Hello and Welcome to my first blog in the series of “Personal Finance”!
You may ask, why is it really important to discuss Personal Finance? The simple answer is, Personal Finance is never taught to us. No one teaches about it during school, neither is it discussed in college (Yes, not even to those who study finance) and once you are employed and start earning, even then no one talks about it though it becomes all the more important than ever. Personal Finance is not even discussed in Indian families because of a lack of information.
“If we command our wealth, we shall be rich and free. If our wealth commands us, we are poor indeed.” – Edmund Burke
Am I saying, I know it all about Personal Finance?
By no means, I am here to judge you or school you on Personal Finance. But I am here as a friend and colleague who wants to break this chain of misinformation, unknowing and nescience. I want you all to embark on a journey with me to Learn, Earn and Be Rich. Through this blog, I want to share my learnings (and keep learning more) about how to manage our personal finances better and let our money work for us even when we are asleep.
Pandemic in the context
We have seen the pandemic do blunders to many. From job losses to huge medical bills to losing loved ones to this deadly virus, it has shown us how unprepared we are financially.
During this past year, I got interested in understanding how money works and what are the dos and don’ts to achieving financial literacy and security with respect to Personal Finance. If Ultimate Financial Freedom is our destination, there are multiple financial junctions we need to cross before we can reach this destination.
The Wake-Up call
You might have heard Boman Irani in the Max Bupa health insurance ad saying “Ab Nahin Khareedoge To Kab?”
I would rather say “Ab Nahin Jagoge To Kab?”(If you won’t wake up even now, then when?)
If something this pandemic has taught us for the future, it is to be better at our Personal Finance than ever to tackle such situations.
This blog might sound a little harsh and a little controversial but truth and facts aren’t melodies to our ears either. Though the pandemic is nowhere near to be over, but preparation is the only tool that will bring us out today and tomorrow of such difficult times.
So are You really Poor? Let’s find out mistakes of Personal Finance!
1) If you were not working, how many months would you survive?
During this pandemic, if you lost your job, you might already know the answer. But if you were lucky enough to hold on to your job (maybe with a pay cut or without an appraisal this year) you need to think about this seriously. This is the easiest way to find out how well you are doing regardless of how much you are earning.
Imagine this, If you were not working and had to maintain your lifestyle, for how long would you have survived? 12 months? 6 months? 3 months or less than that?
If you couldn’t even maintain your current lifestyle for at least 3 months YOU ARE POOR!
I know this reality would have hurt you. But everyone needs protection against worst-case scenarios and the fact that you don’t have even the most basic financial security is worth considering as a wake-up call.
2) Do you have bills that you struggle to pay?
May it be your credit card bills or your year-end tax investments? Every month if you are in a situation where you cannot make your ends meet and pay off all your debts including but not limited to loans (home, personal, car etc), utility bills, credit card EMIs, buy groceries etc then my friend it is not just that you earn less (though you do need to increase your income) but it majorly means you are spending your hard-earned money on meaningless things. It might not be true in all cases but in a larger picture this is the fact and this is why YOU ARE POOR!
3) How strong is your Addiction (if any)?
Do you have an addiction? Are you a chain smoker, an alcoholic or for that matter even a workaholic? Do you eat a lot of fast food or spend a fortune on keeping your wardrobe upto date? Are you spending too much money on an in-app purchase for your fav game or are too heavy on monthly subscriptions? If you spend an extensive amount of your money on any of your hobby or habits, it’s an Addiction. If you are addicted to anything that adversely affects your personal well being, health and bank balance simply means YOU ARE POOR!
4) Are you spending money before you get it?
Are you relying too much on Credit Cards to maintain your luxurious lifestyle? Did you buy a house and paying EMI which is more than 40 or 50% of your monthly salary? Did you buy a car that you could not have afforded without a loan? All these are signs of you relying too much on money which you don’t own! If you have a misconception that loans especially Home Loans are good for you as it’s not your money that is depreciating you are definitely mistaken. In upcoming blogs, we’ll discuss them as well. But for now, if you rely too much on loans YOU ARE POOR!
5) Do you spend money on “things” or on “yourself” when you get it?
When, I mention words like “things” and “yourself” what comes to your mind? On your payday do you plan to spend money on learning something new? up-skilling yourself? investing money and securing your future? pay life and health insurance premiums for yourself and your family “first”? or do you plan to party? go out for dinner? buy that new Apple iPhone or Samsung Galaxy?
If you answered that you spend on “things” rather than “yourself” first, then YOU ARE POOR!
Now a lot of you might think I am suggesting not to buy that fancy phone or go to that happening party, but if you see the word in double quotes you’ll know what I am talking about. If you spend money on things which you want “first” then you’ll never have enough money left to spend on yourself.
6) You have all your savings in Fixed Deposits and Saving Bank accounts?
Even if you do everything right and invest for your future, but your investments are not yielding inflation-beating returns – YOU ARE STILL POOR!
We will surely discuss inflation and the power of compounding in a future blog. But for now, assess if you have most of your savings or investments in low interest yielding instruments you are going to lose the value of your money to inflation!
In short, inflation in India grows at an average rate of 6 to 7% per year. And what you could buy today for 100 Rs. will cost you 107 Rs. next year. A classic example is the cost of Petrol has always increased year on year and prices never came down.
Simply put even if you get 5-6% interest on your capital in FD, after a year considering taxation on interest earned, your effective interest would be in the range of only 3-4.5%. This kind of return does not even beat inflation, let alone building any sort of wealth or corpus for your future.
And I think after discussing the example of FD, you would agree that discussing anything more about a Savings account is not even worth the time.
7) You save more instead of earning more to build wealth?
Every-time you get motivated to become Rich and create more wealth, your first intuition is to start saving more money. This isn’t going to make you Rich! YOU WILL STILL BE POOR!
If you earn Rs. 10000 a month and save Rs. 3000 each month for your future you are on a right track. After a year you still earn Rs. 10000 and are motivated to build much more wealth this year so you start to save Rs. 4000 each month for your future. This time you may not be on the right track!
Ask me why? Simple, because of these 2 reasons:
- The first thing is you would have to cut down on your spendings meaning a lesser comfortable life and hence not so happy YOU!
- The second thing is that even though you increased your savings by 1 extra thousand your journey to wealth creation will still be very slow.
Hence to really build your wealth and Be Rich you will need to earn more of what you were earning the previous year. This way you can continue maintaining your lifestyle along with increasing your investments. How do you earn more you ask? Invest on yourself “first”, up-skill yourself, diversify your knowledge, take up a part-time gig etc.
8) You are an average of 5 people you spend most of your time with
Are you always taking advice from people who are not successful in creating their own wealth? Always remember you are an average of 5 people you spend most of your time with. To say the least you’ll inherit some of their qualities good or bad in yourself and your financial habits will be a reflection of the same.
Only you will have to break this vicious circle and learn more to improve your financial situation, nobody else can help you. And because of these people YOU ARE POOR!
9) Are you disciplined with your Personal Finance?
- If you cannot save a fixed amount from your income every month despite planning for it, you are not disciplined.
- Did you book profits from Share Market at just 10% gain without understanding it’s true potential? then you are not disciplined.
- If you stop investing as soon as you see the first fall in the market, you are not disciplined.
So if you are not disciplined, chances are that YOU ARE POOR!
There is a huge difference between a trader and an investor. A trader can book profits in multiple trading sessions and can lose all of it with just one wrong decision.
Only a full-time trader with a lot of knowledge might build wealth and become rich in the long run. But a disciplined part-time investor with basic knowledge will be Rich in the long run.
10) You don’t have Personal Financial Goals?
Last but certainly the most important one is If you don’t know what you want to save for, then you will not have the right motivation and direction to invest for. If you don’t have the right motivation and direction, how will you ever generate wealth? And hence if you do not have your financial goals laid out, YOU ARE POOR!