Financial Planning : Mistakes I Did & Lessons I Learnt

Please give time and read it carefully. I am not a Financial Planning expert, but I have learned a little
1. from my mistakes, 2. from my own research on this topic and 3. through some really good financial advisers. Sharing few of the lessons and general tips.

This blog is especially for all my medical students and residents, who hardly get time to think and plan about their hard earned money or do random investments here and there without any plan under influence of agents who plan their future through your money or simply spend it with no wish of saving !!

It's difficult, but not impossible to find a good financial adviser, who understands your needs and dreams and plans your investment portfolio. My parents and elders in family taught me the value of saving and piggy bank was our love too. But later I struggled and made lot of mistakes in investing my hard earned little salary. Time taught me few hard lessons and I realised my mistakes.

Though I still do mistakes and no one can be perfect in investment planning , but we can certainly minimise our mistakes and learn from others.

When I started earning after finishing my medical studies, that lasted around 14 years, I was already 34 years of age. During medical studies in MBBS I was dependent on home , though by selling cards made by photos I click, I earned some pocket money, eight rupees per card . Then as junior resident in MS general surgery course my pay was approximately 5000 to 7000 rps per month for three years and in MCh CTVS course as senior resident it was approximately 12000 to 14000 rps per month for three years. And I had no idea how and where should I invest my hard earned money, simply because of ignorance, lack of priority and no time . Whatever little I was able to save ,I kept on investing randomly with advises by random financial agents, with no future thoughts and goals resulting in loosing my hard earned money and missing the benefits of 'early you invest, early you make good returns.'

One of my friends Prof. Lalit Mohan Agrawal says "I too have faced similar challenges which taught me to have 1. Health insurance, 2. One Flat, 3. secured monthly income after retirement because we will not get pension 4. Bank balance of at least 5 months salary for emergency, 6. Good friends and sincere relative along with happy intact family." Always remember 6th one is not the last and least, it's equally important too. 

My suggestions to all young medicos and all our MBBS students and MD/MS/DM/MCh residents , go through below mentioned points , carefully, start your financial planning early, don't think that it's too early to waste time on this, don't think I will start saving after marriage, do your own research, find a good financial adviser, a good doctor for your money, ask questions from adviser, don't follow blindly, do patient's not seek second opinion on our advise to them ? , same-way seek second opinion on your financial adviser suggestions if needed , give time to understand your investments and return from it. Diversification, Patience and Timing are the key factors , and yes I strongly feel that MCI should introduce financial planning as a full chapter in MBBS curriculum. 

The most common mistake across the world investors commit is , following the herd. 

I would recommend two books, Predictably irrational by Dan Ariely and The art of thinking clearly by Rolf Dobelli. Both the books talk beautifully about the behavioral biases we carry, which lead to wrong decisions in Investing. Another interesting book is Rich Dad Poor Dad... and the lessons from it are : 

• Explodes the myth that you need to earn a high income to become rich

• Challenges the belief that your house is an asset

• Shows parents why they can't rely on the school system to teach their kids about money

• Defines once and for all an asset and a liability

• Teaches you what to teach your kids about money for their future financial success

Last week while discussing with a cardiac surgeon, Dr Swarup Pal, I was sharing some of my experiences, he penned it beautifully in to this small note :

What are the mistakes that can ruin our financial lives?

1. Buying insurance policies for investment purpose:-

Have you invested your money in insurance plan to get a return in future ? If yes, then it's a Big mistake! Out of 100 people, 95 have made this mistake. I did many times.

Very few people understand the difference between endowment plan and term plan.

“Your term cover should be 12-15 times your dependent family's annual expenses”. Yet another thumb rule says it should be at least 8-10 times your annual income. But these are rough calculations and what's your worth or what value of term plan you should take, can be calculated with help of many charts and tables available online. 

A good article on this is : 

http://www.ecoti.in/b5fd0Y 

2. Are you paying the minimum amount due on your credit card payment?

If yes, you are trapped in credit card mystery.

On the other side, very few people really enjoy the benefits like free lounge access, buy one get one movie ticket, etc. So if you are not using them, shed these benefits from card and have a card that has no or minimum yearly fees. Remember credit cards are one of the biggest cause of you falling into a debt cycle that will never end.

3. No idea about the power of compounding:-

Everyone has come across the formula of compounding but very few people really understand its power. This is the reason people do not start saving early and hence lose out on the power of compounding. Albert Einstein said that power of compounding is the eighth wonder of the world.

The PPF is a wonderful saving instrument, not only good for income tax saving, but it helps you to accumulate a very good wealth by the time it matures, and another good thing is that interest is tax free. One should certainly open PPF as early as possible in life. It can be extended after maturity.
The ideal way to maximize the interest on your PPF account would be to invest Rs 1 lakh (the maximum investible amount in a year) at one go at the beginning of the financial year. PPF accounts follow an April-to-March year so to earn the maximum interest, you should deposit the amount on/before 5th of April every year. A one-time deposit will earn interest for the whole year.
For details https://groww.in/p/savings-schemes/public-provident-fund-ppf/

4. Buying stocks based on tips without any knowledge:-

You will find every Tom, Dick and Harry giving stock tips over Facebook, Whatsapp and TV.

Unfortunately, a lot of people fall in a trap of these people and invest money without any knowledge. What is the end result? They lose everything!

5. Becoming a victim of lifestyle inflation :-

Moving from 2bhk to 3bhk just because you have got a good hike, upgrading your car because you have got some bonus upgrading mobile on every new model launches or big sales are some of the examples of lifestyle inflation destroying financial lives. Your wardrobe is overflowing with garments which you seldom used. Yet you buy on every visit to mall or on every discount on online sales.

6. Buying things just because they are on discount :-

From Amazon’s “Great Indian Sale” to Flipkart’s “The Big Billion Days”, everyone is en cashing on the weakness of Indians buying things just because it is on discount.

Funny thing is now you will find such sales every other month.

7. Getting tempted to go for an exotic vacation just because someone put a post on Facebook and Instagram

Instagram and Facebook are introduced as Social Media Platform but they are actually destroying the entire social fabric. Facebook and Instagram are more of a marketing platform where people post stuff just to get some likes and companies promote their product and services.

8. Spending a bomb on weekend parties:-

5 days work and 2 days party: This is the new culture in India.

Pubs are jam-packed on weekends where people would spend a bomb on drinks.

By the end of the month, they are left with no money. Think for what kind of fun are you doing this ? Will this give you any eternal happiness ?

9. No track of cash flow:-

Very few people keep a track of their expenses. Most of them just don’t know where the money is gone. Maintain a Diary of your expenses, this will help to develop financial discipline.

10. No emergency budget :-

Not having any extra money in the case of an emergency results in embarrassing situations of borrowing money from friends and relative. Some people even break their investments and make a big mistake.

11. No medical insurance :-

People are losing out the lifetime savings just because they did not take medical insurance.

One accident can shatter all financial dreams. Better be insured. Healthcare cost is rising and it is impossible to manage it without insurance. Read fine prints carefully before taking a plan. Compare online different health plans available and then take one. https://health.policybazaar.com/

12. No financial plan :-

People do not know why they need to save money because they don’t know their financial goals.Set your goals, like your higher education,home,recreation,enjoying hobbies,marriage,children's education and marriage,health needs etc. Plan about your retirement also, look for retirement plans that suit your life style and needs. https://www.policybazaar.com/life-insurance/pension-plans/ will give you some idea on different pension plans in India. Yes it all looks very confusing, but then if you give time, it will become clear. Think about NPS plan of Government of India also.

13. No diversification :-

Some people would invest all their money in real estate, some would invest all the money in gold, some would just keep it in the locker, some would invest all the money in the stock market.

Very few people understand the right way of diversifying the investments. Like we eat different foods to get all nutrients needed for healthy body, in same way we need to invest in different segments to keep our money and returns healthy.

Always diversify your investments. In your financial basket you should have bank investments like FDs and PPF, post office saving schemes, NPS, term and health insurance, mutual funds, property, gold etc.

14. Spending all the hard earned money on children marriage :-

Thanks to our Hippocratic society! People save their entire life just to spend all the money on random relatives who only bother about the food and arrangements.

15. Buying excessive gold only to keep it in the locker :-

Gold worth lakhs is kept in lockers only to be used once or twice a year. This is resulting in the money getting blocked and hence not getting any returns on it.

16. An extremely conservative approach with investment :-

Traditionally, people have been risk-averse. They would just have an FD and live on 6–7% annual interest. Some would just keep the cash at home. Both the approaches will actually make your money negative. Yes some amount of money should be in form of FD or cash so that in emergency you can have liquid money immediately.

17. Lack of clarity between asset and liability :-

Having a car is not an asset because it consumes fuel and has a maintenance cost.Its price will only depreciate in the future. Car is a necessity but people spend a lot of money and even take the loan to buy a luxury car over and above their budget.

18. Considering frugal as cheap :-

A lot of people confuse economic spending with being cheap. An economic spender does not compromise with quality but does his research well enough to buy the product or service at the lowest rate.

19. Procrastinating investment decisions :- “I will invest from tomorrow”. But the problem is that tomorrow never comes.

20. Spending a lot of money on fancy stuff :-

A fancy car, a fancy house, a fancy watch, a fancy vacation. People want fancy stuff and willing to pay a premium irrespective of the value it generates.

21. Lack of patience :-

“I can’t wait for my wealth to grow.I want to double my investments in 6 months. I need to invest in the stock market.” A lot of people lose their lifetime of savings because they don’t have the patience to understand the investment option and would blindly trust anyone with their investment. Another factor is lack of patience when you have done SIPs in Mutual Funds, market goes ups and downs, and when it's down we get panicky and start withdrawing, here patience may play the key. because what goes down certainly comes up one day. As i understand timing and patience play key roles in getting you good returns from mutual funds apart from the selection of funds. One should do research online by seeing the performance of various fund houses and then choose the MFs. Mutual funds are also subject to market risks. Don't sign blindly, ask the adviser about the funds in detail.
What is SIP?

Systematic Investment Plan, commonly referred to as an SIP, allows you to invest regularly a fixed sum in your favourite mutual fund scheme/s. In SIP, a fixed amount is deducted from your savings account every month and directed towards the mutual fund you choose to invest in.

22. Depending upon others for investment decisions :-

“I don’t know anything about investment. Please manage my money.” Unfortunately, a lot of people are dependent upon others with their hard earned money. This is the reason we have a lot of self-proclaimed experts giving stock market tips. But such illiterate investment by you will harm you only.

23. Not discussing the money matters in the family and with Financial Advisers :-

Discussions related to money are considered as a taboo in Indian families. Nobody really discusses money matters.

24. Wasting time on unproductive things :-

Rather than learning new stuff and growing the skill set, people end up wasting time on social media.

25. Lack of disciplined investment :-

Instead of spending what is left after investing, people invest what is left after spending.

This results in undisciplined investment.
26. Property Investment : Buy a property only when you can manage it, you can go there at least once in a year, you have checked its legal papers in depth, land should have well demarcated boundaries, it's always better to but ready to move in flat, don't just buy because property is cheap, you should have a reason to buy it.
27. Teach not only the importance of saving but how and where to save also to your children.

27. Root Cause :- Lack of knowledge about personal financial management !!

Make yourself financially literate for better financial future for you and your loved ones. Treasure of information is available on web on managing your personal finance. Few of the websites are 

valueresearchonline.com, investopedia.com, allbankingsolutions.com, rbi.org.in, sbi.co.in,   indiapost.gov.in,   india.gov.in   incomtaxindia.gov.in, finmin.nic.in, licindia.in, npstrust.org.in, pfrda.org.in, epfindia.gov.in, amfiindia.com, moneycontrol.com, moneyexcel.com,  charteredclub.com, taxguru.in, cleartax.in, basunivesh.com, nseindia.com and of course search engine- google.com and youtube.com.

Thanks for Inputs by : Shyam Maheshwary

Dr. Siddharth Lakhotia

MBBS, MS, M.Ch (CTVS), FIACS