Friday, November 4, 2011

Financial Literacy: A Must For Every Individual

Financial literacy is regarded as an important requirement for the effective functioning for any economy and society. Over the years, financial literacy ensures supports social inclusion and enhances the well-being of our communities. While financial inclusion is the primary criteria while evaluating the level of development & progress of any economy, true financial independence cannot prevail in absence of literacy. In this article, we shall be taking a closer look at what financial literacy truly means and the advantages of it. 

What is financial literacy?
Financial literacy refers to the ability to make informed judgments and to take effective decisions regarding the use and management of money. It thus includes the awareness, knowledge and skills to make decisions about savings, investments, borrowings and expenditure in an informed manner. In other words, financial literacy would mean that you understand the risks & rewards associated with every monetary decision and are also aware of the other options available to you.

Signs of financial illiteracy:
  • Lack of awareness upon the need and importance of various financial services/ products.
  • Lack of access or knowledge as to how to access to services/products
  • Lack of knowledge and understanding of financial services/ products
  • Inability to 'rightly' chose between alternate financial services/ products
  • Inability to make proper assessment of the present & future financial situation
  • Inability to understand the risks & rewards of any financial decision

Why financial literacy is needed?

The need for financial literacy is felt in developed and developing countries alike. Even if you have financial inclusion wherein you have easy and fair access to banking, investment and credit products, the real benefit can only be enjoyed if you are financially literate. There are many cases and even high chances that in absence of proper knowledge, one can be exploited by intermediaries and manufacturers, alike, leading to grave financial loses or crisis. In a world with growing financial inclusion, rise in number and complexity of financial products and a need for financial independence, financial literacy has become a must for everyone.
From a regulatory perspective, financial literacy empowers the common man and reduces the burden of providing protection and even grievance redressal to the common man by the regulators. It thus makes the entire financial system more efficient, disciplined and progressive. Financial literacy not only marks an improvement in the quality of life but also on the integrity & quality of the markets.
Who needs financial literacy?

Financial literacy is for anyone who has somthing to do with money. Thus, there is no one who doesn't need it since all of us are either engaged in earning, borrowing or spending money and do take financial decisions in our daily lives. Perhaps only infants, lunatic, godly men or old age dependents may be excluded from this group.

The focus of this article is on financial literacy that relates to you and your family members. Financial literacy is important for you, your spouse, parents and even children. Though one may argue upon the level and depth of the financial literacy knowledge required between different groups, an overall understanding is a must for all. With financial literacy, we have the following advantages
  • Clarity of financial concepts and terms
  • Making better financial decisions related to savings, investments, borrowings, etc.
  • Accessing financial products & services easily, without fear or prejudice
  • Building assets and wealth over time, leading to better financial health
  • Overcoming vulnerability and avoiding exploitation by people around us
  • Planning towards economic security to self and for family
Components for Financial Literacy:

The next question that arises is to what does financial literacy comprise of? You, most probably, may consider yourself as financially literate but may not be able to clearly outline the required knowledge surrounding it. We are presenting the broad outline to test oneself on financial literacy.
The following together can be considered as comprising financial literacy for any individual.

Financial Planning (FP)
Borrowings / Credit
  • Life-cycle needs and goals
  • Advantages & need of FP
  • Components of FP
  • Current Status V/s Planned Status

  • When, How, Why & from Whom?
  • How much debt should one take?
  • Borrowing for Productive purpose
  • Pre and Post Borrowing Factors
  • Reducing vs. Flat Rate of Interest
Savings & Investments
Financial Products & Services
  • Concepts of ‘Savings’ & 'Investment'
  • How to Save & Invest
  • Relationship between income/ expense and savings
  • Assessing Risk & rewards in savings, investments & spending decisions
  • Wealth creation concept
  • Types of Risks
  • Post-tax / Real returns (after inflation)
  • Concept of Bank and types of Bank services / Bank Accounts
  • Operating Bank Accounts & bank instruments
  • Types and sources of Loan
  • Need & types of Insurance products
  • Types & features of Asset classes
  • Types & basic features of financial products available
  • Credit / Debit cards
  • ATM operations / Netbanking / Online payments
  • Equity markets
Understanding finance
General calculation skills
  • Financial Independence
  • Time value of money
  • Terms (Inflation, Income, Interest, Tax, Capital Gains /losses, Market Risks, Returns, CAGR, Absolute Return, Insurance, EMIs, etc)
  • Practice of Budgeting & Planning
  • Insuring assets / future (life, health, car, property, etc)
  • Future value from present value
  • Present value from future value
  • Absolute Return
  • Simple & Compound interest

The above may seem to be a very comprehensive outline but the idea is to cover all the major aspects of money that one has to deal in their lives. While detailed knowledge may not be necessary under each heading, one should however have the broad conceptual understanding of the idea and/or knowledge of options, as the case may be.


Financial literacy is the primary step for financial inclusion since introspection changes behavior which in turn makes people seek and receive financial services and products. Financial literacy can lead to financial wisdom and financial independence in knowledge. It will give the ability to manage money not just deal with it and to use skills & knowledge to take wise decisions for the future.

We advise all our readers to ensure that they are 'financially literate' in the truest spirit. We also encourage all the readers to make their family members, especially spouses, parents and growing children financially literate. One may use the outline shared to impart such knowledge. Indeed it would be a great learning for anyone that would otherwise take great time & experience to gain. This would help increase the economic space, self esteem and the confidence level of any individual and make him/her ready to easily engage in the mainstream of the financial systems.

Personal Finance Ratios

There is none better way to look at simple ratios to evaluate your financial situation. Companies and analysts are much more comfortable using ratios rather than actual figures for better understanding and decision making. Nothing binds us as normal investors to speak of our own financial situation in terms of ratios. We are sure that the practice would not only make it simpler to evaluate and understand situations but also interesting enough for you to engage in the exercise.

In this article, we present you with few personal finance ratios that can use used to evaluate your financial health. Assessing these the personal finance ratios and fixing your own targets or benchmarks will also go a long way in bringing prudence and control in your own financial situation. It can thus open a new world of possibilities for you...

The following few ratios have been devised based primarily upon common sense. These are not standard, academically defined ratios and you may change the composition of the ratios according to your own needs. Further, you may even devise new ratios that may better suit your unique needs. The objective is to incorporate the use of ratios in our personal financial lives to make more interesting!
  1. Savings Ratio = Actual Savings / Post-tax Income 

    Savings Ratio indicates how much you are saving out of your post-tax income for any period. The higher this ratio, the better it is. However, merely savings is not enough. The savings should be in a right asset class. Money kept ideal in bank accounts or other non-productive avenues do not qualify as savings. One may however cover asset building EMIs, like for home loans, insurance premiums, mandatory savings from salary, etc in savings. The idea is understand how much you are saving in building assets and securing your future. A good savings ratio is anything over 25%, The more it is, the better.
  1. Expense Ratio = Actual Expenses / Post-tax Income 

    The Expense Ratio indicates how much you are spending out of your post-tax income for any period. The lower this ratio, the better it is. Typically Expense ratio should not be beyond 75% of your income. Expenses can be further broken into fixed expenses & variable expenses where fixed expenses would cover expenses like car / personal loan EMIs, rent, tuition fees of children, salary to servants, utility payments, etc. Variable expenses would include expenses on grocery, shopping & entertainment, etc. One can then also look at the proportion of fixed and/or variable expenses to post-tax income to better understand your spending pattern. Typically for any households having higher Variable expense ratio would mean that more unnecessary expenses are likely being made which needs to be controlled.

    The relationship between Savings & Expense Ratio is also interesting since Savings + Expenses = Post Tax Income. One should ideally treat Expenses as net of Income & Savings rather than treat Savings is the residual after meeting all Expenses. By this approach we can limit & control our Expenses while making required Savings.

  1. Debt Repayment Ratio = Debt payments / Post-tax Income 

    As the name suggests, the Debt Repayment Ratio can be used to understand the portion of your post-tax income that you are spending on payments of loans. Such loans would typically consist of home, car, personal or private loans. This ratio should be ideally below 40%, the lesser it is, the better. If it crosses over 50%, one can consider oneself in sort of some debt crisis and should act to minimise the debt portion.

  1. Debt to Assets Ratio = Total Liabilities / Total Assets 

    You must be familiar to the Networth concept which is the balance after deducting all liabilities from the assets of an individual or a company. The Debt to Assets Ratio is on similar lines and speaks about the relative proportion of debt to the assets of an individual. The lower this ratio, the better it is. Typically, 100% or above of debt, as proportion of your assets, is unhealthy. However, due to liabilities of home loan and car, it is not unusual to find even higher proportions of Debt to Assets Ratio. While considering assets, one can either consider only disposal assets or total assets or derive ratio for both. Disposal assets can be considered better since liabilities can be paid off from such assets only and not those assets which are currently used for personal consumption, like for instance your residential home. A lower Debt to Assets (disposal) ratio would mean that you have greater flexibility to manoeuvre your financial situation.

  1. Liquidity Ratio = Liquid Assets / Net Worth 

    The Liquidity Ratio indicate what percentage of one's net worth is invested into liquid assets. In liquid assets, one may consider cash, bank balances and investments in cash & equivalent investments of very short maturity period. Networth, as said earlier, would be the balance of your assets after deducting all your liabilities. This ratio should not be either too high or too low and depending on your situation, a comfortable range can be between 5% to 15%. A higher ratio would indicate that you are not making productive use of your capital and that money which can is invested for better returns are lying ideal. A lower ratio would indicate that you run a risk of going short of cash to meet normal expenditures or to meet any emergency needs.

    One can also view this as Emergency Ratio and can keep a few months of expenses in liquid assets in absolute money terms. This is more recommended it cases of individuals having high networth.

The above ratios with ideal figures are for broad guidance. Typically, depending upon your life stage, there can be acceptable deviation from the ideal figures given above. For eg., for an unmarried person or a working couplel, the Savings ratio can be higher as compared to a family with one working spouse and children. We also need to consider special cases like in case of retired persons, where there is no post-tax income. Thus in such cases, low Savings ratio and high Liquidity ratio is acceptable while Debt to Assets Ratio and Debt Repayment Ratio will be a must.
Although the above personal finance ratios cannot be used for complete financial planning but they can definitely serve as a valuable reference points for better insights to your personal financial world. We encourage all readers to undertake such exercise at regular intervals of time and set benchmarks to be met with the help of your financial advisors, if felt necessary.

Planning For Your Child's Future

The coming of a child in any familly is an occasion of great happiness and rejoice. After the initial euphoria, invariably the thoughts of securing the child's future and providing for the future needs arise. In the hearts & minds of the parents, a lot many dreams and aspirations also start taking shape. These dreams and aspirations perhaps carry the highest priority for any parent.
The above is a common phenomenon for any new parent. Even for existing parents, the growing need for child's future planning is increasingly felt as the child matures. Gone are the days when a parent could relax and think that good upbringing and focus on studies would ensure a good future for the child. The fact is that child planning has become very critical for every parent and it can no longer be ignored or delayed.

Goals for child's future:
  1. Need for strong educational background:
The need for a very strong and quality education is increasingly felt in today's competitive world. With India's burgeoning young population, the excellence in education is a determining factor in the race for better careers today and it will be even more so in future.
However education, especially quality education doesn't come cheap and it is also something that parents hate compromising on. A child's school costs alone have reached sizeable amount. For higher education in reputed institutions can easily cost upwards of Rs.10 lacs in today's value. Similarly education in foreign institutions can easily cost upwards of Rs.20 lacs. Arranging such amounts for education is a big financial goal that needs planning before hand if one wishes to give a good start to the child's future.
  1. Planning for marriage of Child:
In India, marriage is a gala event where money is spent more lavishly. Every parent dreams of organising the ceremony as best as one could provide given the status and social standing of the family. Marriage, especially for girl child is still considered as a big responsibility in many parts of the country where the family often feels obligated to provide for the entire wedding expenses in addition to gifts to the groom's family. With rising prices of gold & jewels and wedding costs, which are increasingly becoming more stylish, the future marriage costs are most likely to be beyond what you plan today. It is thus only logical that parents feel marriage planning for child to be a big financial goal and thus should plan for it today.
  1. Planning for home and/or business capital:
In addition to education and marriage, many parents would also like to provide for a separate homes for their child. There are some distinct reasons behind this like the growing trend of nuclear families, rising prices of real estate and homes becoming smaller to accommodate large families. Parents, especially for the male child, feel the need to have distinct homes that would provide for a great sense of security & a big asset for the child in future. Similarly, there are also parents, especially from the business communities, that may think of planning business capital or seed money for their child own business venture when the right time comes.

Planning for home or business capital for child is one lesser importance than to arrange for education or marriage. Nonetheless, it is something that many parents feel important to provide for and thus requires proper planning by the parents.

One area of that we feel left is that of accomodating for expenses on child's education and upbringing on general terms. One can easily see that after the arrival of child in family, the monthly household expenses easily rise by upto 15-30%. Rise in such regular expenses are in nature of school/college/tuition/hostel fees, pocket money, shopping, gifts & small assets, etc. Though one can plan this as financial goal, often these expenses are adjusted in the normal cash flows of the family.

Nature of the goals for child's future:
The goals related to your child's future are slightly different from the other goals. Let us look at some of the unique features that go along with such goals.
  • Inflation or rate of rise in costs: In goals like education, marriage, etc., one cannot estimate the percentage rise in costs. Neither pure inflation figures can be assumed for such goals. The reason being such expenses are a lot subjective. For eg., while planning for education, one cannot strictly decide upon the nature of course, the institution or the level/years of education today. Further, the rise in prices for such education courses are not driven by inflation but more by the rise in quality of programme, facilities & instructors. Similarly while planning for marriage, one can easily see the sea change in how marriages are being conducted in past and current generation. There is also the angle of rise in social stature which we may not account today. Again inflation is only an indicative figure here and one needs to consider other factors too. 
    Thus, one needs to play very safe while planning for education and marriage. The best thing to do would be to consider the costs of the best education and marraige that can be provided and assume a rate appropriately higher than inflation while planning for such goals.
  • Maturity time: In case of education, the maturity of the gyouoal is generally fixed and one knows that higher education will be pursued after graduation. However, in case of marriage, it again cannot be fixed in advance though a likely marriage age can be fixed. The better idea would be to fix the marriage age on the lower side for planning purpose so that you have the corpus ready should you need it sooner. 
  • Security: Another unique perspective while planning for child' future goals is that of security. By security we mean that the goals of education and marriage need to be secured in the unfortunate event of death or disability of the parent. These goals are such that they are destined to mature, irrespective of anything happens to the parent.

Planning tips:
There are no special tips for child future planning. The tips applicable here are the same one that is universily applicable to all goals and most likely that you would have heard of.
  • Start as early as possible: One may start planning for such goals even if you are not a parent. For existing parents, one strongly advisese to start as early as possible for such goals.
  • Invest in right asset class: We already have talked a lot on the importance of choosing the right asset class according the risk appetite and investment horizon. Equities are the best option for long term goal planning since they are expected to deliver better returns, especially in a growing economy like India.
  • Save Regularly: Making regular savings a habit is probably the best thing of financial prudence. Small regular investments can greatly help for goal planning and is a better option than waiting for big sums of money to be accumulated for investments.
  • Insuring future: A special case for insuring future of the child through products like insurance and other similar products is an important need for child planning.
  • Investment options: There are plenty of investment options available in the markets. The investment options can be pure investment options in different asset classes and can also be in nature of customised products for child goals, as available in insurance products. What is really important for parents is to inquire about the options available in the markets while making the decisions. While selecting any scheme or plan, do not just look at the name which may contain the word 'child' but look at the actual features offered by them.

The main purpose of this article is to highlight the importance of planning for child goals. In an increasingly competitive and uncertain world, as a parent securing the future of child assumes great significance. It is something that should not be delayed and never avoided. The best way to begin is to start assessing the needs and goals for your child's better future today.

Engaging With Right Advisors

There are changes happening in every aspect in our lives. One change that has affected our lives is the growth in financial needs and products available. The result is that today there is a large number of advisors / distributors or consultants that we are associated with. Though this may not be necessarily a bad development, questions do arise on practicality and need to deal with so many different people. In this article, we try to look from the investors perspective and answer upon some unspoken questions.

Choosing advisors:
The first question that arises is now many advisors should we deal with. Historically, the onus has really been on the client to make the holistic decisions on his/her overall financial well being, and then engaging with traditional advisors for specific products or services. Typically, it would not be surprising to know that most of us would be dealing with at least 3 to 5 traditional advisors, from the following list, at the same time...

Traditional Advisor / Consultant
(Product / services offered limited to core)
Core product / service line offered
Chartered Accountant
Accounts, Taxation, Returns filling, Audit.
Life Insurance broker
Life insurance products
General Insurance broker
General insurance products
Mutual Fund distributor
Mutual fund investments
Bank Relationship Manager
Bank services, loans, investments, etc.
Share broker
Stock market investments
Financial Planner
Comprehensive financial planning for life / financial goals

Assessing our financial advisory needs:
The right approach would be to not directly hunt for product advisors/distributors but to first look at our needs holistically. By looking at the needs with this purview, we bring greater simplicity and purpose. It is likely that following 4 broad needs would be identified
  1. Taxation / Accounting services
  2. Risk protection / insurance
  3. Wealth creation / investment
  4. Banking services

We now attempt to take a closer look at the traditional advisors within the framework of our identified needs...
  • Taxation / Accounting services: The CA, as an expert for accounting services, is indispensable. However, if inexperienced or not engaged in financial advisory, he/she may not be in the right position to offer pure investment, portfolio or insurance related advice
  • Risk protection / insurance: The next need of insurance and the choice of the advisor would be subjective upon you. You may engage with a life insurance agent and a general insurance agent or preferably with someone who does both. The limitation is that a pure insurance advisor/distributor will not be an investments expert and would instead recommend insurance products for pure investment needs too
  • Wealth creation / investment: Ideally a wealth advisor should be approached for investment related needs. Typically he would have products for long term wealth creation in his basket. The products of mutual funds, fixed income products and PMS offer acceptable risk-return trade-off and can be looked positively by small & retail investors. The limitation is that he may not be experienced in insurance to provide advice on same.
  • Banking services: The bank relationship, should ideally be best treated as a continuous, service related relationship. The Bank RM, armed with bank info, may offer investment products. However, for small / retail investors it is likely that
  • any product advice is made without proper portfolio / financial planning and is transactional in nature
  • there is inadequate attention & service facilities provided

Financial Advisors / Planners:
With the existence of a plethora of financial needs & products, there is a growing need felt for single window approach to financial decisions. Thus, many traditional advisors are now offering multiple products and comprehensive advice. You may ask your advisor and it is likely that he/she would have multiple products/ services in the advisory basket. Such comprehensive Financial Advisors / Planners offering single window advisory on multiple products are at the top of ladder.

Engaging with Advisors
By principle, it is recommended to deal with advisors that have requisite skills in multiple domains. Clients should engage with advisors offering comprehensive financial planning services. There may be a possibility that your CA also offers Investments / Insurance advisory or your Investments advisor may also have Insurance advisory services and vice versa. The benefits of engaging with single financial advisor / planner for multiple needs / financial planning is as follows:
  • Comprehensive view of your entire financial situation & goals
  • Optimum utilisation of our resources / capital for right reasons
  • Unbiased / product neutral advice
  • Best of different worlds available
Exception to the principle can possible in cases where you are not confident about the advisor's knowledge, skills, quality or limitations on product / service offering.

The following matrix summarises the advisors we would be likely to deal with and the services and products expected from them.

Finance Consultant (Financial services boutique)
Comprehensive accounting and financial advisory services

Bank / Bank RE

Banking services, Transactions

Bank Accounts, Loans, Credit Card
Financial Advisor / Planner (Financial advisory boutique)
Service Need: Comprehensive Financial Planning covering - Retirement Planning, Financial Goals Planning, Investments Planning, Insurance Planning, Estate Planning.

Account ant

Tax processing, Book keeping / Accounting

Investments Advisor
Services Needed
Investment / Wealth Advisory & Portfolio Management
Products Needed
Mutual Funds, Fixed Income, PMS
Insurance Advisor
Services Needed
Insurance need assessment,
Risk Planning
Products Needed
Life and General (esp. Health, Motor, Personal Accident)
Mutual Funds
Share Broker
Life Ins. Advisor
General Ins. Advisor

To start with, you may approach all your existing advisors and seek information about the different products and services advised and offered. You should specially ask for financial planning services, if any offered.

In brief:
In would be better that we deal with a minimum number of good advisors who are in position to offer the optimal combination of important services and products. Taking the financial planning approach is the best way to deal with a large majority of financial decisions in a holistic manner. This is much better than choosing products first ourselves and then approaching distributors. Also, a person who has knowledge and access to multiple products is likely to be more unbiased and would provide advice which is product neutral, presenting you with the options / products across the board.

Taking about the relationship with your financial advisor, it is indeed a special one. A good relationship is something that has to be treasured by us and at the same time we should also be fair and open regarding our needs & expectations. We should also be ready to share information and pay for quality, unbiased services expected from the financial advisor. The relationship is that where mutual trust, respect and understanding is paramount and so is the ability and intend of the financial advisor to work in your interest.

Cost of Wrong Decisions

We have all made mistakes in past and most likely would also make mistakes in future. Making mistakes is not crime but is something human in nature. However, we must learn from past mistakes and failure to do so is most undesirable. When it comes to personal finance decisions, the best way of learning is by analysing the opportunity cost for our bad decisions.

Opportunity Cost:
But before we start, let us first understand what is 'opportunity cost'. The opportunity cost can be understood as
  • the cost of doing any action measured in value terms of the best alternative that is not chosen or is foregone.
  • a sacrifice value of the second best choice available to someone who has picked among multiple choices
Opportunity cost is a key concept in economics, and is used in decision making where there are scare resources to be optimally utilised. The concept can be applied beyond financial costs: you may apply it for lost time, pleasure or any other resource that provides some benefit. Thus, opportunity cost can not only help us in evaluating investment decisions but also can be universally applied to any decision that we take.

Analysing Wrong Decisions:
Let us now attempt to analyse our decision using opportunity cost and a few case studies. The case studies are random examples of what most of us usually are or have ended up doing in past.

Actual / Inaction taken
Without proper
Financial Planning
The Right Alternative
With proper
Financial Planning
Action (1)
Action (2)

Age 35 yrs to Retire at 60. Life exp. 90 years.
Montly Expense Rs.25,000/-
Retirement Planning to be done. Kitty needed: After 25 years Rs.2.36 Cr.

Delayed by 5 years .
Asset Class: Equity
SIP Need: Rs.17,783/-
Total paid:
~ Rs.42.68L
Started at age 35
Asset Class:
SIP Need: Rs.8,561/-
Total paid:
~ Rs.25.68L
Additional amount paid for same result = Rs.17 lacs

Started on time.
Asset class: Debt
Monthly Need: Rs.18,984/-
Total paid:
~ Rs.56.95L
Additional amount paid for same result = Rs.31.27 lacs
Monthly savings of Rs.10,000 for a Goal after 15 years (Child Marriage / Education / 2nd Home, etc.)

Asset class: Debt
End value:
Rs. 40.16 Lacs

Asset Class:
End value:
Rs. 61.64 Lacs

Shortfall in wealth: Rs.21.47 Lacs for wrong asset class
Age: 50. Retirement 60. SIP of Rs. 25,000 to be done for remaining earning life (10 years)
SIP delayed for just '3' months
End value
Rs. 62.75 Lacs
SIP started immediately
End value
Rs. 65.75 Lacs
Shortfall in wealth: Rs. 3 Lacs for missing 3 SIPs
Additional monthly Savings possibility of Rs.2,000/-
Possibility ignored
No wealth
Identified & Eq. SIP 15 yrs done
End value:
Rs. 61.64 Lacs
Additional wealth creation foregone: Rs.12.33 Lacs
A amount of Rs.250,00 for 6 months in Current A/c.
No returns
Invested in MF Cash schemes
Returns foregone: Rs.8,600/-
An individual meets accident / illness
Inaction to take any Policy
All costs on self
Health Policy is taken
Costs on Insurer
All costs paid in absence of cover
Earning member plans to take life insurance (LI)
LI on own assessment
Inadequate life cover
Proper LI need assessment
Sufficient cover taken
Insufficient money (goals / expense)
Above is for illustrative purpose only. Assumptions: MF Equity returns: 15%. Debt returns: 10%. MF Cash: 7%. Inflation 6%. Post Retirement Inflation 4%. Returns on Kitty: 8%. Some figures are rounded off.
Including the above instances, we can short-list the following very common types of action / inaction that have lost opportunity costs attached to it...
  • Planning for financial goals: Here the opportunity cost is often in nature of inability to meet the targeted value fully if we either delay savings for goal or invest in wrong asset class.
  • Retirement planning: This is highlighted here since it has huge impact involved which are not very apparent to us and is often ignored. There can be huge opportunity costs in terms of the required savings to be done and the retirement kitty created if we delay or invest in wrong asset class. The biggest risk is that the kitty becomes insufficient to meet our expenses during retirement.
  • Ignoring Insurance: Ignoring, delaying or taking inadequate insurance is very common. Lack or inadequate life insurance is something very scary since the idea of our loved ones left without any money in itself is unimaginable. Still most of us take inadequate cover without finding out actual cover required and instead directly start looking at products. The opportunity cost in absence of medical insurance is something which would now be very obvious.
  • Idle money not invested: Due to financial indiscipline, we often ignore investing less substantial money on time in appropriate avenues and money is often left idle in form of hard cash or current / savings account balance. We must invest idle money, beyond that required for emergency, running expenses, etc., into liquid MF or similar schemes / products for the small durations of time available. A regular practice of doing so actively can help you good returns on idle money which is not visible to us now.
  • Common investment related bad decisions.: If we can summarise, there would largely be 3 types of bad decisions w.r.t. investments:
    • Investing in wrong asset class as per investment horizon
    • Delay in starting investments or SIP
    • Investing inadequate amount
  • Other bad decisions: Apart from above we also have many other common instances of bad decisions like...
    • Investing in 'Ponzi', 'Get Rich Quick' or 'Chain Marketing' schemes with hopes of making huge money!
    • Taking personal loans for avoidable reasons
    • Making cash withdrawals from credit cards
    • Not paying credit card dues on time inviting very high interest costs
    • Making delayed payments of utility bills, etc. attracting additional money for every instance
The famous and the most successful investor – Warren Buffet has said that “you only have to do a very few things right in your life so long as you don't do too many things wrong” to be successful. Indeed, many small things ignored add up and become significant enough to impact our lives. And bad investment / financial decisions are no different.
The following are the suggested ways that will help us go a long way in improving our financial situation over long term.
  • Always remember that every financial action or inaction has some opportunity costs
  • Procrastination or laziness is a big enemy for wealth creation
  • Small things make big impact over time. Discipline, awareness and active decision making are the right habits to adopt
  • Prepare comprehensive financial plan at the earliest. Do not shy away from seeking advice on small financial matters.

The idea behind this article is to make you aware that every financial decision has costs attached to it and that proper planning, discipline and timely action in our financial matters can help us ensure that we keep the wrong things to the minimum in our lives. A few wrong things are enough to overshadow the benefits from many rights things that we may have taken.