When it comes to investment – Are you focusing on NOW rather than the FUTURE?
Most of us wish to be investors but did you ask yourself if you are a lazy investor?
There are various things which are the building blocks of a good financial life. But often investors avoid taking those decisions. The biggest reason why it happens is that you tend to focus on NOW rather than FUTURE.
If it’s not a problem at this moment then you postpone it and under estimate the problem that can arise in the future.
Let’s look at the impact of these decisions and how it can trouble you in future:
Not buying Health Insurance:
What can happen if you are not covered under a health insurance plan?
When you started your career, there was no money in your bank account and you used to struggle to start saving. While your salary was less your expenses were building up. Expenses like house rent, groceries, petrol, commuting, outings and so on…
Then after a few years, you realize that you need to start saving money for future no matter what. Ans so you start your first investment
Somehow you start your first Recurring deposit. You start with a basic Rs 2,000 per month. Few months pass and you are happy to see that you have some savings now at your end.
As years pass by you manage to save Rs 5 lakhs in your account.
This creates a sense of relief and you feel like a winner.
But then there comes a turning point in life and a bad day happens!
Then one day, while you are on your way to work, some rash car driver hits your bike. It turns out to be a major accident. Imagine the medical emergency your family will need to manage and over come during such an unfortunate incident.
Your hospital bill shoots up to Rs 7 lakhs. You will then have to withdraw all your savingsyou’re your family will also have to borrow from your relatives/friends in order to pay the bill.
After a few months even though your life will resume like before but your financial life will again go back to square one. This incident wouldn’t occur if you would have protected your wealth from medical emergencies by opting for a health insurance plan.
You may not see health insurance as a financial product which actually helps you to protect wealth. Buying health insurance is all about transferring the risk of paying the hospital bills to someone else. Health insurance does not protect your health but it protects your savings and also gives you and your family member the financial freedom to access better healthcare.
Those investors who do not take health insurance have this common misconception that nothing is going to happen. They often end up saying things like;
- What if I never get hospitalized?
- What if I never meet with an accident?
- I follow a healthy lifestyle, why do I need any health insurance?
- My company provides health insurance, do why do I need additional health insurance
- The money paid as premium will be wasted if I don’t get hospitalized
If such thoughts are hovering on your mind then you need to simply focus on one thing that is what if it happens rather than nothing will happen!
Mistake No. 2
Not saving enough money for future
If you dine out often, take short vacations and you are able to take care of all your house hold expenses right now. This is all fine, if you have sufficient savings for future. But if your savings are almost equal to your expenses, remember that one day your income is going to stop permanently.
You may retire at the age of 60 and live till the age of 80. Now if you don’t have enough wealth accumulated by that time, the journey ahead will be filled with financial challenges. You may end up retiring with limited funds that will help you manage just 5 yrs worth of expenses and the next 15 years could be turmoil.
Now this may be difficult to imagine but if you lack sufficient funds in the future then you will have to choose between a vacation and food on the table. Forget food on the table, you will have to choose between “cheaper” vs. “what you like”. You might have to make excuses each time your friends plan a holiday trip or even worse you might have to constantly worry, if the restaurant bill will be too much?
It might sound very dramatic right now but the truth is that future is imaginary and you need to have a concrete plan for it. You need not create enormous wealth by compromising today, but you definitely need little bit of financial planning right from when you start earning.
You may avoid saving because it will not give you any joy or benefit instantly. Saving for future also means cutting down on something today hence you may find it challenging. Saving for future means…
- Reducing your shopping expense today
- Cutting down on outings and dinners today
- Compromising a bit on your entertainment today
Not having a term plan
Accidents are called accidents because they are not planned nor they are expected to happen.
Why are we so over confident that nothing can happen to us?
We all hear to unfortunate news every second day. Sometimes there’s an accident, the other times there’s a fire emergency. The harsh truth is that some people leave their homes never to return.
Life is very long and your family will need financial aid to live comfortably. We need to make sure that we cover this risk by taking sufficient term plan for which we need to pay a very small premium.
If your household expenses are around 50-60k per month then you need a life cover of Rs 2 crore.
If you leave behind a family who is weak financially, you are leaving them with the risk of being dependent on others for their survival. While you can’t prevent the emotional loss, neither you can minimize it. You can surely minimize the financial impact by opting for a term insurance plan.
Before you choose a term insurance plan and decide on a sum assured, answer these questions: In your absence
- How will the next 30 yrs of household expenses come from?
- Who will fund for your kids education
- Who will repay your debt?
- Who will fulfill your family’s financial goals?
- Where will they turn up to when they need money in cases of emergencies?
When you choose a sufficient life cover, you are ensuring that your family is financially ready.
Over investing in Fixed Deposits
Some people believe that fixed deposits are the only way to invest their money. It’s safe and secure way of investing. Our parents did it and there is visible problem when you invest all your money in fixed deposits or saving bank account.
The biggest problem is that your investments do not beat and outgrow inflation over long term. You get a feeling that your investments are increasing, but your purchasing power does not increase. Its goes hand in hand with inflation.
So if you were able to buy 5 apples earlier, even today you will be able to buy the same with the money you had invested in FD.
Your life style will remain the same over the years, because your money is just growing as per inflation. To counter this, you need to invest your money in something which counters inflation. You can consider investing in instruments like ULIPs. They provide you with a flexibility to invest in funds ranging from debt to equity based on your risk appetite and life stage requirement.
Imagine this, Rs 1 lac invested in Fixed deposits 30 yrs (year 1987) back is worth Rs 11.3 lacs today (year 2018). But this 11.3 lacs today is worth Rs 1 lac 30 yrs back in real terms.
Whereas, if one had invested the same Rs 1 lac into Equity 30 yrs back, it would be worth 83 lacs today, that’s close to 7-8 times than FD
Consider two friends who were 30 yrs old in 1987 .. They were fresh into jobs and started their career. One invested 10 lac into FD for his retirement and other one invested 10 lacs one time in Equity.
One retires with 1.1 crores in hand and other one with 8.3 crores. One of them will get monthly pension of 7-8 times compared to other one.
Mistake No. 5
Too much debt
There are two types of people One who buys things in life with their savings, and other one buys most of the things by taking loans.
A credit card or a personal loan can be problematic for your financial well-being. It works on an ideology which is BUY NOW and PAY LATER.
We feel we are in control of our self and we will take rational decisions when it comes to money. But only after years, we realize that this is not so simple.
Once you depend too much on loans and credit cards, it becomes you way of life. You keep shopping and buying things you desire on debt, thinking that you will pay it later.
It’s all about falling for instant gratification and many people have loans which are much bigger that what they can truly afford.
The biggest problem with this approach is that you have promised to pay all your future income, which is uncertain and which is not even earned.
You will be now going to your job to earn money, not by choice but compulsion. If you do not like your job, you will still need to keep quite because there is a sword of EMI hanging. But let’s look at a worse scenario – What if you lose your job?
Also, you will be compromising with your wealth accumulation, because you have already consumed most of your future income through loans. Whatever you earn will be eaten by your EMI’s. There will always be less money for future goals.
We all take few loans in life and that has become the way of life, which is ok but you need to control it and define the boundaries. If you get into the debt trap, it will be very tough to get out of it.
There are few signals which will tell you that you are too much dependent on debt, they are
- More than 50% of your income per month goes into EMI
- Your loan outstanding is more than 4 times your yearly income
- You have more than 2 credit cards
- You have a revolving credit card from last many years
- You have too small savings even though you have worked for many year.