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Personal Finance: Expectations Vs Reality. People will not accept.

Personal Finance

“Personal Finance is the need of every individual but we have not taught it in School” 

One of the hot topics of every generation has been “How to become Rich” or “Wealthy.

Our generation is also in the same queue with the same question, which led us to come up with something called personal finance. 

Personal finance is fascinating and catches more eyes to win the race of financial freedom.

It involves a few simple steps and you will see a bright future where you are as rich as you planned.

The dream life looks very next to you like magic happening.

Our expectations related to personal finance differ totally from ground reality. What we are expecting is a very simple and straight 2 steps formula and those are saving & Investing.

It looks as simple as that but the reality is as Morgan Housel mentioned in his book, “doing well with money has a little to do with how smart you are and a lot to do with how you behave.”

I totally agree with this because I lived this by learning a lot about Personal Finance and still facing it and I am pretty sure you went through the same or learned so and the obtained result is not based on the smartness or the knowledge grounded you have.

Because financial decisions are deeply attached to behaviour that is not easy to shape as those decisions are not taken on the spreadsheet, indeed it is taken on the dinner table with our near and dear one most of the time. Although they might not be equipped with the same I want to talk to, since the behaviour is connected to our emotions and emotions guide us to take care of everyone’s points whether it is related or not.

Why? Because they have some expectations from me.

Let us face the world in reality. 

I will break it down in the steps and will try to do some fact-finding on Expectations and reality based on my own experience and others besides what I reached on.

Other 

Let’s begin!

Saving

Expectations:

This is the most favourite advice carried from generation to generation: you are advised by your parents “Save something for the future”. They got the same message from their parents and the list goes on and on. Do you remember those piggy bank days where we sacrificed our pocket money to buy toys and board games for us?

I am sure you remember all that. 

Sometimes we succeed to meet the goal and sometimes fail.

Anyway, our childhood has very few obstacles on the way to savings.  

Those experiences of childhood are hard-wired in our brain and we are expecting the same when it comes to saving, like sacrificing our pocket money for the future.

And also, we have been bombarded with information daily, tips and tricks to save money. Such as:

  • 50-30-20 rule
  • Leave below your means
  • Unsubscribe unnecessary application
  • Think before buying
  • Debt payment.
  • Autosaving

Based on the above lessons and the experience of childhood, we expect a decent amount of monthly savings.

Reality

Now the face the reality of life financial literacy is not the only key to save money, learning and awareness are quite helpful when it comes to saving or expanding but we should never forget that we will have to fight with hundreds of thousands of the smartest brains to cut off our spending those are working day and night to hook us by showing new offers and creating unwanted needs.

Also, life is not as simple as it was in childhood, it is full of surprises. We never know what is coming next in the way of our savings and life will not go according to plan.

  • Suppose your loved one wants to go for today. Did you plan for that? And if not, will you not go by saying that we need to save this 500 for the future?
  • If you lost your mobile today, would you not buy it?
  • If your kid asked you to buy a toy that is not in the plan, will you ignore it?
  • The medical emergency which you are not prepared for.

There are many more obstacles that welcome you in every step of life. Your needs, your desires and your emergencies.

We are humans, not robots, emotion is deeply rooted within.

It doesn’t mean how smart and aware we are, emotional attacks are always winning the game.

Saving needs the combinations of Patience, Secrificess, Persistence & Discipline.

If you are prepared for those please go on, if not get ready to develop those qualities.

“It is not the man who has too little, but the man who craves more, that is poor. –Seneca”


Investing

“It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.” — Robert Kiyosaki

After saving what comes next is investing that hard-earned money to work for you to earn more which is what we know as Passive Income.

Investment by the general public means

  • Land
  • Gold
  • Mutual funds

Mutual Funds

Expectations 

Let’s start with a Mutual fund, we are misguided by Financial Advisor/Fund Agents by showcasing high commission Mutual funds with so-called high returns. They use to show short term gain like: 

“you will get 15% annual returns as this particular mutual fund has performed outstandingly in the last 2 years.”  

and we hook because you will find almost one agent in every 20 people you are surrounded by in most of the cases and one after another are pitching with the same massage somewhere we convinced subconsciously that we should invest on those of one of those high commission mutual fund with the expectation of getting dream returns taught by the agent. 

Reality

As we discussed above, the mutual funds promoted by agents are active mutual funds.

Here is the reality of those mutual funds:

  • Mutual funds do not offer a guaranteed return even though it is managed by a star fund manager. You can face the negative effect of your investment at any given moment.
  • You do not have control over your investment as it is managed by the Fund Manager.
  • Since it is managed by fund managers it involves fund management charges which come from investor’s funds.
  • 96.55% of Large Cap Funds failed to beat their benchmark last year.
  • Any monkey can beat the market in the short term but the market wins in the long term.
  • Diversification will average out your risk and at the same time it will average out your profit. Therefore, investing in several mutual funds is not promising. “Wide diversification is only required when investors do not understand what they are doing.” — Warren Buffett
  • Some Asset Management Companies (AMC) also charge the Exit load while getting out of the fund.

Have you ever experienced your agent transparency on the above points?

While investing in Mutual funds one should always see their financial goal and choose based on the above criteria. Passively managed mutual funds come with very low charges and expenses as it is simply followed by index funds.

Gold

Expectations 

The second common option for common people is Gold because it’s time tasted the safest investment ever in human history. It is considered to be a safety net in investing as its price is not volatile by nature. Since our brain has evolved the way to prefer safety instead of taking the risk. We fall into this easily in expectation of keeping our hard-earned money safe considering the weapon against inflation.

Reality

Let’s dive a bit deeper into our safest investment plan “Gold”. 

Here are facts about investing in gold:

  • It’s not an income-generating investment.
  • If you think about buying gold jewellery which is the most common option for Indians without considering the making charges which depends on design and jewellers and making charges is not calculated while selling the gold. 
  • The gold is depreciating in weight with the use of jewellery.
  • It involves the risk of storage.
  • We have an emotional attachment with our ornaments so it is painful to sell them when needed although the purpose of buying is an investment.

Mentioned just a few of them.

But it doesn’t mean investing in gold is a total waste of money. Gold has been proved as a storage of value and is also considered a hedge against inflation due to its of The landComparingthetability in nature.

(Source: Statista)

Real Estate

Expectations 

The third option we have is Land, obviously due to the factor that land never depreciates unless there is a natural disaster. People who requisite capital park their money in Land. Because it requires sound money to invest it’s not feasible for everyone. Generally, we invest our money inland by having a clear picture of appreciation in the future.

Reality

Real Estate investment is one of the assets classes with a rare chance of losing that is why it holds goodwill in the market. Let us find the reality of real estate investing:

  • It requires a higher cost to invest in. You can invest in the share market with as minimum as ₹ 100 if you want but investing in real estate is not a piece of cake for everyone. You are permitted to think about it with a few bucks in your pocket.
  • The land has very low liquidity as you cannot sell it out like stock and liquid funds. Comparing real estate with other asset classes is illiquid in the short run because land cannot be sold quickly without losing its value.
  • You can also be trapped by buying thelot daily to daily the lot wrong property where the documents have been fabricated in our country.
  • This could be risky during the economic showdown. The price might depreciate instead of appreciation. 

Conclusion :

Personal finance is all about earning, safeguarding, and investing.

Awareness is the first important task you should perform. when it’s come to investment nothing will pay you more than educating yourself. Understand where your money is going analyse it from every aspect to minimize the risk. As Benjamin Franklin mentioned:

An investment in knowledge pays the best interest.” — Benjamin Franklin

Your savings account should not be more than what you need in an emergency because the returns of the savings account cannot even beat inflation.

“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.” — Robert G. Allen

Investment is a long term game, it’s not a quick-rich scheme. Invest your money and seat back and relax. Don’t be panicked and hooked by scammers who are showing you to own a private jet in a few years of investment.

“The individual investor should act consistently as an investor and not as a speculator.” — Ben Graham

I tried to cover the basics of misconceptions about Personal Finance. Yet there is a lot to cover. I don’t find myself literate enough to explain it very well.

Please comment below your learning and experience about personal finance so that we learn from each other.

Signing Off

Sabbir Ali.

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