Midlife Crises & its Financial Impact

Hemant Beniwal
-
4
Midlife Crises & its Financial Impact

What is midlife crisis? Midlife crisis is behaviour usually displayed by people between the age of 35 and 50 years which is uncharacteristic of them or even inappropriate.  Some people identify the crisis and manage it well by gracefully accepting the fact that they are growing older. Some people struggle to get over it and behave irrationally. In some cases it may be mild and sometimes it can go to extremes affecting health, behaviour and finances negatively.

Midlife Crises & its Financial Impact

Image courtesy of stockimages at FreeDigitalPhotos.net

What are the signs of a midlife crisis?

There are many behavioural traits that can be attributed to midlife crisis. Too many instances of unpredictable behaviour, risky actions or uncharacteristic acts can be signs of midlife crises. Splurging on expensive items like a new luxury car on a whim is a sign that the middle-aged wants it just to feel good. If it a purchase without planning, it could be a sign of middle age crisis.

Midlife Crises & its Financial Impact Click to Tweet

Some people take on more risky things like leaving the job without any plan, sudden divorce or commit infidelity just to crave attention. Such actions lead to emotional problems, professional/business issues and financial problems.

Read – Understanding Financial Infidelity – Symptoms & what to do

Some people try to get back their youth. They spend a fortune on plastic surgery or on a lavish lifestyle. They believe this will help to retain their attractiveness, Such irresponsible behaviour causes health and lifestyle problems.

Depression is also a sign of midlife crisis. People going through a midlife crisis might get angry or irritated without reason. They become very sensitive. They abandon rational decision-making process and act recklessly. They might get into too bad habits like too much smoking and/or drinking without limits. They feel sad that they have only a finite time and have few options left. If they have not achieved what they want, they feel that their life has been unfulfilled and get negative thoughts.

What is the financial impact of an uncontrolled midlife crisis?

Midlife crisis if managed well, will not cause too much harm. It will just be a short phase in life and a person will get over it. But if it is not handled smartly, it can cause your financial status to go wayward.

If you leave your job, you will lose your steady source of income. Your financial goals will not be achieved and you will get into serious money problems. If you have people dependent on you, their life will also become difficult. Leaving a job as per a long-term plan with enough money saved and a concrete back up plan, then it is a different case which can be executed.

If you purchase many expensive things without planning, you can eat up your savings or even worse, you could land in excessive debt. This will make your financial plan go awry.

If you destabilize your family life or get into rifts with friends, it will cause you unhappiness and unnecessary stress. This can lead to irrational behaviour for which you might regret later on. Divorces and affairs can be uncomfortable situations and quite expensive.

How to manage or avoid a midlife crisis successfully?

Midlife crisis can occur in anyone’s life. It is good to be forewarned and prepared.

Financial Planning – Firstly, financial planning should be done and followed meticulously. Sound financial planning can take care of some wrong moves. The financial plan should be revisited regularly and updated as per different milestones in life. You should follow financial prudence like saving regularly, investing and spending as per the budget.

Revisit dreams and goals – Sometimes we are so caught up in our education, career, family, kids etc. that we forget our identity. We forget about our dreams. When we reach middle age and look back at our life, we might regret that our wishes did not get fulfilled. This can trigger a midlife crisis and lead to reckless behaviour. It is good to keep our aspirations in our mind and try to fulfil at least some of them if not all so that we can be happy.

Family and friendship – It is important to have strong ties with the family members and build friendships. This will fulfil needs of love, compassion and bonding that will keep triggers of midlife crisis at bay.

Read – Top regrets of the dying

Keep your mind engaged – You should keep your mind busy so that it remains alert and engaged. You should focus on your career/business. You should devote some time to your hobbies. You should develop new skills. This will help in keeping the mind fit and not going astray.

There will be different challenges in life. You should be mindful of that and take positive steps to achieve your goals. You should take support of loved ones and professionals to ensure you are financially and emotionally on course.

Must Share your experiences on Midlife crises. 

Top regrets of the dying… What can you do to avoid them

Hemant Beniwal
-
4
Top regrets of the dying… What can you do to avoid them

No human can escape the fact that one day he/she is going to die! I can put this in polite words, but a fact is a fact however you put it across in words. We are all busy with education, jobs, family, travel, finances etc and never really think about such morbid details. Of course, it is not healthy to have negative thoughts all the time but have you taken a little time out to think about your death? What would you regret most on your dying day? Here are some of the top regrets that people have and our two cents on how you can avoid them (this list is based on international survey) –

Top regrets of the dying... What can you do to avoid them

Image courtesy of Craftyjoe at FreeDigitalPhotos.net

Read: Money can buy happiness

Top regrets of the dying

1) I should have let myself be happier –

Many people on their deathbed have felt that they could have been happier in the state that they were in instead of wishing for more or complaining about the current state of affairs. We should strive to achieve more in life, but we should be happy with what we have. A positive outlook always helps us to achieve more. It helps to be less serious and is nice to laugh at some silly jokes or even laugh at yourself and find humour in life.

Read: I am too young to plan my retirement is a myth

2) I wish I had saved more for retirement –

Some people in their dying days feel that they should have managed their retirement funds better. If you have not planned for your finances for retirement, you could get into trouble. In old age, one may not have a regular income and inflation and medical bills can eat into your savings. It is important to plan for your retirement so that you can live comfortably without any financial trouble.

Top regrets of the dying... What can you do to avoid them Click to Tweet

3) I wish I worked less –

We are always busy making a living. We are so immersed in working towards reaching our career goals and business goals that we forget to make time for ourselves. It is important to make money but not at the cost of our health, personal time and relationships as in the end these things matter more than materialistic things.

Read: Complete Health Check Up – Yuvraj’s message for you

4) I missed spending time with family and friends –

It is important to spend time with loved ones as that time makes for the best memories. It is important to spend time on activities that we like so that our lives will be more fulfilled. Many people on their deathbed regret losing touch with friends, drifting away from family ties or missing on their children’s growing years as they were busy working too much, meeting impossible deadlines and working long hours in office just to prove to others that one is working hard.

Read: How to live & die – Khushwant Singh style of managing life 

5) I should have taken more chances –

When we look back in life, we see many missed opportunities. Some people regret that they did not chase their dreams or were scared to do something considered unconventional. When one is healthy and has the time, he should take the chance and try to fulfil his dreams. You  should apply for that dream job or take the course that you always wanted to or a business. You should be more courageous and not live as per boundaries that you have set for yourself. Yes, a stable job, a steady salary and a comfortable life are important but once in a while, we should try to do what we are really passionate about and that is living to the fullest.

Read: Money Vs Job Satisfaction – which is more important for you?

6) I should have taken care of my health and happiness –

Many people close to their last day, feel they should have taken better care of their health. We should find time in our daily routine to follow a healthy lifestyle. This helps us physically, mentally and financially in our old age. We are responsible for our happiness. It is important to maintain relationships and do things that will make us feel happy. If we are too serious or do not make ourselves happy, we will be grumpy and have a negative outlook in life. This affects our health and wealth. It is better to resolve issues as soon as possible else it might be late leading to bigger problems.

Take some time out and review your life, work, finances and relationships. Do you think you will regret some things later on. If yes, it is not late yet. You should make some conscious decisions and concrete action to change your lifestyle that so that you don’t experience any of these regrets when it is too late.

Diderot Effect – You may not have heard of it but you may be a victim

Hemant Beniwal
-
15
Diderot Effect – You may not have heard of it but you may be a victim

You buy the new fashionable shirt or a new coffee table and you feel that you don’t have a good pair of trousers to pair up with the new shirt or feel that the good old couch does not match up to the nice new coffee table. You then go and buy a pair of trousers and then maybe a pair of shoes to go with the new outfit. You buy a couch, new cushions for the couch etc. to match the coffee table. You end up splurging a lot of money or over consuming. If you had never got that shirt or the coffee table, you would have saved a tidy sum. I was surprised that this phenomenon of overconsumption due to the acquisition of one item have a name…. the Diderot effect.

Diderot Effect – You may not have heard of it but you may be a victim

Image courtesy of Vlado at FreeDigitalPhotos.net

Read: How to Stop Buying things you never use

I am a recent Victim of Diderot Effect

From last  1 year, we were planning to replace our decade old car but I was resisting for the simple reason – our house lacked covered parking area (it really pains to see your car battling the sun in Rajasthan’s dry summers). Earlier we thought to put a fiberglass shade over iron frame, which will not cost much & our purpose will be solved. But then WE (wife empowerment/enforcement) decided that let’s have proper porch & the first floor can be used as a guest room (spouse was after my life for this from last few years & I was resisting).

Diderot Effect – You may not have heard of it but you may be a victim Click to Tweet

Finally, work started after the rainy season…. and after a few days of work came another twist as the contractor suggested some changes in our layout & from nowhere he was able to add an extra room that can be called “kids room”. Home Minster okayed the plan & Finance Minister was looking at his deficit. In addition to this some changes in elevation, additional furniture & paint in whole house which was overdue also happened, leaving a vast ditch in my pocket.

Now work is in final stage & I know why one ad screamed CAAAAAR – car has become 2.5X…. Oops!! now I realise Rs 1000 car cover was a better option, but it’s too late 🙁

Yesterday this thought came to my mind that is there any scientific name of this DISEASE & discovered Diderot effect.

Who observed this first

This effect was described by Denis Diderot, a French philosopher. In an essay, he tells how a new dressing gown made him feel that all his other things were old and resulted in him buying a lot of stuff. This led him to falling into debt. The phenomenon of overconsumption where one item leads to spiralling buying spree is called the Diderot effect. Many of us have been victim to this concept even though we may not be aware of it.

Read: SmartPhones are making us dumb – Financially & Mentally

There’s another problem

Many of us fall prey to the Diderot effect as we tend to identify ourselves on the basis of what we have, what we wear and our lifestyle. Society is tending towards the Diderot effect. In earlier times, a family used to buy 1 car or 1 television set. It was used for many years. It was taken care of and maintained well. If it broke down, it was repaired. But today we do not have much patience to take care of our possessions and we want the new car or TV that is in the market. We throw away the older stuff even if there is nothing wrong it. Manufacturers also market goods in such a manner that makes us throw away the old stuff and buy new stuff. This results in overconsumption. The fashion industry is a perfect example of making us fall into the Diderot effect. We buy clothes not just to protect us but as a means of self-expression and show. Fashion keeps changing and we keep buying new clothes and accessories to keep up with latest fashion trends.

The Diderot effect results in our bank balance going down and us getting trapped in over consumerism.

Here are some tips to avoid falling into the Diderot Effect trap 

1) You should avoid unnecessary buying or consumption. You should buy what you need and not satisfy all your wants.

2) You should not let materialism dominate your life. You should live your life with a sense of purpose and be involved in things that give you peace of mind and happiness. You should not let buying of new things and possessions define your self-worth and status in society.

3) When you feel you are buying more than you need, check the cost implications. If you are going to buy things like a belt, handbag and shoes to match the new outfit, calculate the total expenditure involved before buying. You will realise that you are wasting money.

4) You can set limits on yourself if you feel you are falling in the Diderot effect trap. You can set a monetary limit on new purchases or different expenditure categories. You should buy new gadgets that work well or sync well with existing gadgets like chargers and cables. If you really want the new phone launched, you should set a constraint on yourself that you will gift yourself that phone next Diwali or on your birthday. This helps in curbing consumption.

5) Stick with the PLAN.

There is nothing wrong in wanting good things in life or having a well-coordinated wardrobe or home. But this should not make us consume unnecessarily and feel good only when we possess more and more. We should strike the right balance so that we satisfy our needs by consuming optimally, do not go into a  drive to possess more and more material things and save money and use it to improve our financial status.

There is a difference between lifestyle & quality of life – choose wisely.

Take some time to reflect on your buying behaviour in the last couple of months. Do you think you were a victim of the Diderot effect? Let me know how you want to change this behaviour.

Mutual Funds Jargon – Get Your Basics Right

Hemant Beniwal
-
7
Mutual Funds Jargon – Get Your Basics Right

Investments in the form of mutual funds have become a necessary instrument to utilize one’s money more effectively for future. As a layman, an investor only knows how to invest in mutual funds and get returns on the investments. Thus, investor’s concept remains limited up to a certain point where one only knows about few terms like SIP and NAV. When money is being put into funds, then it is better one gets educated about the different terms used in these markets. The mutual fund jargons when known, gives a clear picture of the concepts related to the investment world.

Mutual Funds Jargon - Get Your Basics Right

Check – Should You Invest in ICICI Prudential India Opportunities Fund

Mutual Fund Jargons

Let us now take a look into some jargons that are generally used by mutual fund experts in order to describe one’s investments, their expenses and various other terms:

  • AMC (Asset Management Company) – An AMC is the fund house or a company that manages the funds. It invests its client’s pooled funds into underlying securities that match one’s financial objectives. These companies provide a lot of options to the investors for diversification and try to minimize their risk in the best way possible. The mutual fund is a trust registered under Indian Trust Act. It is initiated by a sponsor. A sponsor is the one who acts alone or with a corporate to establish mutual fund. The sponsor then appoints AMC to manage investment, accounting, marketing and other functions pertaining to the fund.
Mutual Funds Jargon - Get Your Basics Right Click to Tweet
  • NFO (New Fund Offer) – This term is given to a new mutual fund scheme. The NFO is similar to IPO (Initial Public Offering).In other words NFO can be defined as a security offering in which investors may purchase units of a closed or open-ended fund. Unlike IPO the price paid for the unit in NFO is fixed at Rs. 10.
  • AUM (Assets Under Management) –AUM is the total value of all investments currently being managed by the fund. For example the initial corpus amount invested was Rs. 1,000cr. but due to a rise in price of underlying security it has invested in, the value of units have also increased and now the corpus has become Rs. 1,100 cr. This particular figure is called AUM.
  • Units- An investor, by paying money to a company subscribes for shares; similarly by contributing into mutual fund scheme, an investor subscribe for the units. A unit holder of a mutual fund scheme is a part owner of the fund’s assets.
  • NAV(Net Asset Value) – NAV is the price of a unit of a fund. Value of a NAV fluctuates daily according to the changes in the underlying security. It is calculated by dividing the total value of the assets of the fund, less any liability, by total number of units issued by a mutual fund.
  • Entry load and Exit load: The charges which are imposed on the investor to cover up the administrative & few other expenses of the fund are called as load. The amount which is deducted at the time of investor’s entry into the scheme(at the time of buying the units) is called as entry load. Since 2009 entry load is banned by SEBI. Similarly, the amount which is deducted from the redemption or sale proceeds payable to the investor at the time of exit from the scheme is called as exit load. For example, generally there is exit load of 1% applicable if one redeems funds before 6 month or 1 year.
  • ELSS(Equity Linked Savings Scheme)- ELSS is a diversified concept of mutual funds that invests in various shared of different companies across different sectors. This kind of investments allows the investors to claim tax benefits under the section 80C of Income Tax Act. Investments in this scheme have a lock-in period of 3 years.
  • SIP (Systematic Investment Plan)– SIP refers to a fixed amount periodic investments in mutual fund schemes. These investments can be monthly or quarterly. SIP normally presents a win – win situation as it allows the investor to take advantage of the rupee-cost averaging.
  • SWP(Systematic Withdrawal Plan)- This is a service provided by mutual funds that normally provides a specific payout to the unitholders at pre-determined intervals generally monthly, quarterly, semi-annually, annually. This concept is normally useful to for those who want monthly payout to meet daily requirements during retirement. Check Systematic Withdrawal Plan benefits, taxation & examples
  • STP(Systematic Transfer Plan)– This is a kind of facility available to a customer where one can invest a lump sum amount into one scheme and then systematically transfer the specified amount to another scheme. Generally STP is used to transfer amount from debt scheme to equity scheme.
  • Open-ended Funds: An open-ended fund is the one that sells and repurchases the units all the time. Here, purchase and sale of units take place between investors and the mutual fund. A new investor can enter or exit the fund anytime; therefore, the corpus of this kind of fund keeps changing daily.
  • Close-ended fund: Unlike open-ended fund the corpus of close-ended fund remains fixed. It allows the investors to purchase their units through NFO and once the NFO closes then it does not allow the investors to buy or redeem their units directly through mutual funds. However, to provide liquidity, these units are listed on a stock exchange enabling the investors to buy or sell the units just like shares of a company.
  • Return on Investment – ROI measures the efficiency of an investment to compare its position among other investments. Simply put it shows the growth of an investment. This is expressed in the form of percentage. {CAGR (compounded annualised growth rate) is the best way to compare returns of any two products}
  • Total Expense Ratio (TER): Apart from risks and returns, investors should also look at the costs involved while investing in mutual funds. Though these costs are very small component, they can knock down the earnings of the investors if the fund does not perform well. TER involves audit fees, management fees, marketing and selling expenses, fund administration expenses. The NAV is net of all liabilities including TER; therefore a fund with lower TER can result into higher returns.

These are some of the terms that are normally used in the world of mutual fund and knowing such terms can be an added advantage. Are there any other terms which looks alien to you? Let us know and we’ll be happy to explain and clear your doubts.

This article is written by Ravi Variyani, Para Planner at Ark.

As an Investor, you have to Understand “Law of the Farm”

Hemant Beniwal
-
4
As an Investor, you have to Understand “Law of the Farm”

Stephen Covey, the famous motivational author, and speaker created the term – ‘The Law of the Farm’. What is the law of the farm and how is such a term connected to personal finance?

Law of the Farm

The Law of the Farm states that a farmer will have a good harvest only if he plans and works diligently over a period of time in the farm. He has to do many tasks at the right time in the right order if he wants to get a bumper crop.  The farmer has to prepare the field, plant the seeds, nourish the soil and seeds, water the plants, provide protection to the plants from insects, diseases, and stray animals and birds, take care of weeds and watch over the crops regularly. This will help him get a good harvest. If the farmer just plants the seeds and expects them to grow crops on their own, he is mistaken. He is going against the ‘Law of the Farm’ and cannot expect to reap good results.

As an Investor, you have to Understand "Law of the Farm"

This law applies to many aspects of our life. For example, you can do well in your studies if you are disciplined and work hard and smart consistently. A tennis player has to spend hours training and practicing. She has to work on her fitness, game strategy, and mental strength continuously to compete at the highest levels.

Click to Tweet

Similarly, we have to plan our finances, take different steps at different times and monitor and review our progress to achieve financial freedom. Winning a lottery or selling out your business or company will get you a lot of money but if you don’t take care of it and plan well, you might squander it all. People who are successful investors have worked on their investments for many years and are able to delay gratification and do not believe much in quick successes.

Let us look at the various ways farming and investing are similar –

Prepare your financial Plan

Just like a farmer readies the land before cultivating it, you should prepare your financial plan stating your objectives, steps to achieve your objectives, and parameters to measure your success.

Execute your plan

Once the land is ready, the farmer sows the seeds. He should plant generously. He should constantly cultivate and fertilize the field. He should water the crops regularly. The farmer bears the risk in terms of weather conditions etc. which he cannot predict. But he studies a threat from insects and birds etc. and finds the right time to plant seeds and takes precautionary measures. Similarly, as an investor, you need to take calculated risks to get optimum returns. You need to research before you invest.

Protect your finances

For a farmer, it is important to protect the crops. He has to work at the weeding. He has to build fences around the field to protect from stray animals. He has to plant in such a way and such time that crops are protected from unfavourable weather conditions.

Even small Farmer tries to saw two crops – to avoid losses due to the price fall of one item due to the cyclical nature of food prices. Similarly, you cannot invest all your money in one basket – diversify. You have to take steps to mitigate losses and protect investments from the downside. You have to be careful of where you invest and review on regular intervals.

Be Patient

Just like you cannot reap the harvest fast, you cannot become rich overnight. It takes time for investments to give good returns. It is not smart to sell some stocks just because they have reached near their highs. They might have more potential. Similarly, Stocks and Mutual Funds units will not rapidly increase in value. You have to be patient to reap the rewards of a good investment plan.

Keep working towards your financial goals

A farmer has to keep working in his field. He also gives a break to the field from cropping so that the soil gets replenished. But even then, he takes care of the land and soil. Similarly, you have to keep working towards achieving financial independence. If you are not actively doing anything with your investments, you should take other steps like getting your documentation in order or checking if nominations are in place. You can update your financial knowledge as well. These steps will help you in easing the way to reach your financial goals.

It is not easy to follow the Law of the Farm as we want shortcuts for everything including financial success. We want to put minimum effort and get maximum returns. In farming, you cannot ready the soil, plant the seeds and put the required water and fertilisers in a few days and expect to get a good harvest. Similarly, you cannot cram all your investment strategies in a small time frame and expect them to be a success. You might make money in a few quick trades, but that will not work in the long run and nor will they help you achieve your financial objectives.

Do remember that, in investing just as farming, you need to focus your efforts on the goal and work with dedication and discipline to reap a good harvest. You need to make the right efforts, take the right decisions at the right time in a continuous manner to get successful results.

These points may sound so simple but in reality most of the investors don’t follow. Tell me a good reason why most of the investors join the party at the peak of an asset bubble. 

Instant Gratification is Hazardous to your Wealth

Hemant Beniwal
-
6
Instant Gratification is Hazardous to your Wealth

We live in the world of everything ‘Instant’. We can live off instant noodles and coffee. We like something that we see and can have it delivered to us by ordering online. We can acquire the latest gadgets as soon as they are launched or sometime before they are launched. We need not wait for our salary to be credited to our account to buy something. We can always buy ‘NOW’ and pay later using credit cards.
This is very different from the earlier generations who knew how to wait. They had to wait for a letter to get news from their dear ones. They had to wait till they had saved up enough cash to buy a luxury item. Today we really do not want to wait or even do not have the patience to wait for anything. Of course, technology has helped to speed up things and it has many advantages. But has it improved the quality of our life. We just keep doing things to get short-term satisfaction, but this results in lesser success when it comes to long-term goals, feeling of satisfaction and balance.

Instant Gratification is Hazardous to your Wealth
It is more so in the case of financial goals. You want to buy the new car launched even though it is not a necessity but do not think of the long-term financial needs. You want to go to the fancy restaurant and blow up a lot of money which could be saved for a rainy day just because your neighbour went there. You buy some financial products without much thought just to save some tax. You are satisfied in the short-term as you feel good with your latest purchase or feel proud about saving some money. But will this matter in the long-term finances. The car will be expensive to maintain – the EMIs will become a burden. The tax-saving product might not fit into your investment plan leading to financial imbalance.
Do you think you are more contended than people of the earlier generation with a similar lifestyle? Mostly the answer would be “No” considering the stress and discontentment around. What can we do about this?
They say, “Great things come to people who can wait.” We need to understand the concept of delayed gratification. It means selecting something that will stop you getting something instantly for the satisfaction of getting something better later. This will help in our personal finance and even other aspects of life.

How do we embed delayed gratification habit in our life:

1) Strike a balance –

It is good to have a balance between instant gratification and long-term satisfaction. You might want to spend on some things which you really like for short-term gratification and save the rest for long-term goals. If you keep stopping yourself from spending on what you really like, there can be negative consequences. You might feel low, inferior to others and if it gets to you, you might let loose and really go overboard on expenses completely disregarding long-term goals.

2) Pay cash –

When you are tempted to buy something which is not a need, try to pay by cash. When you see real money being spent, you might think twice the next time. You would think more logically when making saving/spending decisions.

3) Create a Financial Plan –

It is of utmost importance to create a financial plan. The plan will have the details of income, expenditure, assets and liabilities. It will have the short-term and long-term financial goals. It will have the steps, investments to be made etc. to achieve the goals. This will help put things in perspective and when you are tempted to satisfy your wishes instantly, you will check if this spending fits with the plan or not.

4) Manage Investments better –

You have some mutual funds or blue chip stocks with you and the stock market is on an upward trend. You might be tempted to sell them for instant gratification. Have you thought what would you do with the sales proceeds? If the stocks have more potential, in the long run, it might be better off to hold on to them which might not give you instant gratification but the delayed gratification might lead on to higher profits. Similarly, you might be holding on to investments which are not performing well and do not have the potential to give you good returns. You might be holding on to them to have a false sense of comfort or to avoid admitting you made a mistake. It is better to sell them off and cut your losses. You would feel bad at making a loss but in the long run, it is better for your finances.

5) Avoid Temptation –

It is difficult to avoid temptation. We are tempted to buy things, go for ‘sale offers’ at malls and eat and drink in excess. We are tempted to have what others have. These things make you feel good in the near term but are not good for your long-term finances. You have to think rationally and responsibly before making any decision to spend or save. Instead of giving in to impulse purchases, you could take some time out and list the reasons for the purchase. More often than not, there will not be a concrete reason to make that purchase and you would be convinced not to buy.

Instant Gratification is Hazardous to your Wealth Click to Tweet

6) Education and Career –

You have to plan your education as per your interest, scope for the future and financial means. You might join a course because your friends have enrolled in it and you fear the unknown in a new or different course. You might feel comfortable for some time but then if the course is not something you enjoy or something that will use your potential, it is a waste and it will affect your future life in many ways. Similarly, you should choose your job or income opportunity with careful thought. High paying jobs are not the best necessarily. You should look at various aspects like the company profile, your career path and potential in the chosen subject area. This will ensure that long-term career is taken care of.

We do not think of the long-term finances when we make impulse decisions on buying and selling. It is important to keep an eye on the long-term financial rewards and make sure that short-term gratification does not mess up our finances.

Must share – how you hold your horses…

Throwing Good Money After Bad – Sunk Cost Fallacy

Hemant Beniwal
-
4
Throwing Good Money After Bad – Sunk Cost Fallacy

Sunk cost is defined as a cost that has been incurred in the past and cannot be recovered. You must be surprised all of us do this mistake – levels can be different. In everyday life, we tend to think that we make rational decisions. But are they always rational? For example, you go to see a movie in the theatre over the weekend. But 15 minutes, into the movie, you realize it is a bad movie. Do you leave the theatre? Most of us suffer the movie thinking that we have paid for it and might as well utilize it. It even happens in the games in fairs and malls. We keep spending money to play more in the hope that we get some prize at least else we believe that the money spent is wasted. Behavioural traits in choosing the above-mentioned options are called sunk cost fallacy.

Throwing-Good-Money-After-Bad-Sunk-Cost fallacy

Image courtesy of sdmania at FreeDigitalPhotos.net

Read More- What is Insurance – Investment or Expense

This is sunk cost fallacy as you have spent time in seeing a bad movie. You could have utilized that time better. You spend a huge amount of time and money to get an inexpensive prize as you believe that you have already spent money on this and need to get something at least back. But you do not realise that you have acted irrationally as you have “wasted” a lot more money and time compared to the prize or the experience that you are getting.

Throwing Good Money After Bad - Sunk Cost Fallacy Click to Tweet

Few examples of Sunk Cost Fallacy

We fall for the sunk cost fallacy in various aspects of our life including our personal financial life –

If we look into history – Vietnam war was Sunk Cost Fallacy for the USA, Concorde (fastest passenger plane) for France & Britain, countries bailing out banks or companies.  Most Common example that comes to my mind in case of personal finance –

Investment-Linked Insurance Policies – Sometimes I feel Insurance companies created these products after doing Ph.D. in “How to use Sunk Cost Fallacy?”. The way these products are created, it’s really tough to take surrender decision – at least we are emotionally stuck. If you are TFL reader I don’t think I have to explain this again, others should go through below links.

Must Read- How to exit mis-sold insurance policies

Few More… 

1) Investments in Direct Equity – You have bought few shares of a company you thought had potential. It was probably a good “performing” stock at the time you bought. But for some known/unknown reason, the stock falls in value and now you get information that the stock is not going to perform very well. What do you do? Many of us hold on to the stock thinking that the money invested is already sunk cost and to leave it as-is in the hope that someday we might get better returns. This is not a smart move as 6 months down the line, the investment value will erode more causing you to lose more money. If you had sold it 6 months before, you would have made a smaller loss. You could have invested that money in a better investment alternative and earned better returns. Averaging when stock prices (individual stock) are falling is very common in direct equity but it’s really dangerous. THINK – what will happen if that stock will never recover. It’s not only limited to direct stocks – we can find n number of similar examples in Mutual Funds.

You may be surprised to know that Reliance Power have more shareholders than Reliance Industries – I think it’s a brilliant example of Sunk Cost Fallacy & Herd Mentality. 

Check- Psychology of an Indian when it comes to Life Insurance 

2) Holding on to physical assets like land, vehicle – The sunk cost fallacy affects other investments too. For example, you have a car and you keep fixing it year after year and spend a huge amount on repairs thinking you have spent a lot of money in buying the car and you cannot afford to buy a newer one. But have you considered the time, effort, trouble and money invested in fixing the old car. (but before buying a car – must answer these 4 questions) It might make better sense to consider future costs only rather than thinking of the costs incurred in the past. Similarly sometimes investment in the land does not appreciate. But holding on to the investment and locking that money there is sunk cost fallacy. It is better to sell it off and minimize losses.

3) Everyday Life – We make many such irrational decisions. For example when we go for a buffet meal, we try to maximize for the money paid. We end up overeating which is not good for the health and can cause sickness. Sometimes we tend to give great appraisals to employees whom we have hired just to prove that we have taken the right decision. But in the long run, if the appraisal is not fair, it will hurt the department and the company and your career too. Club Mahindra (my sunk cost fallacy) or any other membership.

4) Entrepreneurship – People who start their own business are passionate about it and will do everything to make it a success. But sometimes, the business does not perform well and does not look like it will be successful. Instead of mitigating losses, entrepreneurs are overconfident and invest more in the business in the hope that it will become successful. Unless there are no rational reasons to support more investment, it is better to think of ways for business closure in such a way that investment loss is minimum.

Read – Steps before you start your own business.

Why?

People fall for the sunk cost fallacy as they want to avoid loss. They are financially as well as emotionally invested in many decisions and cannot bear to see their decisions go wrong.
But it is important to get out of it. It is important to think logically. It is important to realize the additional costs incurred in terms of time, money and effort due to poor decision making due to sunk costs. They should not fall for the sunk cost fallacy in investment decisions as investment returns can be affected adversely and it can lead to the financial plan going awry. Once you are aware that you are giving sunk costs a lot more weightage than you should, you will take more logical decisions.

How to save yourself from yourself 🙂

A simple trick can help – whenever you are stuck in such situation, Ask yourself

  • “If I weren’t already invested in this ……, how much would I invest in it now?”
  • “What else could I do with this time or money if I pulled the plug now?”

Some time calculation may not be simple but right logic can take you in the right direction.

I can’t imagine that you haven’t fallen prey of Sunk Cost Fallacy – must share your experience. 

How to save Capital Gains Tax on Property sale?

Hemant Beniwal
-
53
How to save Capital Gains Tax on Property sale?

Do you want to reduce your capital gain tax liability on Property transaction?

If yes, then this article is for you! 

 What is Capital Gain?

Profits or gains arising from transfer of a capital asset are called “Capital Gains” and are charged to tax under the head “Capital Gains”.

How to save Capital Gains Tax on Property sale?

Image courtesy of iosphere at FreeDigitalPhotos.net

Types of Capital Assets

  • Any Property
  • Any security
  • Jewellery
  • Archeological Collections
  • Drawings
  • Paintings
  • Sculptures
  • Any form of Art.

Types of Capital Gains

types of capital gain tax

  • Indexed cost means the inflated cost of the asset which is taken out by dividing the index number of year of sale and index number of year of acquisition of the asset.
  • LTCG stands for Long-Term Capital Gain and STCG stands for Short-Term Capital Gains.
  • Indexed cost also stands for Adjusted for Inflation.

Read: Cost Inflation Index (CII) How it impacts Capital Gain Tax on Real Estate & Mutual Funds

What is Capital Gains tax on sale of property?

The Income Tax Department imposes taxes on capital gains. These taxes are capital gains tax. If a property has been owned by you for less than 3 years and you have sold it, short term Capital Gains tax has to be paid else  the terms of Long Term Capital Gains tax have to be applied. Short Term Capital Gains tax is paid as per income tax slab that one falls under. Long Term Capital Gains tax is set at 20%.

How to save Capital Gains Tax on Property sale? Click to Tweet

How do I save Capital Gains Tax from sale of Property?

  • Section 54 : Old Asset : Residential Property, New Asset : Residential Property

Any long term capital gain arising from sale of residential house property shall be exempt to the extent such amount of gain is invested in

  1. Purchase of residential house during 1 year prior to or 2 years after the date of the transfer of property.
  2. Construction of residential property within 3 years from the date of transfer.

It may be noted here that with effect from 1st April, 2015, such investment can be made only in one residential property located in India.

If the new property is sold before expiry of 3 years from the date of acquisition/construction, then for the purpose of calculating capital gain for such property, the cost of acquisition shall be reduced by the amount of capital gain exempted earlier.

  • Capital Gains Account Scheme:

In case, the new property could not be acquired/constructed before the due date of filing of return for that year, the amount sought to be invested can be deposited in Capital Gains Account with any authorised bank. Generally, most of the public sector banks are authorised under the Capital Gains Account Scheme.

Note that the amount so deposited shall be eligible for exemption as if it has been utilised for purchase/construction of new residential house property, however, if any amount so deposited, remains un-utilised at the end of 3 years from the date of transfer, it shall be chargeable to tax in that year.

  • Section 54 EC : Old Asset : Any Asset, New Asset: Specified bonds

If you have sold property but do not wish to invest in another property soon, you can invest in bonds issued by National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC) to save capital gains tax. You can invest up to Rs. 50,00,000 in the bonds within 6 months of date of sale of property. The bonds must not be sold up to 3 years from the date on which property was sold. It has to be noted that you should invest before the returns filing date if you wish to claim exemption in that financial year.

Kindly note, please make use of this benefit before the return filing date. If the amount is not invested, then it is included in the taxable income.

  • Section 54F : Old Asset: Any Asset, New Asset : Residential Property

Wondering about how to save your tax if you have any asset other than residential house? There is Section 54F for you. J

Secton 54F : Section 54F states that any gain realizing from the sale of any long-term asset ( Apart from residential asset ) shall be fully exempt if the entire net sales is invested in purchasing of  1 residential house within 2 years or before 1 year from the date of such transfer OR the net consideration is invested in construction of 1 residential within 3 years after the date of such transfer.

Pro-Rata Exemption: If full consideration is not invested into the aforesaid options, then exemption would work on a pro-rata basis. The formula for the following is:

Amount exempted= Capital Gain X Amount Invested/Net Sale consideration.

Kindly note, at the date of such transfer the assese should be in possession of not more than 1 residential house apart from the house that he is investing his capital gain into.

Read: Mutual Fund Taxation in India

What if you have loss in selling of a property?

Things  does not always work out according to the pans. If you end up in loss after selling your property, then that Long Term Capital Loss (LTCL) can be set off from long term capital gain ( LTCG ) arising from sale of any asset ( apart from gains arising from sale of shares, mutual funds etc on which STT has been paid ).

If the capital loss cannot be fully set off in that particular financial year, then it is allowed to be carry forward for 8 years but should be set off under the same head only.

Herd Mentality – If 10 Cr people say something Foolish, it is still Foolish

Hemant Beniwal
-
10
Herd Mentality – If 10 Cr people say something Foolish, it is still Foolish

You see a stock zooming upwards and reaching new highs every day. You see your friends buying and calculating their notional profit every day. There is “positive” news on the stock always. You too go ahead and buy it and as everything that goes up must come down, the stock value plunges and you lose your hard earned money. Is this not a familiar story? What you did is, followed the herd and invested at a higher price without having the right reasons for investing.

Herd Mentality - If 10 Cr people say something Foolish, it is still Foolish

What is Herd Mentality?

Herd Mentality is defined as individuals doing the same thing as others in the group so that they conform to the norm and their desires for acceptance and belonging to same group are met. They also feel they will be safe if they do the same thing as the group. Sometimes individuals subconsciously follow the group. They may think that their decisions are based on their own judgement and independent thinking. But that may not be always the case and they are just following the herd and accepting the group decision without thinking through it or because they are less experienced in taking such decisions.

Is it only limited to equities?

Not at all – sitting in financial market it’s easy for us to find & share those examples. But what about insurance as investment or Real Estate Price/Bubble (still people are not ready to accept that property prices can correct/crash including builders) or Recent Gold Rush or money making scheme like Speak Asia. Herd Mentality is not only limited to investments – it can also exist in fashion or brands. THINK

It is really tough to stand against Herd Instinct – I have always faced the brunt whenever I have wrote something against social proof. Kind of comments people write can tear your confidence & emotions.

Herd Mentality - If 10 Cr people say something Foolish, it is still Foolish Click to Tweet

How all that started?

Herd Mentality might be good in some cases. Think of nomads – staying together in a big herd in the jungles to stay protected from predators. You will be surprised but science has proved that our behaviour issues are because of how our civilisation has developed over 1000s of years.

But if you don’t do your research and follow the equity market just because everyone is doing the same is a risky proposition.

Height of Herd Mentality

Retail investors have faced the brunt of herd mentality many times. For example, in late 1990s and early 2000s, a lot of people started investing in “dot com” companies without really understanding the business model. People invested when they saw others investing and wanted to jump on the bandwagon. But the bubble burst, many people lost a lot of money when the businesses could not sustain themselves. There have been many cases like this across the world. And one of the major reason for every bubble is Herd Mentality.

Biggest issue with Herd Mentality

If you are following the herd in investing, it means that you are probably already late and you are buying it when it is expensive. Many times experts and analysts and well meaning friends say, “Gold is a good investment” or  “’XYZ’ stock is a good buy” or “Real estate prices will rise”. Each time, if you react by selling what you have invested in and buying a new asset, your transaction costs & tax increase and you might sell off assets which may outperform.  This means you do not get optimum returns.

It also happens the other way around. For example, markets are in a downward trend after the China incident. This does not mean, we should sell off all our stocks because many stocks are at much lower levels. Mutual Funds or quality stocks that you have purchased at the right price after thorough research should not be sold off even when prices are falling. Once markets consolidate, they may perform better. Assets should be bought and sold as per a planned investment strategy and not based on emotions.

WHY – Herd Mentality

Herd mentality also comes into play because as humans, we fear missing out on the opportunity, fear of being ignorant and greed. We always want the best and the most with least effort and as quickly as possible. But herd mentality mostly does not help us to achieve our financial goals.

How to save yourself from yourself 🙂

Though it is easy to follow the herd, you are better off following a sound financial and investment plan –

  • You should do your research on the various investment options available.
  • You should have an asset allocation model in place based on your risk profile.
  • You should focus on your financial goals, long-term investment strategy and personal finance status and take investment decisions accordingly.
  • You should be ready to face some ups and downs in the market. It is impossible to time the market correctly and buy at the lowest prices and sell at the highest prices. You should not get emotionally attached to the profits and losses made.
  • You should take the help of a financial planner if you are not confident of making investment decisions. But you should be involved in financial planning and track and review actions taken by the financial planner.

You might still face losses or miss some opportunities but you should focus on your long term financial plan. But no one can get the best of the market each and every time. You should make investment decisions to achieve the short-term and long-term financial goals that you have set. If you see yourself being tempted by what is happening in the market and wanting to buy/sell, you should keep your emotions in check. You should force yourself to take a few days to review your buy/sell decision. Once you are more rational, you should consider how this step aligns with your long-term financial plan and then take a decision.

You should remember that aiming for financial stability and growth is more important than following the herd.

Do you think, you have made investment decisions following the herd? What was the impact of that decision on your investment portfolio and strategy?

Ark wins the Emerging Advisors Award at WealthForum

Hemant Beniwal
-
13
Ark wins the Emerging Advisors Award at WealthForum

Since the inception of our financial planning firm, ‘Ark Primary Advisor Pvt Ltd’ in 2009, we have worked towards making people more financially independent so that they can lead a life that they dream of. (Without any worries about their finances)

Day by day, we worked towards giving our clients the best and we are now helping over 175 families across the world to achieve their financial freedom.  Love and appreciation from our clients and recognition from our fraternity keeps us moving forward. We are proud to have received a prestigious award which we believe is the recognition of all our efforts over the years

Ark has been awarded

‘The Emerging Advisor Award’

by WealthForum

Ark emerging advisor award wealth forum

WealthForum Emerging Advisor Award

“Three years ago, Wealth Forum instituted the Emerging Advisor Awards to recognize new talent in the IFA world. Every business and every profession needs young blood to infuse new life and new vigor in the profession, to challenge status quo, to raise the bar, to nudge the profession to scale new highs. The Wealth Forum Emerging Advisor Awards puts a spotlight on emerging talent in the IFA space, and recognize rising stars that are making a mark in the profession within a short span of setting up their practice.”

Ark primary advisors award

We really liked the message on certificate “In setting a benchmark in excellence, you have challenged the rest of us to push ourselves harder & further.” 🙂

What worked in our favor

What worked in our favor is passion for goal based advice, understanding people -before numbers & the virtual advice model that we followed from day one.

Last quarter report from global consulting powerhouse McKinsey identifies Virtual Advice as future of Financial Advisory.

Ark wins the Emerging Advisors Award at WealthForum Click to Tweet

“Virtual advice should not be confused with a high-end call center” the report reads. The three core features that define the virtual advisor channel, according to McKinsey, are:

  1. Dedicated advice at a distance i.e. centralized hubs from which high-caliber advisors deliver a high level of personal service.
  2. Central locations from which advisors interact with clients via phone, video chat and e-mail.
  3. Seamless digital fulfillment with nearly all transactions completed digitally and seamlessly.

The Iceberg Illusion

As the pictures say, there is a lot of hard work and dedication behind a lustrous success story.  Our firm has a similar story – we will share it someday.

I

This award gives further impetus to us to work with passion, dedication and love for our existing and future clients. A heartfelt thanks to our clients & our team – without them this would not have possible. We would also like to thank organizers and fellow advisors for this prestigious award. Special thanks to TFL readers – you all are part of Ark’s journey.

1...181920...44Page 19 of 44