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8 Personal Finance Mistakes That Are Too Common And Too Expensive

No really, why invest at all?

25/03/2017 9:25 AM IST | Updated 25/03/2017 11:58 AM IST
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Sometimes you need to lose money to learn about losing money. We bring you some of the worst financial mistakes people make. Here are some sure-fire ways to lose money, and how.

Start investing late

The idea is to keep working until that one day when you have a heart attack hunched over your keyboard looking for the letter "R" when you're typing out your resignation. Spend in your 20s, because there's nothing left to save. In your 30s, you're too busy with your career to invest. In your 40s, your housing loan and kids take over and man, stuff is so expensive! In your 50s, let's get to saving.

Saving ₹10,000 per month when you turn 25 can make you to ₹3.25 crores by the time you're 60. To get to the same point from age 50 instead, you will need to save ₹170,000 per month. Start at 40? You'll be paying ₹47,000 per month.

Basically, it costs less to start early.

No really, why invest at all? Aren't bank accounts good enough? What's inflation?

"If I have some money in the bank, I am earning 4 per cent. And then there are fixed deposits that earn 7 per cent. Isn't that enough?"

But if you pay taxes of this, your money grows at less than 5 per cent, which is lower than inflation.

Why care about inflation? If you're spending ₹50,000 per month today, you'll be spending ₹200,000 per month in 25 years at an inflation of 6 per cent.

Why care about inflation? If you're spending ₹50,000 per month today, you'll be spending ₹200,000 per month in 25 years at an inflation of 6 per cent.

Yet, if you invest just 30 per cent of what you spend today, and it gives you a 12 per cent return, you would have more than ₹4 crores in 25 years. And that takes care of your spending (by now, ₹200,000 per month) for 22 years more without having to work further.

Therefore, bank accounts don't beat inflation. Real investing does better.

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Pay just those credit card minimums every month

"I love my credit card. I pay only the minimum every month. I'm smart, I rotate credit."

You might as well wear a hat marked "Sucker." Credit card rotation is the most expensive form of interest known to formal finance. Typical interest rates are 36 per cent a year, and then there are so many fees and taxes that your brain turns to jelly by the time you figure it all out.

Credit card rotation is the most expensive form of interest known to formal finance.

At the very least, find a way out by taking a personal loan--this will bring down the interest rates to about 12-15 per cent. And pay the entire outstanding amount each month, or you'll be outside, standing.

Ignore the impact of compounding.

"₹20,000 per month gives me 1 crore in 25 years! That's awesome, where do I sign?"

If you think that's a great return: This is how much your a 4 per cent bank account will give. It's nothing, and it's less than inflation.

That's because as humans, we can't think in large numbers and long time-frames easily. So use online calculators. At a more acceptable return of 12 per cent, you will end up with ₹3.75 crores in 25 years. And if you increase the monthly payment every year by 6 per cent, you'll have ₹5.8 crores.

Now, that is really being a crorepati.

Ignore taxes

"So what if I pay tax? Either I pay it later or I pay it now..."

Consider the 10-year fixed deposit of ₹10 lakh that gives you 8 per cent. And then, consider a mutual fund investing in bank debt that gives you the same 8 per cent.

In the former, you pay taxes every year and the rest is re-invested. Your return, then, is lower, and after 10 years, it can be lower by a good quarter -- ₹17 lakhs versus the mutual fund investment which has become ₹21.5 lakhs now.

Holding investments longer term will reduce your taxes.

Holding investments longer term will reduce your taxes. A long-term mutual fund is taxed at 10 per cent, and a long-term equity investment sees no taxes, currently. The lower taxes can significantly increase the money you'll earn.

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Keep buying houses

"You can't go wrong buying a house. There's only so much land, but the population is increasing."

Property prices have, in the last few years, fallen to low single digit percentage growth. Properties are typically so expensive that you end up taking a loan at 10 per cent or so. And with rental yields at 3 per cent, it's hardly sensible to borrow and pray for price appreciation.

There may only be so much land, but it's more than enough to support all of India's growing population for the next millennium.

Refuse to diversify

"I work in this company. My savings are locked in this company's shares. They even pay for my health insurance."

If your company has to shut shop, then you have two problems: You don't have a job, and your savings are now worthless. Not diversifying risk is to deny yourself the cheapest investments. You just invest in different things that don't necessarily go up and down together. You'll have a little debt, a little equity, a little gold, some (but not too much) real estate, and so on.

Too many people have their wealth in fixed deposits, and their idea of diversification involves choosing different banks.

Taking advice from people who pretend to care but don't

"My banker tell me to buy that insurance product so I did. I got an SMS to buy a stock and I did. My neighbour is investing in startups. My husband's friend has a second cousin who walks the dog of this company's CEO, and she said they will make lots of money so should I buy that stock now?"

When information is being given to you for free, question why. You aren't entitled to anything free, and they've even managed to bottle fresh air. So why would someone give you good advice for free?

When information is being given to you for free, question why.

The bank manager gets his commissions. Your SMS tipster just wants you to bump up a stock. Your husband's friend's CEO connection is, well, a waste of time.

Are you an investor or just a lemming? Don't follow advice blindly, especially when it's free. Including this article.

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