Financial Adulting

Personal finance is something very few people usually talk about, especially in a country like India, where there is a significant gap between what is needed and what we know. From childhood, we are exposed to an environment where lavish expenses and pseudo assets (which turn into liabilities over time) are honoured for being “High status.” Certain belief systems that support this mindset are deeply ingrained and long-lasting. Addressing personal finance, an often overlooked but crucial issue, needs immediate attention.

Why Should I Consider Financial Adulting If I Earn So Much?

• "I have a strong family backing."
• "I'm never forced to save."
• "Why do I need this?"

Let’s dive into statistics directly and let the numbers speak.

Understanding the Indian Context:

In India, financial literacy is shockingly low. A survey carried out by Standard & Poor’s revealed that only 24% of Indian adults are financially literate. This lack of knowledge leads to poor financial decisions, inadequate savings, and a lack of investment planning.

Important statistics showing India’s current financial challenges:

• 50% of Indians do not save any money regularly.
• 41% of Indians rely on friends or family for financial advice instead of professional advisors.
• Only 12% of the Indian population invest in mutual funds which indicates a lack of awareness and trust in the financial markets.

The situation globally is no better. Many countries have very low rates of financial literacy whereby only about 33 % understand basic concepts related to finance. The stakes are high from this kind of an educational gap in finance as people continue engaging in bad fiscal habits without knowing how to prepare for their future.

For further understandings, let’s understand a case study, we would use some excel data to dive deep into numbers making it crystal clear that yes “I NEED FINANCIAL ADULTING”

A Tale of Two Friends

Imagine two friends, Ramesh and Suresh, who started their careers together with similar jobs and incomes with a starting salary of ?50,000 per month. Their financial journeys, however, took drastically different paths based on their choices.

Initial Scenario:

• Starting Salary: ?50,000 per month
• Annual Income: ?6,00,000
• Consider similar increments and a 10% market growth

Financial Habits:

Ramesh:

• Follows the 50:30:20 rule (50% needs, 30% wants, 20% savings/investments)
• Regularly saves and invests a portion of his income
• Avoids unnecessary debts and lives within his means

Suresh:

• Prioritizes spending and lifestyle over savings
• Relies on credit for purchases and accumulates high-interest debt
• Does not invest and has minimal savings

Financial Outcome After 20 Years: (we are not considering inflation here to make it simple, but in actual scenario the difference would increase if we do this)

Ramesh's Scenario:

• Regular savings and investments grew over time.
• Avoided debt and managed his expenses.
• Achieved financial independence and security.

Suresh's Scenario:

• High spending habits led to no savings.
• Accumulated significant debt with high interest.
• Faced financial distress despite earning a similar salary.

Impact of Inflation and Loans:

Inflation erodes the real value of money over time. Assuming an average annual inflation rate of 6%, the real value of savings and investments decreases. This means that ?1 today will be worth less in the future.

For example, if Ramesh's total savings after 20 years are ?37,50,000, the real value, adjusted for inflation, would be significantly lower (Investments would help tackle this). Similarly, Suresh's debt would increase with compounding interest, exacerbating his financial strain.

Household Loan Statistics in India:

• Percentage of Households Taking Loans: Approximately 15% of households in India have outstanding loans.
• Average Loan Interest Rates: The average interest rate on personal loans in India ranges from 10% to 20%.
• Average Loan Amount: The average loan amount per household is around ?5,00,000.

This story isn't unique to Ramesh and Suresh. It plays out in real life across different geographies and income levels. The moral? Financial literacy and disciplined financial habits are crucial for achieving long-term financial security.

By understanding and avoiding common financial mistakes, you can achieve financial independence and security. Let's explore these 26 common financial mistakes and how to avoid them, helping you move from merely earning a living to building lasting wealth:

1. Short-term Thinking

• The "YOLO" (You Only Live Once) mindset prevalent among GenZs can be financially destructive. Focusing only on immediate gratification leads to ignoring emergency savings, retirement funds, and big future purchases. Long-term thinking and planning are essential for financial stability.

2. Ego

• Ego often drives us to spend on status symbols, which are a zero-sum game. True wealth is a positive-sum game where everyone can win. Spending to satisfy your ego can derail your financial goals. It's essential to differentiate between assets that generate income and liabilities that drain it.

3. Relying on One Job to Build Wealth

• Depending solely on a salary is risky. Diversify your income streams, including investments and businesses. Building personal brands and engaging in freelance gigs not only diversify income but also create valuable connections. Your job might seem secure, but the market is unpredictable. Always be prepared for changes.

4. Excessive Diversification for Investments

• Diversification can protect against risk, but overdoing it can dilute returns and complicate management. Focus on a balanced portfolio that aligns with your financial goals. Understanding your investments and their roles in your portfolio is crucial.

5. Underestimating Expenses

• Small, overlooked expenses can add up and significantly impact your finances. Meticulously tracking all expenditures ensures better budgeting and saving. This habit helps in identifying and cutting down unnecessary costs.

6. Believing in a Risk-Free “SAFE” Career

• A so-called "safe" career can be risky if it limits your potential for growth and diversification. Risks are inherent in any venture but can be managed and understood. Embracing calculated risks can lead to higher rewards and financial independence.

“The biggest risk is not taking any risk.” – Harshad Mehta, Scam 1992

7. Not Keeping Track of Your Money

• Most people do not track the last 10-15% of their spent money, which is crucial. Keeping detailed records of all expenditures helps in better budgeting and savings. Financial literacy and tracking your money are essential for making informed decisions.

8. Not Budgeting the Money

• Following a budget helps in controlling spending and prioritizing savings and investments. The 50:30:20 rule (50% on needs, 30% on wants, and 20% on savings/investments) is a practical approach to budgeting.?

“A budget is telling your money where to go instead of wondering where it went.” – Dave Ramsey????

?9. Excessive Borrowing

• Many people fall into the trap of excessive borrowing due to the easy access to credit. This often leads to living beyond one’s means and accumulating high-interest debt, which can become a significant financial burden. To avoid this, it is crucial to borrow responsibly and only when necessary.
• Prioritize paying off high-interest debt first and make a conscious effort to live within your means to avoid falling into the debt trap. In India, approximately 15% of households have outstanding loans, with the average interest rate on personal loans ranging from 10% to 20%

Financially smart people take loans, even if they can afford it, to save money. Financially weak people take loans, knowing that they can't afford them, to spend.

?10. ?Ignoring the hidden costs

• Big purchases such as cars or homes come with hidden costs like maintenance, taxes, and interest on loans, which can add up significantly over time. For instance, a car costing ?10 lakhs could, over time, cost 1.6 times its purchase price when factoring in these hidden expenses.?
• Before making significant purchases, it is essential to research all associated costs and factor them into your budget to avoid financial surprises.

?11. Delaying Investments

• Delaying investments is a common mistake that results in lost growth opportunities. Early investments benefit from the power of compounding. For example, starting to invest at age 25 can yield significantly more returns by retirement age compared to starting at age 35. Start investing as soon as possible, even if the initial amount is small, to maximize the benefits of compound interest over time.

?12. Ignoring inflation and taxes

• Ignoring inflation and taxes can significantly reduce the real value of your money. Inflation erodes purchasing power, and taxes can eat into investment returns. To combat this, choose investments that outpace inflation and consider tax-efficient strategies. In India, the average annual inflation rate is around 6%, which means the value of money decreases significantly over time if not invested wisely.

?13. Ignoring insurance

• Insurance is often overlooked but is essential for financial security. A lack of adequate insurance can lead to financial ruin in case of unforeseen events. Ensure you have sufficient health, life, and other relevant insurance policies to protect yourself and your family from potential financial disasters. Statistics show that only 30% of Indians have life insurance, and even fewer have health insurance, underscoring the need for better insurance coverage

?14. No emergency funds

• An emergency fund provides a financial cushion for unexpected expenses, such as medical emergencies or job loss. It is recommended to save at least six months’ worth of essential expenses in a readily accessible account to cover unforeseen financial challenges. Despite its importance, surveys indicate that 63% of Indians do not have an emergency fund.

?15. Over-dependence on employer

• Relying solely on corporate insurance might not cover all your needs and may be lost if you change jobs. Supplement corporate insurance with personal policies to ensure comprehensive coverage and continuity of protection. In India, employer-provided insurance often lacks sufficient coverage, making personal policies a crucial addition.

?16. Compounding can be a double-edged sword

• While Compounding can significantly grow investments, it can also increase debt if not managed properly. High-interest loans can quickly spiral out of control due to compounding interest. Focus on reducing high-interest debt as quickly as possible and leverage the power of compounding for your investments to achieve financial growth.

?17. Overnight millionaire schemes

• Many fall for overnight millionaire schemes, (Especially youth in early 20s) which are often scams or extremely risky. Such schemes can lead to significant financial losses. Instead, focus on steady, long-term financial growth through sound investments and savings. The allure of quick riches can be tempting, but sustainable wealth is built over time.

?18. Trading without understanding

• Investing in the stock market without proper knowledge can lead to significant losses. Educate yourself thoroughly before engaging in trading. Start with small investments and gradually increase as you gain experience and confidence. According to a survey, 41% of Indians rely on friends or family for financial advice, which highlights the need for better financial education and professional guidance.

?19. Not using Stop loss

• Not using stop-loss orders can result in holding onto losing investments for too long. Implement stop-loss orders to manage risk and limit potential losses in your investment portfolio. This strategy is crucial for protecting your investments in volatile markets.
• Stop loss as a concept is also helpful while dealing in any financial deals (not only stocks), if at any point you think the threshold has reached, pull out and retrospect what went wrong.

?20. Investing while in loan

• I have seen individuals invest while they have EMIs to pay, loans with staggering interests waiting to drain their pockets, but still focusing on "Investing money".
• Focus on paying out the loans first and then invest buffers, I would always prefer investing my savings post every other aspect is settled

?21. Investing in a real estate asset?early in your career

• When starting your career, it's hard to predict where you will be in the next 5 to 7 years. Committing to a property purchase early on can restrict your mobility and financial flexibility. Renting can be a more practical option initially, as it often costs significantly less than buying, especially in tier 1 cities where purchasing a property can require at least 70 times more monthly yield than renting. By renting, you maintain flexibility and can allocate your savings towards other investments that offer better returns and liquidity.

?22. Impatient redemptions

• Investing with a short-term mindset, especially in small-cap stocks, often leads to impatience and premature redemptions. Statistics show that investing in markets for just one year offers a 50% probability of profitable returns. However, extending the investment period to three years increases this probability to 90%, and holding investments for five years or more guarantees 100% profitability. This underscores the importance of patience and long-term commitment in the stock market. By resisting the urge to redeem investments too quickly, you can significantly improve your chances of achieving substantial financial gains.
• There might be corrections in the market but patience is the key.

"The stock market is a device for transferring money from the impatient to the patient." - Warren Buffett.

?23. Conservative approach

• Taking risks in your early 20s is crucial because you have the advantage of time on your side. Being overly conservative with your investments can limit your financial growth potential. At this stage in life, you have the opportunity to explore different investment options, learn from your mistakes, and recover from any setbacks. Embracing calculated risks can lead to significant rewards and set a strong foundation for long-term wealth. Remember, the earlier you start taking risks, the more time you have to benefit from compounding and market growth.

?24. Not Understanding the System's Nature

• Society often promotes a cycle of buying, flaunting, and repeating, creating a system designed to encourage consumerism and debt. This system pressures individuals to take out loans, stay in jobs they may not enjoy, and perpetually spend to maintain a certain status. This benefits banks and financial institutions by ensuring a steady stream of income from interest payments and fees.
• Understanding this system's nature is crucial to breaking free from its constraints. Instead of falling into the trap of constant spending and debt, focus on financial literacy, prudent saving, and investing wisely to build true wealth and financial independence.

?25. Losing hope

• Losing hope can be a significant barrier to achieving financial success. The journey to financial independence is often long and fraught with challenges, which can sometimes feel overwhelming. It's crucial to maintain a positive outlook and remember that setbacks are a natural part of the process. Perseverance and resilience are key to overcoming financial obstacles.
• For instance, many investors abandon the stock market during downturns, in fact, during the 2008 financial crisis, nearly 7.6 million investors exited the market, missing the eventual recovery and substantial gains that followed. Celebrate small victories along the way, and stay focused on your long-term goals. By keeping hope alive and consistently working towards financial stability, you can navigate through tough times and eventually achieve your financial aspirations.

26. Go start!!!!!

• After reading all these ( I know very few would reach here), and that serves the reason you should appreciate yourself that you actually want to grow in life, these disciplines are not just about money, but about life, you see, goals are a result of systems and if you want, you can build those systems and achieve your part, but i want you to go out and start working, start slow, start small, but start, not next week, nor tomorrow, start today, win today, win big!!