Why Do we Make Financial Mistakes

Last week I shared (confessed) that Club Mahindra Membership is my biggest financial mistake. Why I am saying confession? Because one reader said “Usually success is a public affair and failure a private funeral”. But I don’t think there is any harm if readers learn from my confession or they can save themselves from a mistake. Assuming that someone has never done any mistake is in itself a big mistake (may be a very big lie too). But I am bit surprised that no one asked me WHY part of that equation. So let me introspect:

  • Why you purchased Club Mahindra Membership & now you are saying it is a mistake?
  • You are so called financial savvy guy, WHY you did that dumb mistake?

What is Financial Mistake?

First we have to clearly define what is mistake & then only we can find the reason.

Have you said “where we lost money”??  But this is just hindsight or postmortem of our financial decision, which we took couple of days or years back. And sometime even wrong decisions can generate positive results, may be in short term – does that mean we should say that was right decision & should be repeated.

For example: Most of the employees who get ESOP or ESPP benefits hold these stocks close to their heart. And in most of the cases I have seen that with time these stocks become their biggest financial asset or biggest equity assets. But I have to ask these people:

  • Is this (your company) the best stock available in the market?
  • Don’t you think you are losing the benefit of diversification?
  • What will happen if your company starts underperforming – you will see tough times in your job as well as your stocks will underperform?
  • And the worst case – what will happen if your company becomes next Satyam or Enron?

So we should not judge our decision based on the results but the principal that decision is based on. Then only we can expect our financial life on right track with great amount of confidence.

WHY do we make Financial Mistakes

There can be many reasons but the biggest reason is this image

WHY we do Financial Mistakes

Because we don’t ask WHY at the time of taking decision

Simon Sinek is a motivational guru & he gave the concept “Start with WHY”– he shared the golden circle that you saw in above image.

If you look at the outer layer of golden circle there is WHAT & the core is WHY. Most of people never reach the WHY before taking decisions.

WHAT: Most of the people know WHAT they do in life. WHATs are easy to identify.

HOW: Some people know HOW they do WHAT they do.

WHY: Very few people can say WHY they do.

When most people think or act they do from outside in, from WHAT to WHY. They go from the clear thing to unclear thing. We say WHAT we do, we sometimes say HOW we do it, but we rarely say WHY we do WHAT we do.

Knowing your WHY is not the only way to be financially successful, but it is the only way to maintain a lasting financial success.

Let me Simplify

Everyone is interested in knowing the product or telling the product. You open any business channel, magazine or pink paper everyone is ready to recommend you something without knowing you & your requirement. It is a right solution for you or not is none of their business. I wonder how a doctor can write a prescription before understanding your requirement.

Even your thought process is changed or should I say it is still the same & even your questions start:

  • WHAT should be the best fund?
  • WHAT will be the best insurance policy?

But if you would like to improve the things WHAT should always come after thinking about WHY & understanding HOW.

Product manufacturer or distributor is only interested in WHAT part of the equation. So they push you the product & you keep wondering where to fit this in your financial “Picture Puzzle”.

But let’s stop blaming others – it’s your responsibility to make your family’s future bright – so you should first ask WHY (plan – the bigger picture). No matter what is your methodology, just reverse the old-fashioned judgment circle. Start with the plan (ask why), then move on to the process (ask how) and only then look for the exact products (ask what). Starting with “Why” means achieving clarity about your personal financial goals and creating a plan. To reach that point, you need to consider your values and then set some SMART goals.

Read: Setting SMART Financial Goals

Single Goal Vs Plan

It was start of 2008 when I was in job as most of you are now – my overall finances were on track, with decent corpus & regular savings every month for my basic goals. I was working with WHAT company & my yearly bonus was more than club Mahindra membership fees. My question was not that – “will it make sense in my overall financial life” but it was a simple comparison which today I can laugh on “Club Mahindra Membership Vs Equity Diversified Mutual Funds”. Luckily I was having knowledge about Equity Market Valuation & their history across the globe; plus I read couple of books including “Intelligent Investor” by Benjamin Graham. I easily related to Mr Market commentary & equities were clear NO at that point of time. So second obvious choice was membership but I think I should have applied other acid tests before taking it.

Even if I assume I knew WHY – “my goal was holidays every year”. But even that was piecemeal approach where I have not analyzed impact on other goals. Focusing on single goal like child marriage, retirement or buying flat will not help in winning the financial war & achieving financial freedom.

When we start concentrating on one goal, there is good chance that we may achieve it but it can have significant impact on other goals. Financial Planning takes into account the inter-related nature of the goals that one has & helps in deploying the finances so that the high priority goals are given precedence & are met. It takes away the uncertainty out of life and brings in peace of mind.

Hope you learned lot of lessons from last two posts, now I would like to understand – you start with WHAT or WHY & if you start with WHAT are you planning to change it.

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Hemant Beniwal is a CERTIFIED FINANCIAL PLANNER and his Company Ark Primary Advisors Pvt Ltd is registered as an Investment Adviser with SEBI. Hemant is also a member of the Financial Planning Association, U.S.A and registered as a life planner with Kinder Institute of Life Planning, U.S.A. He started his Financial Planning Practice & TFL Guide Blog in 2009. "The Financial Literates" is a dream & mission to make Indians Financial Literate.


  1. Hi Hemant,

    Your article reminded me of famous saying,

    “Nice guys finish last and Smart guys finish first”.

    Another saying which I created is, 😉

    “Be nice to your family members and smart to your outside world”

    This way we can live a happy and successful life. 🙂

    • Hi Manoj,
      I am not sure my wife have read this or not but she keep saying “thoda sambhal kar, sab log aap jaise nahin hain” 😉

  2. Most of the time (99.99%) what. But my problem is not what and why, generally i struggle with how 🙁

    Very amazing article.

    • Once you realise the problem its east to find the solution – most of the people don’t realise there is any problem.

  3. Good article. The journey of “what” to “why” is each investor’s very personal journey, in which there are mistakes from which investor has to learn and start focussing on the risks (in case of insurance) and goals (in case of investments) before buying products. Sadly, the euphoria and marketing around products is so huge that the “why” is somewhat lost.

    good thoughts!

    • Hi Abhinav,
      Very rightly said “the euphoria and marketing around products is so huge that the “why” is somewhat lost”

  4. Good one!This is pretty much applicable when the insurance agents try to missell the policies.

    • Hi Madhavan,
      They say “If you dont know where you’re going every road will take you there.” that’s the reason people can buy anything which may or may not make sense for them.

  5. Great Article. Personally, I liked your interpersonal skills. You are very honest person and Financial Advisor.

    Please keep it up. You are doing the best work not only for your life but for everyone.


  6. Hi,

    In india everything happen by accident & quite unfashined but true that we all learn from instances only.

    Nowadays people get trapped for financial follies but our oldies hardly had…because there wishlist =needs while presently the list is unending and then the list of blunders just start getting unknott.

  7. I invested Rs 20000 in Suman Motels Highway Infrastructure Bond in 1997. Is there any proceeding going on to recover the amount?

  8. I invested in Sip in SBI Magnum Contra Fund on 15th aug 2010, kept it till a year. Realising that this fund is an underperformer I stopped my SIP. Is it advisable to wait for this fund to perform before exiting.At present I would book a loss if I exit.

  9. Hi,
    Iam (Aged 32) father of a 4yr old child. My current Status
    Income: 12L pa
    Housing Loan 32,000 pm

    Term Policy – 1C Aviva ilife
    ULIP – 50,000K pa
    LIC Bheema Gold – 17000K pa.
    Mutual Fund : 3000pm SIP.

    Looking for good long term plans to support my daughters need and my retirement.

    Kindly suggest me suitable options.

  10. Why do we make financial mistakes?
    Because most of the times we do not know why we are taking a particular financial decision.
    You have hit the nail on the head.
    Very interesting article.

  11. Good artical , i think this artical is very helpful to many persons..including ME to change their views in investment…

  12. Hi, hemant thanks for the guidence,ur article is very helpfull for people like me & others with lots of questions…im a mother of 2daughters & 1 son ,im a house wife but have to take care of all financial decisions as my hubby is all time busy with his work..this make me more worry if i have taken a right decision investing in LIC & other things..i have invested in Jeevan ankur for my kids kindly guide if its right…thanks ..ur doing a good job.

    • Hi sneha,
      Thanks for appreciating.
      Regarding jeevan ankur, read review of this policy…. Check archive.

  13. hi hemant,

    i must say, a very thought provoking article. often times we all follow the herd mentality. everyone is doing this or everyone is doing that. thats why it becomes very easy to market things for mass consumption.

    If we start thinking about the 3 questions deeply enough we realise the same things are true for life. The “what, why and how” are the core of life and alonside financial health.
    what do u want?
    why do u specifically want it?
    how will u get to it?

    the why takes care of the fact that u don’t want unnecessary things….if u cant answer the why well and u give a variation of the answer suspiciously close to “everyone does it” (he does it, she does it, uncle does it) u are heading for trouble…..

    and figuring out the what, why and the how is a lifelong quest…..it goes on and on!!

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