दुख: में सुमिरन सब करे, सुखमें करेन कोई।
जो सुखमें सुमिर न करे, तोदुःखकाहेकोहोय॥
In anguish everyone prays to Him, in joy does none
To one who prays in happiness, how can sorrow come
Though Sant Kabir’s famous verse is about remembering God in good and bad times it applies beautifully to many other things and behaviors in daily life. Managing savings and investments is one of them.
Many of us spend more than we save and invest.
Easy availability of loans and EMIs has had such an adverse impact on our personal spending habits that some of us are living an overleveraged life trapped in never ending debts. In times of contingency we resort to borrowing from friends and family, often putting personal relations in jeopardy, but we could have easily planned, saved and invested when we had some extra money on hand.
“बूँद-बूँद से बनता सागर!”
If you wish to make a fortune and you work towards it by planning, saving and investing nothing can stop you. But we often give excuses and do not do what we know is necessary. We allow inflation to erode the purchasing power of our hard earned money and thus risk our long-term financial well-being.
Here are six common behavioral biases we come across when we ask people to check their financial well-being:
1) I am saving enough already and I am not left with any more money to save now.
People often save; but save without concrete goals. The most important financial goal for anyone should be retirement and contingency planning but unfortunately it is ignored. You may be saving but if you are saving without a goal in mind then it may be quite unorganized and may not really help.
It goes without saying that people sometimes do not have enough to save because of extravagant spending habits. Benjamin Franklin rightly said, ‘It is easier to prevent bad habits than to break them’. Hard-earned money needs to be used wisely by engaging in a prudent budgeting exercise. The old saying, money saved, is money earned, is timeless. It’s only when you save your hard-earned money that you can invest.
“Do not save what is left after spending; instead spend what is left after saving.” – Warren Buffet
2) Do not understand how to plan, it is very scary!
“Failing to plan is planning to fail.” – Alan Lakein
Do not be scared to plan. If the plan does not work, change the plan, but never the goal.
To build wealth and fulfill the envisioned financial goals you ought to invest regularly and in a disciplined manner. Opting for Systematic Investment Plans (SIPs)—a mode of investing in mutual funds—is one of the easiest ways to invest.
3)I have poor luck with stock markets or it is too risky to invest in mutual funds.
It is a misconception that mutual funds are just about stock markets. Mutual funds may be equity funds, debt funds or balanced funds that are a mix of equities and debt. One can select a mutual fund to invest in based on one’s risk appetite. Equity funds as an asset class play a very pivotal role in the long term. If one invests wisely, these funds can help in generation and accumulation of wealth and can counter inflation effectively. Having investments in equities (stocks and/or equity mutual funds) can help particularly during retirement.
Investing in the correct mutual fund for your investment portfolio could generate appealing inflation-adjusted returns (also known as real rate of returns).
Disclaimer: Mutual Funds are subject to market risk, read offer documents before investing.
4)Misconception of – I am already well invested!
Many families are happy with their significant investments in real estate. However real estate cannot be liquidated easily and urgently. It is important to have a diverse portfolio across asset classes like equity, fixed income, gold and real estate to reduce investment risk.
Personalised and prudent asset allocation plays a crucial role in optimizing risk-adjusted returns.
5) I do my own research, the search engine has all the information.
Yes, search engines can a give lot of information, but sometimes over information can lead to confusion and too much data can have you make the wrong decisions. Additionally it is important to understand that information and technical skills are two different things. Watching a person getting a haircut online does not equip you to cut your own hair!
Comprehensive research and a need-based approach are essential to pick the best investment avenues that suit you. Do not follow the herd or blindly accept what is online; often views are biased and misleading.
Even when you rely on external research reports, carefully ascertain their business model and their intentions behind recommendations.
6) Let life unfold, I do not want to stress right now about financial planning and all
Dreams don’t work unless we do. Procrastination has hardly helped anyone ever.
By delaying investments, you lose out on several years of creation of wealth. Time plays a vital role in helping your money grow. The earlier you start the more you benefit from the power of compounding and the earlier you achieve your financial goals. To understand the effect of the power of compounding, let’s look at an example of Ram, Shyam and Laxman.
*Maturity Value considered at Age of 55 @10% Interest
The above example is merely an illustration to explain the benefit of investing at an early age. Assume SIP returns are done regularly every month. Mutual Fund investments are subject to market risk.
And, Ram could earn almost twice as much as Shyam and almost thrice as much as Laxman despite the fact that all three invested the same amount and earned the same interest per annum. This is because Ram stayed invested for the largest time. Also note that Ram made the least per month contribution but still earned the most.
For Laxman to make as much as Ram in 10 years, he will have to draw returns of approximately 32% per annum which is highly improbable.
Hence, the sooner you start, the better it is for wealth creation. So, make the most by investing now!
To conclude, break away from these behavioral biases before it’s too late. The sooner you make wise financial decisions, the closer you would move to financial freedom and be a successful investor.
Beautiful lines by Mrs Douglas Malloch – take this as learning lesson not only for financial management but for life.
I nibble this, I nibble that, But never finish what I am at,
I WORK HARD AS ANYONE, And yet I get so little done,
I would do so much you would be surprised
IF I COULD JUST GET ORGANIZED!!!