Financial mistakes can cost you dearly. But if you look at them as learning experiences, it would not deter you from achieving financial freedom. Let’s accept it. You are going to make mistakes. I made a lot of financial mistakes myself and I will continue to make them.
The important point to keep in mind we take our decisions to the best of our ability with the information we have at hand. And those decisions make sense to us at that point in time. It is only in hindsight we realise that it wasn’t the best one. And making these financial mistakes is completely ok. You need to forgive yourself and move on.
Welcome to my blog series – ‘In Pursuit of Financial Freedom‘. This is the 7th post in the series and if you have not read the earlier 6, I highly recommend giving them a read –
- Why is investing your money necessary?
- The basics – Do this before you start investing.
- What are the different investment options in India?
- Mutual Funds – How do I select one to invest in?
- Credit Cards: Their role in your financial freedom
- Financial apps on my phone in 2021
In this blog post, I will share some of my decisions that I now consider financial mistakes. And hopefully, you find something relevant so you can avoid these.
1. Didn’t start investing early
This is more a regret than a financial mistake. Unfortunately our education system doesn’t focus on financial planning. And until you figure out the importance of investments, you are usually already in your 30s. Same was the case with me. I started a full time job when I was 21. But, I didn’t start proper investment until I became 30. I regret not starting investments in my 20s. And I consider that one of my biggest financial mistakes.
I explained the power of compounding in the very first blog post. It is often referred as the 8th wonder of the world. The biggest factor to gain the massive benefits of compounding is time. The more time you allow it, the more wealth you will accumulate. Let me give you an example.
| Scenario 1 | Scenario 2 | |
|---|---|---|
| SIP Starting Age | 21 | 31 |
| SIP Amount (per month) | 10,000 | 10,000 |
| Expected Return | 12% | 12% |
| SIP stopping Age | 30 | 60 |
| Retirement Age | 60 | 60 |
| Total Investment | 12,00,000 (12 Lakhs) | 36,00,000 (36 lakhs) |
| Value at retirement | 62647755 (6.2 Cr) | 35299138 (3.5 Cr) |
Analysing the example above –
Ok, in the example above there are 2 scenarios. In the first scenario I start investing at the age of 21. I invest 10,000 per month and I stop investing at the age of 30. So, I have invested 12 lakh (1.2 million) rupees over 10 years. And I let it stay there until I retire at the age of 60. How much money do I get back? 6.2 crores (62 million rupees).
In scenario 2 I start investing at the age of 30 with 10,000 monthly SIP and I keep investing until my retirement age of 60. So I will invest 36 lakh rupees (3.6 million) over 30 years and at retirement I get back 3.5 Cr (35 million).
And I have only considered conservative return rate of 12% here. If you are going to be invested for that long, you can easily expect 15-20% returns. So, if you look at the example above, by starting my investment at the age of 30 I am putting in 3 times the money and getting approximately half the return at retirement compared to if I had invested in my 20s.
I hope you can see how this is one of the biggest financial mistakes and you don’t make it yourself. Also, if you are now in your 30s or 40s or even 50s, this example shouldn’t discourage you from starting investments now if you haven’t done already. Scenario 2 is also gives amazing returns as compared to just keeping the money in bank!
2. Linked insurance with investment-
Back in 2009, when I started working, I wasn’t financially literate. So when a financial advisor reached out to my family with a life insurance plan that would also give returns after maturity, we took it. They are marketed as different things but they generally fall under the ULIP bucket (Unit Linked Insurance Plan). These plans combine wealth creation and protection and may be good for people who are extremely conservative. But it wasn’t for me. Mainly for 2 reasons –
- The insurance cover was too low for the premium I was paying. I later took life insurance which was half of the yearly cost and covered 10 times more than the ULIP plan I had.
- The returns were pretty low – 5% annually on a simple interest basis. That doesn’t even beat inflation. So in reality I was actually loosing money.
The worst part is I kept paying premiums for this plan for 10 years before I realized it was a mistake. Now, I have closed those policies and in return, I get 75% back of the amount I invested. So I am losing 25% money upfront. But that is just a smaller loss. If I had invested that amount somewhere else, it could have been a small fortune by now. Let’s do some math –
Yearly Premium - 100,000 (approx)
Invested for - 10 years
Total value invested - 10,00,000
Got back - 7,50,000 (approx)
Upfront loss - 2,50,000
If I had invested that amount over 10 years as SIP
Monthly SIP - 8333
Total Investment - 9,99,960
Expcted return - 12%
Estimated return - 9,36,112
Final value - 19,36,082
Actual loss = 9,36,112 + 2,50,000 = 11,86,112Clearly, as you can see, it was a big financial mistake. My only hope is to be aggressive with the money I got back and try to make up the losses. It is not going to happen, I know.
3. Listening to stock tips
If you have ever dealt with stocks, you have probably made this mistake too. Because once you see your money grow, it gets to your head. It gets addictive. And you try to make a quick buck. So you don’t do your due diligence. You don’t look at what the stock company is actually doing, what are their financials, what is their vision, etc. You just look for tips from your friends or tele marketers. And may be the first time you actually make money. And now you are super pumped.
This is when you fall in the trap of listening to stock tips. This is a bad, bad idea. How bad? Let me show you with how one of my stock purchases now looks like.
I have blurred out the stock name here. Because I am not a financial advisor. And that is not even the point. I bought this stock 4 years ago because it was growing like crazy and my friend told me to invest in it. I trusted his advice and put money there. The day I purchased the stock was when it was at its lifetime high. It was all downstream from then to a point where my losses reached 95% of my invested value. And I kept buying more as prices dropped so I could ‘average’ out the cost. Another big financial mistake.
My losses are still at 83% and I put 3 years in it. Imagine putting that money in a decent stock or even a mutual fund! I have still kept that stock in my portfolio and not sold it. Not because I can’t face to bear the losses. But more as a reminder to myself that this is what happens when you take stock tips from others.
4. Mistook trading for investment
It took me a few years to realise that trading and investment are actually two completely different things. Investment takes a long-term approach where the focus is on wealth creation and achieving financial goals. Trading on the other hand is a short-term approach where the focus is on making profits regularly (sometimes even on a daily basis).
First of all, if you have a full time job, let me break it to you straight – trading is not for you. Your focus should always be long term and you should invest in companies that have a long-term vision and horizon and scope to grow.
I made the mistake of thinking intraday trading is the same thing as investment. I did make some money doing it. But it was frustrating and not meant for me. I do not understand the technicals and I was solely relying on stock tips. It wasn’t good for my day job productivity as well.
5. Stopped investing in stocks
With the losses I faced due to listening to stock tips and intraday trading, I became pessimistic about investing in the stock market directly. I switched all my focus to Mutual Funds and started selling some good stocks and moving that money to MFs. Now, Mutual Funds are an excellent way to invest your money and they give decent returns. But now I realise that writing off direct stocks was a one of the financial mistakes I made. And if I had held on to those good stocks for a long term, I would have got much better returns than moving that money to mutual funds.
I still don’t have the time and technical skills to find the next best stock. So I have started using smallcase which is a great middle ground between stocks and mutual funds.
6. Ignored Cryptocurrency
I have always considered myself an early adopter of technology. In early 2013, I gave a presentation at my work place that read – Bitcoin : The future of money. And then I also setup a rig at home to mine Bitcoins. Unfortunately, the interest lasted only a few days and then I ignored cryptocurrency for a long time. The RBI also banned Crypto trading in India which was squashed later by Supreme Court. There still aren’t clear regulations in place. And all of these factors added to why I kept ignoring crypto. It was a mistake.
The word is still not out if the current cryptocurrency system is the future of money or not. But I strongly believe that technology and globalisation is going to play a big role in money matters. The future money is going to be a decentralised system.
I now invest a little amount in Crypto every month like a SIP from the long-term perspective. But I do keep thinking that if I had mined a few Bitcoins back in 2013, I probably would have achieved financial freedom by now. Funny how a few moments of laziness can affect your life.
Conclusion
Your journey to achieving financial freedom is a very long one. And you are going to make financial mistakes. I made a lot of them. But it is important to learn from them and move on. I highly recommend reading this book – The Psychology of Money if you haven’t already. It speaks a lot about how money decisions are more emotion based than logic based. And it is important to forgive yourself for the mistakes you make. Another important point to note here is that these financial mistakes should not deter you from your path towards your financial freedom.
I hope you found this post useful and I hope this will help in your financial journey. What were some of your financial mistakes? Let us know in the comments below and please subscribe to the blog so you can get updates.
