What can prove to be harmful to your personal finance?

Being an investor , you must be coming across all the dos and don’ts of investing! There are many experts writings and books which tell about how to go about personal financial planning and investments. But, despite of all such right sources available to refer to, we find many investors face many jolts in their investments.

The reason is our ‘behavioral finance’! This simply means, investor’s ability to think , respond and take decisions about his/her own personal finance. This says, investors psychology and own biases often control their decisions.

So, lets see what are such harmful thoughts and actions that can cause hiccups in your financial life…

Being Envy of others finances and lifestyle: There are many who often try to copy others in terms of their lifestyle. This urge to show and prove oneself better than others in terms of lifestyle, cloths, expensive household items ,cars, etc makes the person to spend in excess of what is really needed.

There is a famous scene from the movie ‘ Three Idiots’ and a dialogue in it says,” Ghadi 400 rupayon ki ho ya 4000 ki, time vahi bataati hai’!! means ‘ If you wear a watch worth Rs 400 or Rs 4000, it shows the same time”!!

Likewise, instead of flaunting your exclusive items out of envy of others, you end up spending on unwanted items, which is actually not required. So, rethink and revise your thoughts about it.

Always spend less than you actually earn!

Greed for new shopping items: Sometimes the point mentioned above can be the reason behind it and sometimes attractive sales offers , discounts and life occasions can make you spend on new items like clothes, mobiles ,shoes,etc.

‘Credits cards’ also add to your wish to get new items in your kitty. This makes you to pay more and more bills everytime.

Sticking to traditional instruments for investments: When you start earning, elder people in the family influence you to save your money using traditional sources of investments. Many people blindly follow their advise.

But, what worked for your parents may not work for you! Looking at the lifestyle inflation, insecurity in the job sector, competition in the career and general inflation, demands your money ‘to be invested’ and ‘ not merely saved’.

Investments and savings in traditional items can not give you good ‘real rate of return’ !So, along with starting your monthly investments in ‘Recurring deposits’ in bank or post office, you can think of starting ‘Systematic Investment Plan’ to achive your short/long term goals.

Along with investing your money in Bank FDs, you can invest in Tax Free bonds, Non Convertible Debentures (NCDs) , Taxable bonds, corporate deposits , Debt mutual funds.

So, look for new methods and instruments for your investments which are suitable and beneficial for you! Follow the mantra of “Investment Woh hi, Soch Nayi’ means ” Invest with different approach”!!

Starting your investments late: When you start earning, the feeling of ‘becoming financially independent’ is new. You enjoy spending your money on your favorite wish list. Eventually, your income increases and you start neglecting the ‘need to invest your money’.

But, never take things for granted in life! You must continue to be financially independent throughout your life so that you can face any challenge that life may throw at you. Also, to fulfill all your short/long term goals, investing is very important.

For this, starting early is very important. Lets see following hypothetical example-

E.g for your long term goal of retirement which is at 60 years of our age, if your expected retirement corpus to be created is Rs 2 Cr . Then, if you start your equity mutual funds SIP at the age of 30, assuming the rate of return @13%, you can start you SIP with Rs 4500.But, if you delay it by ,say suppose 5 years, with same rate of return,then SIP amount goes almost double i.e Rs 8900.

Blindly Following others advice and portfolios: Your friends, colleagues must be telling you about the progress of their portfolio, returns they are getting from their investments ;Stories about how they are successful investor must be keeping you busy in lunchtime. This can be vice-versa means how some investments re dump and harmful,how they cant give you returns but only losses, etc.

Please dont pay attention to any such stories and experiences. If your friend is getting returns is good, but never follow his/her advise blindly to invest in the same product.

Please remember, ‘you’ are different from others in terms of your goals, income, responsibilities, risk appetite, investment tenure etc. What will suit them, may not necessarily suit you also.

So, before investing, please understand your risk appetite, set your short/long term goals and decide on your investment tenure. This creates a foundation for you to invest in the right product.

Never maintaining records of your finances: Your finances have various aspects. Some are your investments, some are your assets, some are liabilities, some are the items of your wealth and prestige. Along with these, you must be maintaining number of bank accounts , demat accounts for you and family. Here, you should maintain the clear record of these things and update every now and then.

This helps you to be updated with the exact state of your wealth and portfolio,.

Mixing Insurance and Investments: In our country, people only seek returns fro their money invested. Unfortunately, large number of people are still not insured and those who have taken insurance, are under insured and insured in the wrong way.

The major wrong approach here, seeking returns from your own insurance policy. Irony is how can we expect so, where we are only giving money to assure the wellbeing of our dependents after us?

Life insurance must be the pure assurance to insured’s dependents, that their long/short term goals, lifestyle and well being will be intact in case of any unfortunate demise of the insured.

So, when looking at life insurance, please select ‘Pure Term’ Insurance only! This serves the purpose with low cost to you.

Not reading about personal finance at all: The one who reads, get saved! When it comes to personal finance, investor must keep oneself updated . This is really very dynamic field and you must gather maximum knowledge every now and then.

Nowadays,you can easily read newspapers on your phone!. Even big good books you can listen to!! ‘Kindle’ helps you read big books and its very handy to carry along.

So, please understand the basics about personal finance so that you will be aware of where your money is going and how it is working for you.

Maintaining monotonous approach in your investments: Monotony is always boring.. To remain fresh, you need to initiate some changes! Same applies to your portfolio too.You may be experiencing negative returns from your investments but still feeling unable to take decision to move out or remain invested.

Different investments need different outlook to judge their progress and take right decision whether to make additional purchase, redeem the investment or stay invested!

Many investors,though not in the need of money and have made investments for a longer term, still find it difficult to handle negativity.

To make life simple; lets see how you can view your portfolio in different instruments and what can make you to take right decision while Investing and reviewing.

a) Mutual funds: With strong inflows into this product, surely this is gaining momentum day by day. Investor invests here through Systematic Investment Plan i.e. (SIP) or in Lumpsum. Many a times ,investor invests here seeing at the popularity of the instrument and by listening to others.

Ideally, mutual funds investments must be made as per your short/long term goals, your risk appetite and investment tenure.If you fail to do so, then you may not get expected returns from your investment.

On the other side, even if you have made investment as per the above criteria, you may face negative side of your portfolio but please don’t panic! Mutual funds is a market linked product and so subject to market risks. You may face ups and downs , but be stable and review it regularly.

If your scheme is really not performing for a long compared to its peers and benchmark, then only take decision to move out. You can take the expert opinion for this.

b) Gold: Gold always glitters and tempts the investor for buying and investing in it! We, Indians are largest consumers of Gold in the word. Due to cultural, emotional values and prestige associated with it, gold is the favorite among us!

Since ages, Indian prefer to buy gold in physical form, i.e. coins , bars , jewellery etc. Here, it increases the risk to store it safely and handle its safety throughout. If you are making a jewellery, its design may become outdated over a period of time.

If you are buying with the purpose to use it as a gift to your daughter or a daughter in law, then for such long term goal, its a long term risk to maintains its safety.

But, investors, though they know about all this, still continue to invest heavily into gold.

But, its time to change the approach! You can buy and invest in gold in E-form.

‘Sovereign gold bonds’ and ‘Gold ETF’ are better options to invest in gold online.

‘Sovereign gold bonds’ are backed up by government, hence carry high safety. They come with long tenure i.e.8 years. These bonds offer interest rates @2.5% p.a.

At the end of the tenure, you can redeem them at the prevailing rate of gold that time. Investor can invest it through demat account as well.

Another option to look at is; ‘Gold ETF’! They are exchange traded funds. Here, 1 unit=1 gram of gold. Since its an exchange traded fund, you can track the price daily. You can invest in gold ETF through your demat account.

Both these options are simple and convenient to invest and reduce the burden to store the gold and keep it safe.

c) Real Estate: Real estate is another investment instrument which carries prestige and its all people’s favorite. Everyone dreams to buy his /her own house, which is absolutely fine. But, if you wish to invest in real estate, and buy second home, then take a wise decision.

Due to returns that real estate has given, people often buy real estate with the hopes to generate more returns. But, returns from real estate are stagnant these days. Real estate carry many costs along with it like stamp duty, registration charges, maintenance charges etc.

If the property is far from your residence then transportation costs also add to it.

When you wish to sale your property, it again adds costs like broker charge etc along with the time which it takes to get a good deal.

To keep you away from all these burden, you invest in the property where you wish to reside. And take a wise decision to buy your second home with set goals in mind!

Life becomes simple when we change our approach to look at things and also remove harmful thoughts! Its just that we need to apply it for our ‘Personal Finances’ too!!

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