is long, if you are just 25 or 30 in this situation, this situation may not look very bad to you , but wait for some more years , once you have other responsibilities like a Family and Children ,Regular Bills and Education costs , you will so stuck .

One of my friend in Pune says that “It comes to his life daily morning when he has to leave for office, He just dont like the work he does” , This is critical situation .Our lives today is full of stress , Problem at work , Issues with Marriage (Amazing Book I am reading these days) , Unhealthy life style and many more like these and combined all , It has deadly effects.

In coming years you will have to plan for your expenses and money will come from this job which you hate , and then it will be tough situation . These people unconsciously worry a lot for their Financial Goals like Child Education , Marriage , Retirement etc because they somewhere know that there are greater chances of not excelling at what they do because they just cant perform better and what is expected out of them .

These are the people who make Investing mistakes in hope for big returns because they want to fulfill their Financial goals as soon as they can .  Most of the people in this category do things like one mentioned in this article

I know people who earn 90,000  per month but they are the most negative people I have seen when it comes to their future , and yes they tell me how idiotic job they do .

2#. You Love what you do in your Job and get your Salary every month

Now this is a very different Situation , here you love to do the job , Your satisfaction part is already fullfilled . If you not paid for what you do , you can still do the job sometimes and wont feel about it . I charge clients for the Financial planning , but I do not charge my close friends when I do it  .

I am not paid there .. but Its fun to me , Its something I enjoy . Every new article is a challange for me,  Its never a job for me .  Every new comment is an appreciation and a message from you that I am being read and I write wonderful 🙂

As per a famous Chinese proverb “Find a job which you truely Enjoy and you will never have to work after that” . People who love their jobs already solve one of the big issues in daily life . When they are at Home , they are more cheerful , more energetic and tend to make a better environment  around them .

These poeple Financial life is also better because they dont have a mental pressure of “making themselves fullfilled” at work . These people know that they are going to get much better in what they are doing and someday will reach heights , where they will have much better salary and hence it will help them that time if they are unable to save and invest today .

I am not saying that they dont save or invest, but they are not worried for their future .  Read an interesting article on “Can you live with 90% of your Salary ?”

I know a person who is 23 and recently left his Software Job to make a career in full time blogging , He earns more than 1 lac per month now .

What is the Solution ?

Oops .. Its a tough problem to solve . The best thing I can think of is

1. Identify first if you are happy to do what you are doing , make sure you understand that you are going to do it for 20-30 yrs . I am referring to people in Software especially , because most of them just know it sucks .

2. Identify what you like to do and how can you make a career out of it . Career 360 is a good place to look for some career related stuff

3. Gradually start upgrading your skills and get some education in the field and in the meanwhile create a buffer of money which will support you for some 1-2 yrs if things fail and you can get back to what you were doing.

4. Gradually shift to other field once you are ready to make a move .
One thing is sure .. If you do what you love , you worry least about salary hikes , office politics , worry for slowdown and most important “getting Fired”, you have that amazing confidence that you are the powerful person in your job because you will always excel at what you love to do .

What should be the Ideal Situation

We have to plan for different things in life , some are small things and others are very important in life . Below is the list of things I personally feel are extremely critical for a successful Life .

Life Planning

Each of them is dependents on the things coming next in life . Your Education decides what Job will you get in , Your Job decides how much you are happy and how much you make in money terms .

This combined with how well you choose you Life partner and how great you plan your Family decides your Life ahead, and at the end what we discuss on this blog comes “Financial Planning” . It depends on various small things we generally ignore 🙂 .

So you need to ask following Questions

1. Do I love my job ?

2. Even Though I feel I love this Job , Is there something I can do better and Make a much better career ?

3. If I had to do my current work for next 30 yrs , Am I mentally Ready for that or Will I just Die out screaming !! .

4. What is it that I like to do and what are the career opportunities in that field ?

Answer it yourself 🙂

Conclusion

This is a very Important aspect you need to think about , Financial Planning is totally dependent on how comfortably and happily manage to get the cash flow in your accounts . If its a burden on you rather than a enjoyful event, you are bound to get screwed some time in coming years .

Forget how to choose the best Mutual fund and what is the cheapest Term Plan or What is the best way you can invest your 2 lacs kind of silly questions .. They are idiotic questions which we try to find answers for , answer these real questions in life first .

Comments

I am sure my writing this article at 3:30 am in morning will not go waste and you will provide your valuable comment on this .

Why don’t you let me know about what you feel about this and to what extent you agree on this, Can you suggest some ways out for this problem?

What do Friendship and Marriage teach us about Investing?

Posted on by Jagoinvestor

Friendship and Marriage, are two important things in our life .. The principles of good Friendship and good Marriage also apply in Investing also.

Whether its Mutual funds OR Direct Equity. key is having Small group of good friends (Mutual funds) and giving enough time and trust to your Partner to have a long lasting and successful Marriage( Mutual Funds or Stock Investing).

friendship and marriage

Friendship

“One loyal friend is better than ten thousand family members.”

We should have some good quality friends who are there with us for long term . They are not 1 month or 2 month friends, they are friends who are there us for long term, like Years !!

There are some people who we need to make friends with but for short term, may be because they are there for us for small time or they are good with us for short term, once they show there true colors, better search for better ones, Its too difficult to change nature of a friend.

Mutual Funds are like Friends, Have less of them and have long term friendship, There are many people/Mutual Funds, which look very attractive in short term, they will be very nice to you, will give amazing returns to you in 3 month or 1 month, and this will attract you, make you feel that “he/she is a good one”, but give some time and they show you the true colors.

Just like you need to have 2-3 very good friends, they same way have just 4-5 very good Mutual funds, whom you have seen for long term, reviewed from some website (valueresearchonline), have done your own study and saw there long term performance (5+ yrs). You have to understanding long term performance of Equity.

If you have 5 friends, still there are thousands of other people who can become your good friend if you give time and spend some effort, but that does not mean that you will leave your old friends and start making new friends with others every year.

You have to understand that there will always be some people who are good, potential friends, but you have to skip them and not think about them. Just concentrate on your current friends and deepen your friendship with current one’s.

The same way, there are hundreds of mutual funds in market and you cant just choose the best of them, All are good and potential long term investments, all you can do is to choose some of them and develop a long term relationship with them, understand them, Trust them in bad times and be with them, Juggling between friends will leave you no where but with an impression that you are choosing the best.

Therefore, just have 2-3 Friends and 4-5 good Mutual funds (max 6-7) .

Tip : So if you have more than 6-7 mutual funds in total, Better say bye bye to some of them, not because they are bad, but because you cannot give proper attention to all of them. Have some of them and have them for long.

Marriage

“The secret of a successful marriage is always a Secret”

I have seen most of the Marriages/Relationship breaking or “on the rocks” f0r mainly one reason, “Not giving enough time to understand the other person”. This is my view.

Most of the people be in a Relationship/ Marriage and within months or maximum 1 year, Judge the person and loose patience. They do not give appropriate time to the other person to actually show their real face. Everyone in this world has many different faces/moods and you cant know a person in a short span of time, You have to give them time and trust them that they can be your dream spouse.

There are good and bad times in Marriage , You see both the times and have to trust your partner in bad times also, that there will be some time in future when you will see good days too, provided that you have chosen your partner carefully. There are times when you are there with wrong person and then you have to suffer all your life :).

I have seen many people do similar kind of mistake with there mutual funds and shares, If their mutual funds and shares have given good return, Great !! If they do down in some loss without giving them any returns in start, They are just “Bad mutual funds”.

What you have to understand is that you have to give enough time to your mutual funds to see their actual performance and what they have to offer. Good and bad times come and go, You have to trust your Mutual funds or shares. See list of Best Mutual funds for 2009

“Take time to choose your partner and after that, be with them, trust them, grow with them, Talk to them, try to understand them, and communicate, DON’T second guess and suspect there performance”

Tip : If your mutual funds have given bad returns or less than expected return, ask your self, if you have choosen them after lot of consideration and trust, If not, remove them, if Yes, then dont worry, give them time, they will come up with the returns you have expected from them, they just need some time to show what they are 🙂 .

Comments

Let me know what you think about this, Can you suggest something else which teaches us from real life about investing.

Note : I will be in Delhi for 4 days from 22nd – 25th and then back to Bangalore on 26th 🙂