MONEY TRAP - 9 : Putting Obligations Over Necessities

In the words of the great investor Warren Buffett “If you buy things you don't need, you will soon sell things you need ”. You don’t need much of an excuse to satisfy your urge to splurge. Festival purchases….Peer Pressure…Lifestyle expenses….Family Pressure…Well the list is long. But what about emotions? Can emotions force you to make the wrong financial purchase? YES…They certainly can and there are salesmen, marketers and even friends and relatives, who know how to exploit this weakness of yours. Just look around and see how unhealthy carbonated cold drinks are sold. Spirit of adventure….Drops of joy….Drink this and stay young. Banking executives, insurance agents and mutual fund distributors, are no different from any other salesmen and marketers. The smiling bank executive who sells you a life insurance plan, you don’t really need….A mutual fund distributor who sells you equity mutual funds saying…These are the best mutual funds you can buy. He is so friendly that you feel bad to refuse him and actually make the purchase, knowing the equity mutual fund is not that great and all the friendly mutual fund distributor wants, is to pocket a good commission. This is nothing but FOG. Selling of Financial Products using Fear, Obligation and Guilt. Want to separate emotions from sound financial decision making? Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice / education to ensure that you are not mis-guided while buying any kind of financial products.

Putting obligations over necessities

You need to be ruthless while making investment decisions and this example shows you why. Uday, a 32 year old teacher in a reputed school, always thought himself to be a smart decision maker, when it came to purchasing financial products. Uday cared for his wife and child and wanted to avail a term life insurance plan, to provide for his family in case of his untimely demise. Uday knew that a term life insurance plan was best suited for this purpose. This life insurance plan charged a lesser premium for a higher sum assured, than other life insurance plans such as an endowment life insurance plan and even a ULIP. If Uday met an untimely end within the term of the plan, his spouse and child would get a lump sum amount, called the death benefit. This money could mean his family would enjoy a good quality of life, even in his absence. Uday also knew that he would get nothing, if he survived the term of the plan.

This did not bother him too much. Uday had all but decided to avail a term life insurance plan, when a good friend Tarun came weeping at his door. Tarun was a life insurance agent and was struggling to meet his targets. Uday felt sad for his friend and wanted to help him at any cost. Uday availed an endowment life insurance plan from Tarun, which charged a yearly premium of INR 20,000 for a tenure of 15 years. The sum assured was a mere INR 5 Lakhs. Uday knew that if he availed a term life insurance plan, he would be paying a far lesser premium and would get a higher death benefit, in spite of the bonuses the endowment life insurance plan offered. Uday put friendship over sound financial decision making. What were the consequences of this decision?

Uday was stuck with an endowment life insurance plan which charged a very high premium, for a low sum assured. Paying this high premium meant compromising on financial goals and quality of living. Uday had to postpone buying a new car. Uday had to cancel his foreign holiday. Uday had to cut down on his parties and eating out. Worse…if something untoward happened to him, his family would not have sufficient money to lead a good quality life. Helping a friend is great, but should it be done at the cost of compromising on your financial goals or the safety and comfort of your family. You be the judge.

Helping a stranger at the cost of your financial goals

You are a slave to your emotions. You just have to help your friends when they are in need. But what about a total stranger? Rupesh a manager at a garment factory in Bengaluru, was a regular visitor at his bank. He still remembers the polite…always smiling…friendly bank executive…who used to greet him, whenever he visited the bank. One  day this friendly bank executive came to him crying (Rupesh had never seen a grown up man crying before) saying…My manager will sack me. I am not able to sell these equity mutual funds. How will I meet my target? For those who don’t know, banks make their executives sell life insurance plans and equity mutual funds to make a profit. Bank executives are given a monthly target of selling life insurance plans and equity mutual funds, which if they achieve, they are paid a good commission. If they fall behind in achieving these targets, they could even be sacked.

Feeling bad for his friend, Rupesh purchased equity mutual funds worth INR 50,000. Rupesh had never invested in equity and he had purchased a financial product which did not match his risk profile. Meanwhile, problems in the garment factory kept Rupesh busy. He did not have any time to visit the bank. Unfortunately for Rupesh, a few months later, the stock market crashed. The value of the equity mutual funds which Rupesh had bought, was just around INR 15,000. Rupesh rushed to the bank but found that his friendly bank executive, no longer worked at the bank. The other bank staff were not too helpful. Stuck with the equity mutual funds and not knowing what to do, Rupesh in a panic, sold these equity mutual funds at a heavy loss.

What do you learn from this mistake of Rupesh? Rupesh went to help a stranger at the cost of compromising on his financial goals. Rupesh had to postpone the purchase of his laptop, because he put obligations over necessities. Not much of a loss you can say…But totally unnecessary.

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