Today we are going to cover the importance of why investing on learning to manage money and personal finance is one of the life skill you must learn
As its rightly said , it doesn’t matter how much you have or how much you make , its more of how much you keep! . Lets breakdown the 5 mistakes most people do while managing their money.
- Investing in assets they don’t require!
House is a basic human necessity and we all grew up understanding its importance, but what we are not taught is to when and how to navigate this important milestone in our life. Most of the investors I consult are debt ridden paying off huge home loans with very less surplus income to spend / invest.
Real estate was a good investment vehicle whilst India was still opening up post 1991 till 2006 and most of the people who got multi bagger returns on their real estate investments are those who got in early ( some before 1980’s!) . First house is necessary, second one is a MISTAKE!
As per our approximation on the data that we were able to collect inflation adjusted returns of real estate vs broader market indices are :
Real estate has given a CAGR of 6.5% || Equity with a CAGR of 12.7%
2. Buying what we don’t need, selling what we do!
Have you heard of millionaire celebrities and sports persons being bankrupt within their lifetime. How did they end up there, what went wrong ? Former heavyweight boxing champion Mike Tyson, who was once worth up to about $400 million, declared bankruptcy even before he retired in 2003!
Whether you have a lot of inherited money or you manage to earn a lot in short term, the principal is same how much you manage to keep! Celebrities are under pressure to manage their life under the lime light and do things which are far stretched out of their budget just to be relevant. Most of us middle class people are under similar pressure, when our friends & family buy new CARS, HOUSES, VACATION HOMES etc. Never sell your portfolio to buy things you don’t need!
A simple google search will tell you that you car, however fancy it is will lose 35% of its value in just 18 months of your purchase! Yet Maruti has the highest selling cars in India and Bankers have Car loans as the highest profitable portfolio and on the other had participation in the EQUITY market is less than 10% of the population! As per a survey 48% of India’s investments is in REAL ESTATE and 16% in deposits and mere 4% in Direct Equity / Mutual Fund!
NEVER BUY LOSING ASSET , NEVER SELL WINNING ASSET!
3. Depending on Single Income stream
While its easier said than done, but depending on a single income say your job / profession is hazardous for our financial health. Because when we are young, we have more of HUMAN CAPITAL (i.e., ability to learn and execute things) and as we age we keep losing this. So when you are young and doing your business / job, learn skills that will allow you to sustain in-case things go southwards (say like the current pandemic ) wherein a lot of people have lost their well settled jobs!
To manage this , create passive income streams by investing early into dividend paying mutual funds / high dividend yield stable stocks , mix of government and AAA rate corporate bonds.
Or learn public speaking , digital content creation , social media marketing . From 1990 -2010 most of the jobs were done on the desk , in the next 50 years most will be done on your PALM!
KEEP LEARNING , RUNNING WATER NEVER GOES STALE!
4. Spending time with unproductive people
Believe me this is the single most differentiating factor , its very important to check whom you are spending your time with , what are you discussing , where are you spending your money and what’s the long term view. Our brains are wired by our surroundings, hence unconsciously we end up being the average of the people we spend our time with.
Consider this , a person graduating from India’s premium institute like IIT / IIM will always have a higher probability of financial success (not necessarily ). The reasons are multiple , but one of the most important is the peer group they represent and the way their mind is modeled .
Do this exercise – Take a pen / paper note down the habits and net worth of your top 10 friends / family people whom you spend your time with , and then compare it with yours & you will find a striking similarity !
YOU ARE THE AVERAGE OF THE FIVE PEOPLE YOU SPEND THE MOST TIME WITH – JIM ROHN
5. Lack of planning & knowledge
It doesn’t matter if it fails , but still have a plan for your life , time and your money. If we don’t plan well we take decisions based on our personal biases.
Top 3/4 things people plan for are important goals like marriage , house , children education and retirement . Failing to plan for these results in abrupt lumpsum investment habits , this may lead to lesser returns or failure to achieve desired capital because of the phenomena of MARKET TIMING.
Say you invest in when the market is at its peak , then believe me even in longer terms you will be way behind your peers who started earlier and systematically. Because now it’s a game of catch up , & they must be having investments at all intervals limiting their downside.
Lastly , educate your self on basics of finance . In todays world YouTube is the best place to learn anything about personal finance from qualified personals & there are loads of options to invest track and manage your money . So start today and inculcate the habit of learning .
FAILING TO PLAN IS PLANNING TO FAIL!