Money is a terrible master but an excellent servant

William Shakespeare, in his masterpiece, dealt with the struggle with procrastination that brings the downfall of the main character Hamlet.  It is a fact that no brilliant intellect is worth its value if it withdraws from the action. Procrastination or delay or indecisiveness is the root cause of many bad financial decisions.

There are millions of people who have six-figure balances lying idle in savings bank accounts of banks and post offices without realizing that their money is losing value with every passing day as inflation is eroding its purchasing power.  Similar is the case with spending too much on needless items, buying life insurance policies to save tax or investing in risky stocks to make quick money because there are rumours that a friend has made money by investing in a particular stock. These are some of the blunders that Indians make that is affecting their financial health.

This fortnight’s Tehelka Special Story looks at 8 such common financial habits that need to be changed for the better to keep our financial stability in the pink of health.

Buying insurance policies for investment purpose

CA Govind M Chandak pointed out that the “big mistake is that out of 100 people, 95 have made this mistake because very few people understand the difference between term plan, endowment plan, etc.”. Many people lured by marketing and sales professionals invest their hard-earned money insurance plans they don’t need. Most of them are lured by the hefty benefits of tax deduction at the time of investment. Buying insurance policies to save on tax liability is a poor idea. These plans look promising but once you dig deeper, you find that the returns are no more than 5% or a little more or less.

Traditional insurance plans neither offer sufficient insurance cover nor give very good returns. The real objective of the insurance plan is the insurance cover offered in case of death but the primary focus of investors in the majority of cases is the tax deduction under Section 80C. For a senior citizen, the ideal situation is to invest in the Senior Citizens’ Saving Scheme to save tax and get a regular periodical income.

Buying stocks based on tips without any knowledge

You will find every Tom, Dick, and Harry giving stock tips over Facebook, WhatsApp, and TV. Unfortunately, a lot of people fall in the trap of these people and invest money without any knowledge. What is the end result? They lose everything! Often the sharp fall in the stock markets shakes investors and so is the sudden rise.

Even blue-chip companies and their stocks and index stocks have not remained unaffected. Choosing mutual funds as an investment option will not cut the risk entirely, but risks are minimal. Ideally, investment in diversified equity funds focused on different segments gives the portfolio all the diversification it needs and reduces the risk. The golden principle is never to keep all your eggs in one basket.

No emergency budget

Not having any extra money in the case of emergency results in embarrassing situations of borrowing money from friends and relatives. Some people even break their investments and make a big mistake. One should save enough for the basic necessities of life.

Keeping a contingency budget for any future eventuality should always be kept in mind. Life in metros is becoming most uncertain and there are fears of losing a job, helping a near and dear one in case of emergency. Little doubt that everyone should have an emergency or contingency budget for the rainy days. Very few people keep track of their expenses. Most of them just don’t know where the money is gone. People do not know why they need to save money because they don’t know their financial goals. Thanks to our Hippocratic society! People save their entire life just to spend all the money on random relatives who only bother about the food and arrangements.

Buying things just because they are on discount

From Amazon’s “Great Indian Sale” to Flipkart’s “The Big Billion Days”, everyone is encashing on the weakness of Indians buying things just because it is on discount. Funny thing is now you will find such sales every other month. Instagram and Facebook are introduced as Social Media Platform but they are actually destroying the entire social fabric. Facebook and Instagram are more of a marketing platform where people post stuff just to get some likes and companies promote their products and services.

Then spending a fortune on a party too is a bad idea because it could jeopardize your total budget. This is the new culture in India. Pubs are jam-packed on weekends where people would spend a bomb on drinks. By the end of the month, they are left with no money. A journalist friend told that often he had to borrow money from his maid at the end of money. That speaks volumes for financial mismanagement when it comes to personal finance.

No medical insurance

People are losing out the lifetime savings just because they did not take medical insurance. One accident can shatter all financial dreams. Better be insured. Healthcare cost is rising and it is impossible to manage it without insurance.  Then there are people who are paying the minimum amount due on credit card payment? If yes, they are trapped in credit card mystery. On the other side, very few people really enjoy benefits like free lounge access, buy one get one movie ticket, etc.

Everyone has come across the formula of compounding but very few people really understand its power. This is the reason people do not start saving early and hence lose out on the power of compounding. Albert Einstein said that power of compounding is the eighth wonder of the world.

Becoming a victim of lifestyle inflation

Moving from 2bhk to 3bhk just because you have got a good hike, upgrading your car because you have got some bonus are some of the examples of lifestyle inflation destroying financial lives.  Some people would invest all their money in real estate, some would invest all the money in gold, some would just keep it in the locker, and some would invest all the money in the stock market. Very few people understand the right way of diversifying the investments.

Gold worth lakhs is kept in lockers only to be used once or twice a year. This is resulting in the money getting blocked and hence not getting any returns on it. Traditionally, people have been risk-averse would just keep the cash at home.  By investing in fixed deposits in a bank they would earn more and their funds would be safe too.

Considering frugal as cheap

A lot of people confuse economic spending by being cheap. An economic spender does not compromise with quality but does his research well enough to buy the product or service at the lowest rate.  Having a car is not an asset because it consumes fuel and has a maintenance cost. Its price will only depreciate in the future. Car is a necessity but people spend a lot of money and even take the loan to buy a luxury car over and above their budget.

A fancy car, a fancy house, a fancy watch, a fancy vacation are bad investments decided by whims. People want fancy stuff and willing to pay a premium irrespective of the value it generates.  Then there are people who lack patience and want investment to double in a few months. Such people fall into the trap laid by unscrupulous agents to lure them. The RBI has been warning people to never invest in plans that offer huge returns.  Many people lose their lifetime of savings because they don’t have the patience to understand the investment option and would blindly trust anyone with their investment.

Not discussing the money matters in the family

Discussions related to money are considered as a taboo in Indian families. Nobody really discusses money matters. Unfortunately, a lot of people are dependent upon others with their hard-earned money. This is the reason we have a lot of self-proclaimed experts giving stock market tips.

People blindly invest their money in penny stocks, day trading, futures, and options. They eventually lose all their hard-earned money. The root cause is greed. As a result, many people rather than learning new stuff and growing the skillset, end up wasting time on social media, YouTube and other social platforms. People should remember that best advice on matters including financial comes from the family than people with vested interests.