In India, I have always heard that the rich people are growing richer and the poor are getting poorer. When I grew up and started to understand how our society and system works, I realized that what I heard is true. But as most of the Indian middle class people, I have not stopped there and started experimenting with this reality to understand why that is the case? I found some reasons and trying to share with you people to make it more clear and take one second opinion to check if I am true. (Most of Indians do not take second opinion 🙂 )
Let us start with one story, story of my dad, he had worked since his childhood may be from the age of 13-14yrs. What did he learn from working so early in life? I think the common motto of our society, which was reinforced on everyone that working-hard will make you earn good money. He learned that very well, he started from scratch and created one line of business but as the business have their cycles during downturns he failed because of lack of cash-flow and have to change his line of business to start from scratch all over again. He was a good money saver, but as all middle people say it is almost a cardinal sin to withdraw money from your deposits for cost of living, so he always just kept on depositing. He bought number of insurance policies offering protection to his family and receiving maturity/seasonal benefits in case of survival. The second option he chose was Post-office, where money was safe and you can do fixed deposits as well as recurring deposits buy Kisan Vikas Patra or NSCs (National Stock Certificates). The third option he got stuck to was fixed deposits with banks. He saved lot of money in FDs. He also tried in the era of defaulting financial institutions like Golden Forest, Swarnabhumi and other private institutes in hope of better fixed returns, but end up losing his hard earned money.
As the time passed, his money grew but his expenses multiplied faster and grown bigger than savings. He bought house but have to shell out more than he would have imagined, the education for his sons became expensive that ever thought by him. In the last, he end up being without money for his retirement. What went wrong? He did everything right as it was taught in old school of thought, work hard save money and don’t overspend. Let’s try to list out all the reasons and how to avoid it:
- All of us spend a great deal of time while switching Jobs/changing business, why? Because our expenses run on our salary/profits and we have to make sure we earn more than that. But as my dad most of us do not think about our future incomes and expenses, which will primarily be generated by our present investments. We neither spend time on learning the art of investing nor spend time on selecting the right avenue of investments. We think about our new job which we might stay just for 1 yr at least a month but we never spend time on our investments which will fund our retired life of 25-35yrs as per requirement.
- Understanding the effect of inflation, when my dad planned for us the cost of graduation was INR 10,000 in the most famous institute but when we graduated even INR 3,50,000 was the bare minimum to do proper graduation. In 20-25 yrs it grew by 35 times. The cost of education grew at a CAGR of 15% did he plan for it? I think not because no one ever explained him the time value of money.
- Selecting the right investment instrument to gain the maximum, He bought many insurance policies thinking it will meet his future expenses but never realized that the return of any traditional insurance policy (Endowment plans) never been more than 6-8% and it can be as low as 3.5% per year. Like most of us, he never realized insurance is not an investment option it is a risk cover.
- He went to barber to ask does he need a shave. As barber will make money he will always suggest yes. Same is the case of financial service segment, you meet any insurance agent/post-office agent or bank clerk and ask is this the right product for you? They will always say yes. But you should always take a second opinion analyze the product if it suits your requirement and the take a decision.
How should we avoid these issues/fallacies? I think I explained it already in the above pointers but lets summarize it once more for our benefits:
- Educate ourselves about the financial products, spend some time reading financial articles, magazines, blogs to understand them
- Plan your major expenses accordingly keeping inflation and its effect in mind
- Select the right instruments to give better returns and enable you to meet your expenses
- Always take a second unbiased opinion on your investment decisions to double check any errors you might be committing
All these steps will not able to help you in managing your finances well but also it will enable you to meet some of your dreams. In next blog we will try to see identify the pitfalls of Modern arena, till then read more and educate yourself.