Money confessions of a techie in the mid 30’s
For some time now, I have been discussing matters related to personal finance with investors working across various sectors such as manufacturing, I.T, pharma, banking to name a few in order to gauge their psychology concerning matters related to personal finance. Coincidently, one of my old friends working in an I.T MNC in Gurgaon recently visit us. It all started with a light chit chat about the news making headlines in the media for a few days now about series of layoffs by I.T sector bigwigs and how serious is the problem really on the ground.
As I and my friend began to dig deep into the problem areas especially those engulfing mid-tier software engineers having high salaries, outdated skillset with fear of being redundant sooner or later, cost pressures on companies due to squeezing of margins and low I.T spend across the globe by clients as a whole, increased automation eating into the jobs etc. etc – my friend said, “Dear friend, this has to lead to a far bigger problem in a totally different way which we no one is anticipating”.
I paused for a moment, gave it a serious thought as if it was a KBC 10 Cr question and I queried in a hesitating voice- “Are you talking about the financial impact of all this mess”?. “Exactly”, he said and I breathed a sign of relief.
He mentioned that impact on the ground is yet to be seen but for sure this has given a grim reminder to techies that even with fat paychecks one needs to plan their finances with utmost caution. All of a sudden, one of most sought after career path is being looked with skepticism, especially in mid-tier and senior level who are hit the most.
We never thought in our lifetime that we at some point of time will also need to plan our finances explicitly as the inflow was always too comforting to even think about planning anything. Having the majority of money allocated to bank FD’s, ULIP policies and PPF, life was going on pretty satisfactorily with enough liquidity in the bank account. Ongoing turbulence in the I.T sector (how minimal it may be at the end) has taught us an important lesson that adequately managing the finances has to be a top priority of any household. Once you have right investments in place, your money will grow. Your money, in true sense will be working for you in the background.
My friend, firmly into his mid 30’s (35 to be precise) now has all the family responsibilities firmly in place – responsibilities of family (wife and two school going children with ever increasing education, healthcare cost), two home loan EMI’s for 2 properties he possesses (one home for self and one for investment purpose), one car EMI, whole host of premiums to pay including ULIPS, car insurance, health insurance, property tax, maintenance bills etc. and most importantly maintain current standard of living. With the job on a shaky ground, it has made him seriously introspect what he could have done better as regards managing his finances all through the last 13 years. He was of the view that had he managed his finances better, he would have been a lot more confident personality today to face such challenges head on rather than worrying too much about the financial impact of this.
He said he had few confessions to make and specifically instructed me to prepare a write-up on this and publish it on the website so that mistakes he has done is not repeated by new joinees or working professionals in mid 20’s who have joined a few years back.
Here’s a summary of some of the points he had put forward during our conversation.
Confession No 1# – Lethargy to understand various investment products
According to him he never had any interest whatsoever discussing investment products since it was assumed that traditional insurance policies, PPF are the best options available. Investment always sounded boring and the market was assumed to be a gambler’s den. This attitude according to him probably did him in. Now he has realized that there is a need to keep self-updated about what can and more importantly what cannot create wealth in the long term. He has realized now that investing definitely is not a rocket science but needs to be planned better.
Lesson: Talk to your spouse, parents about your investments. Sit and discuss. We even within our family tend to shy away from having finance-related discussions and thus lose out on valuable advice which could have been useful to us or maybe unlearn few things from someone’s bad experience.
Confession No 2# – Buying slew of ULIP policies right in the beginning and not keeping investment and insurance separate
Very excited after his first few pay cheques, he one day asked an individual who used to come to his company premises to file tax returns on behalf of employees – “I want to make an investment. Can you suggest something?”. He was suggested a ULIP policy which he thought was a great investment since it gave him a dual benefit of insurance and investment. He paid the first premium and all the premiums post that only to realize 6 years down the line that he could have been better off without it. Within these 5 years, he has bought 2 more ULIP policies and was paying a hefty premium for them too. He also rued the fact that in all these years he not even tried to read in detail the policy documents, its reviews on the web and how this policy fits into his overall financial portfolio.
He also rued the fact that in all these years he not even tried to read in detail the policy documents, its reviews on the web, how this policy fits into his overall financial portfolio or at least take an advice of an expert.
Most of the individuals tend to mix insurance and investment. They get lured by fact that you are getting insurance and investment returns at the same time under one policy. They don’t do the follow-up calculations as to how it actually works and how much returns they will end up getting. A life cover of 2 lakhs, for example under a particular policy in today’s time, is nothing and normally we don’t bother questioning the agent who is selling the policy. Don’t by shy – Ask questions now so as not to repent later.
Lesson: It is always better to do a bit of your homework before asking for a suggestion also. With so much information available to you, it should not be a difficult proposition. Due to this, you can also ask some valid questions to the advisor and have more clarity about the product. This will also make sure that the client doesn’t misguide you on any financial product. Lastly, keep your insurance and investments separate.
Confession No 3# Obliging relatives by buying policies
Though it may not happen with everyone and but he ended up buying some useless policies as he was unable to say ‘No’ to a close relative who was an agent of an insurance company. ‘Sir, ek policy toh leh lejiye’ and there you go.
Lesson: You should learn to say ‘No’ politely in such circumstances. You can’t afford to jeopardize your investment portfolio just to please someone.
Confession No 4# Procrastinating Damage Control Exercise
He mentioned that he invested in a policy which few years down the line he realized that it will give you meager returns. That’s fine. Not a crime. You were not aware of it initially. But where he let down himself was by delaying corrective measures like opting out of policy after lock-in is complete or starting SIP’s immediately when he realized benefits of compounding.
Lesson: Procrastinating the damage control measures is also a mistake one should avoid.
Confession No 5# Shunning systematic investment in equities and not starting SIP’s in equity mutual funds
According to him starting a SIP was the simplest thing to do at that time also. Had he done that, he could have laid a solid financial foundation for his long term goals all through these 12 years by investing monthly in mutual funds and getting the benefit of magic called ‘compounding’ in the process. Equities in long run are the only way to beat inflation- we can’t shun it altogether.
Lesson: Start your SIP right in the beginning as you start earning. SIP can be started with a monthly allocation of as low as 500/-. So there’s no excuse to make. Start with a balanced fund and as you get hold of equity market have a well-diversified portfolio in place. 5-6 funds should be enough and increase your SIP amount as your investible surplus increases.
Confession No 6# Following family traditions and over-investing in PPF
Public provident fund (PPF) come as a natural investment avenue to most of the retail investors since the family has been doing that since ages. He said has been investing maximum permissible amount per year in PPF as part of tax saving exercise. He was of the view that though investing in PPF still makes up a good debt instrument’s but he could have been better off investing part of it in ‘Equity Linked Savings Scheme’ which could have given him an equity component in the portfolio besides saving tax.
Lesson: In 20’s, it is always better to invest in Equity Linked Savings Scheme for tax saving besides PPF as ELSS funds can give relatively much better returns to PPF in the long run. Early in your career, you can ride off volatility easily as you don’t have too many commitments on your side. Starting SIP early can do a world of good to your end corpus due to compounding impact.
Confession No 7# Stacking up money in bank account and bank FD’s not taking inflation into account (Too conservative approach)
Stacking up money relentlessly in the bank account at 4% and FD’s at dismal post tax returns didn’t do him any good. “It was a great satisfaction to see his money in his account”, he said. Few years down the line, he realized that inflation is a monster and with money in his bank account not growing at a fast pace, his purchasing power with that money is getting less and less by each passing year.
Lesson: Always account for inflation while deciding on corpus you will require for each of your goals. As an investor one’s investment returns need to beat inflation by a good margin to be of meaningful use. In initial years of your job, you should have more inclination towards investing in equities for the long term.
Confession No 8 # Not evaluating a possibility to seek help of a financial advisor
Fee-based SEBI registered financial advisors will charge you fees but will also help you growth your wealth. He had always seen advisors with the suspect post-ULIP fiasco. Had he tried to look for a genuine good financial advisor based on fee-based advisory, his portfolio could have been in a better shape.
Lesson: Never assume things about a particular aspect if you have had a bad experience before. There are great financial advisors out there who are there to help you grow your money.
Confession No 9 # Not mapping investments to goals
“Had I mapped my investments with goals, I could have been saved myself from some bad investment decisions”, he said. Had I tried to map my investments to retirement goal, I could have realized important of investing in equities through SIP’s in equity mutual funds early in my career. Mapping investments to your goals help you choose an appropriate financial instrument for that goal. For instance, for a retirement 30 years away, you can invest aggressively in small and mid cap funds for a long term whereas for buying a home 5 years away, you can opt for a balanced fund. Also while mapping investment to goal, you reach to a particular corpus figure taking inflation into account. Sometimes such a figure can be mind boggling which will increase your resolve in long term investing.
Lesson: Always map your investments with goals. You will get a greater clarity about which financial products to choose in accordance with a particular goal.
Confession No 10# Opened a Demat account for long term investing but lost money in trading
There was a Savings cum Demat account opened by my friend to buy shares for a long term but when his long-term investment strategy became a short term trade, he himself couldn’t realize. Long term investing looked boring and required lot more patience whereas trading gave him instant profits. Profits in first few trading transactions increased his confidence only to be confided with one big loss which stuck him really hard. That was the last time he invested in direct equities. Demat account till date is dormant but with zero holdings.
Lesson: It is always recommended to start investing in equities via Mutual funds. Still, if you want to invest in direct equities, make sure you choose companies with excellent management, industry leader, great vision, clean order books and financials to name a few. Don’t buy out of speculation or friend’s advice and invest only for the long term. Patience to hold quality businesses and keep adding to your holdings during market downturns is the key to successful equity investing.
Confession No 11 # Spend first, Save later
There was some wreckless spending all through the initial years of job which could have been avoided. Buying expensive gadgets, eating out almost daily could have been avoided. There was no budget plan in place and spend first and whatever left is saved was the mantra. Moreover, one-time bonuses were spent on luxuries rather than investing an additional amount in equity mutual funds through SIP’s. Unprecedented use of credit card was also not warranted and lead to huge credit card bills even before the salary was credited to the bank account.
Lesson: Irrespective of the stage of life you are in, you need to keep a tab on your spending and keep it in sync as a certain percentage of your total income. Save and invest first and then plan your expenditure from the remaining amount.
Confession No 12 # Not spending on skill upgradations
Even though some of the sought after technologies in the job market were not used at his current job, he could have looked out to get self-trained on hot technologies. He never thought of spending on relevant courses, certifications, online training rather than spending on other luxuries which could have been avoided.
Confession No 13 # Buying a second home
With EMI of first home already in works in addition to the car loan and other expenditures in the pipe line, putting undue strain on finances by buying a second home may not have been a wise decision. Recurring costs such as interest costs, maintenance cost, property tax and insurance costs were not taken into account while reaching to the decision. More importantly, it reduced surplus investible amount significantly while jeopardized other much better investment avenues for the long term.
Lesson: Investment in a second home is a personal investment decision but make sure you take all factors into account before going forward with such a purchase as it is a long term commitment. Evaluate where it fits into your overall investment portfolio.
Confession No 14 # Getting excited when markets are at an all time high
There are investors who are absent from the equity markets for the majority part but gets excited on hearing news of markets scaling all time highs. That is the time when they make lump-sum investments when there’s a lot of froth in the market and every other stock in up defying the fundamentals. Investors need to be cautious at this point of time and invest in a staggered manner. Making lump-sum investments in random stocks can be a sure-shot way to make money. If an investor is investing in a staggered manner, in that case, an investor can be benefitted from all market cycles and investment cost will get averaged out.
Money is scarce and irrespective of how much you earn at a particular stage of life, you need to plan your finances well. Starting investing early with impeccable discipline ignoring the noise, following goal-based investing approach, selecting appropriate asset class for each of your goals, buying adequate health and life insurance, doing one’s own research before investing or seeking help of a investment advisor, spending within limits and make money work for you can help an investor sail through turbulent times with much more confidence wherein one can focus on upgrading his/her skillset rather than worrying about money matters.
Do you have any confessions to make concerning any of your financial decisions you have made till date? Do share it with our readers in the comments section below.
Disclaimer: Please consult your financial advisor before taking any investment decisions. The write-up is for information purpose only and is not a recommendation of any sort to the readers. Mutual funds are subject to market risks. Please consult your financial advisor before taking any financial decisions.