Some of cases I have seen from my experience are as follows:
Rohit’s wife met with an accident and he ended up spending Rs 5 lakh in surgery. He had to take out his investments in mutual funds which he was saving to buy a car.
- No Emergency Fund: He didn’t had emergency fund as he invested all his money. It was a bear market and his investment were not giving good returns. This was not the right time to take out money from mutual fund as it was planned to be taken out after 5 years.
- No medical policy: Rohit never imagined this situation and never got a medical policy. If he had the medical policy, he would not have to take this financial hit.
Learning: Always have an emergency fund (at least 6 months of your expenses) and a medical policy for every member of the family.
Virat is an average guy. He did his engineering from a tier 2 college and recently got a job in SINFOSYS. Though his salary is not much, he has a good sense of investment. He invested Rs 10,000 per month from his 1st salary till the age of 35. However, after 35 he discontinued his investment but didn’t take the amount as this was his plan for retirement.
On the other side, Rohit is an intelligent guy. He did his engineering from IIT and got a huge package. But he didn’t have investment mentality. However, at the age of 36, he realized that he should start investing some money for retirement. So he started investing Rs 20,000 per month (double of his friend Virat).
Now assume that both get 10% compound interest and take out money at the age of 65. What will be the individual contribution and total accumulated amount?
Virat invested 16.8 lakh and he gets a return of Rs 6.4 crores at the age of 65 (38.3 times) whereas his friend Rohit invested Rs 72 lakh and get a return of 4.3 crores (6 times).
It means for every rupee invested by Virat, he gets a return of 38.3 rupees whereas, on every rupee invested by Rohit, he gets a return of 6 rupees.
It doesn’t matter if Rohit earned more than Virat but at the end of the day what mattered is Virat invested early and earned much more than Rohit.
Financial Mistake: Not starting investing early and missed the power of compounding.
Learning: Start investing as early as possible. Save even if it is a small amount.
After engineering, both Rohit and Virat were looking for Life Insurance plan. Both of them want a life insurance of Rs 50 lakh and policy period is 30 years.
Rohit is looking for a plan which provides a life coverage but at the same time, help him save tax and provide a lump sum on maturity. Hence he buys Endowment Plan.
Virat on the other hand, looking just to get life coverage. Hence he buys Term Plan.
Who do you think made a wiser decision?
Term: 30 years
Sum Assured: Rs 50 Lakh
Yearly premium: Rs ~1,50,000/- (average)*
(* I just googled an endowment plan calculator and selected a famous endowment plan of India’s most trusted life insurance company to get the yearly premium detail)
Plan: Term Plan
Term: 30 years
Sum Assured: Rs 50 lakh
Yearly Premium: Rs 4,000/-
Now instead of investing Rs 1.5 lakh like Rohit, Virat invested just Rs 4,000/- and used Rs 1.46 lakh for investment with 10% compound interest. By the time he turns 60, he gets a return of whopping Rs 2.64 crores!!
Financial Mistake: Considering Life Insurance as an investment and buying endowment plans.
Learning: Never buy endowment plans. However, always keep yourself insured and buy a term plan.
Rohit invested in mutual fund but he bought regular plan instead of direct plan.
He invested Rs 30,000/- per month in SIP and got a annual return of 12% after 10 years. He received an amount of Rs 69.7 lakh.
However if he would have invested in direct plan, he would have got 13% return and would have received Rs 74 lakh.
Financial Mistake: Not using internet to buy the direct mutual fund. He asked an agent to buy a regular plan and hence lost Rs 4.3 lakh.
Learning: Always buy a direct mutual fund.
There are many other financial mistakes which are common:
- Using Credit card and only paying the minimum amount due. This result in person paying interest as high as 35% to credit card company.
- Spending crazy amount in weddings. Indian weddings are crazy. People end up taking loan and spending many times their actual financial capacity.
- Following stock market gurus and investing based on advice rather than doing own research. Some people get carried away and enter into futures and options. Most of the people do not have a clue and just invest based on “speculations”.
- Keeping money in saving account and not realizing the difference between real and nominal return.
- Last but not the least, many people end up getting trapped in lifestyle inflation. They end up buying a new car just because the old one doesn’t match their “standards”.
Author — Sahil Bhadviya
Personal Finance Coach and Consultant