Cardinal sins of personal finance and how to avoid them.
As you grow in to an adult and step in to the world of work, it is exciting to receive the first pay cheque, the first pay rise etc.
However, it is very easy to spend all your money and get habituated to a life style that will set you back financially in your later years. So make sure that you do not commit these cardinal sins that can spring a nasty financial surprises when you least expect them.
Not paying yourself first: The Richest Man in Babylon by George Clason is one of the best books on personal finance. One of the really cool takeaways from the book is to “pay yourself first,” no matter what. What does that mean? After all, when you start your job or your internship, you always get paid, right? It means that you set aside (at least 10 per cent of your income) enough money towards investments and savings, before you start spending your first rupee from your salary. Most of us get this wrong and do things the other way round. We go to that swanky restaurant or pub with our friends and buy the latest smart phone, and before we know it, we are down to our last rupee. For a successful financial life, get in to the habit of inverting this habit. Save first a definite amount and then do what you want with the rest.
Being the credit card company’s best friend: The customer that the credit card loves is the one who always makes just the minimum payment or the one who habitually pays late. Why so? This is because, when you roll over your credit card debt, the card companies make a killing. Ditto for late payment charges.
Remember that the credit is rolled and the interest is compounded, so you have one of the greatest forces in the world (Compound interest) working overtime against you. Before you know, you may end up paying two or three times the original amount rolled over. Does this mean that you should not use credit cards? No.
Actually, with a bit of practice, you can be the customer the credit card companies like the least — the customer who benefits from the convenience and interest-free credit of the cards, but the one who pays his bills completely and on time.
This way, you get all the benefit without letting the card companies make any money.
Hoping that the intermediaries would take care of your financial health: In almost all cases, financial intermediaries like advisors, brokers, fund agents etc. charge fees, some in a straightforward way and the rest in an opaque manner (insurance agents). While a two per cent fee per annum looks innocuous, remember that a $1 compounded at two per cent, say at the time of birth of Jesus, and would be more than the net worth of the wealthiest person in the world today. Tiny drops really do make an ocean. Besides, in most cases, the intermediaries make money off you, whether they meet your financial objectives or not. Instead, invest in a good course on financial and money education, cut out the intermediaries and get a handle on all your investing activities. With time, the results will surprise you in a positive manner.
Venkatesh is the co-founder and Director of Money-Wizards, a company engaged in financial literacy and money education for adults and college students. Details on workshops at Info@Money-Wizards.com