Thanks to liberalization policies and Information Technology boom, you will find ever growing middle class population in India. They are the individuals who are earning pretty decent salaries and are able to lead a respectable life. Same has been the trend with many other countries also.
But at the same time, you will find that most of these salaried class people are so ignorant on managing personal finances. The reason is these people may be experts in their domain, but when it comes to understanding personal financial management, they fail miserably.
Most of you would have watched T.V shows where more and more working Professionals are seeking advice from financial planners to manage their finances. These working professionals may be earning monthly salary in lacs, but they are so over burdened with debt that they are unable to manage their finances. All this is not exaggeration. If you look around in your circles, you will find a similar pattern.
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Now the question is, despite earning decent salaries, if one is not able to create financial assets, instead he is in debts, then where is all the money draining down.
Before proceeding further, let me assure you, there is no rocket science in managing personal finances. It is simple common sense. But at the same time, this simple common sense is so uncommon to find.
The first thing to understand is that nobody can give you ready made solutions for your problems. I will make you think through a different perspective, so that you can take your own decisions intelligently. So let’s try and simplify some of our financial problems.
How to handle debt problem?
When we start earning, it is obvious, we are all excited. And we all have plans to start spending on things which we were not doing till now. We may want to buy a new car, a house of our own, costly smart phones, electronic gadgets, branded clothes etc. I am nowhere saying that there is anything wrong in it. After all why are we earning, if we are not going to spend it. But where we go wrong is that whether we should opt for the big car or we can manage with a small car.
You may argue that a small car is not a luxury these days but a necessity. I fully agree with you. But a big car is of course a luxury. Do you feel the need to take car loans so that you can enjoy a big car or you can buy a small car and move on? The choice is yours.
Similarly, if you are living on rent and you don’t have a house of your own, taking a home loan and purchasing house may be a wise decision. But already having your own house and then taking home loan to buy properties is a decision you need to revisit. By buying additional properties, you could be unnecessarily reducing your monthly disposable income by giving EMI’s for home loans. Moreover, if the newly purchased property is not going to give you rental incomes in the near term, your decision could be all the more wrong.
Have you observed that lot of real estate companies these days are incurring losses? The reason is they had taken huge debts from banks and started multiple projects. Ultimately they are suffering losses due to high interest cost. On the other hand, small builders who were taking one project at a time and executing project are able to give delivery to buyers and at the same time are making profits.
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It is so common to see absolutely pointless and crazy shopping madness when we start using credit cards while shopping. Credit cards should be used only for emergency situations.
How Fear and Greed destroy our wealth
Fear and Greed are two habits that are biggest obstacles in achieving financial freedom. You will find that at crucial times when we need to take financially prudent decisions, fear and greed overpower common sense. The result is that the decision so taken under the influence of fear and greed always leads to financial losses.
Now just give it a thought. Is it not correct, that whatever be the asset class, be it property, gold or equities, whenever they are dead cheap, even a common man knows that they are cheap? Actually it is talk of the town at that moment. Then why a common man does not purchase it? The reason is simple. All of a sudden our common man starts behaving like a super intelligent man.
The demon named fear simply overpowers his common sense. Fear tells him that if the prices have fallen from top to this level, there is likelihood that it will fall further. So let’s wait and watch. On the other hand, this is the time when the savvy intelligent investor is putting money in this asset class. This is the investor, who is intelligent, who uses common sense and who takes calculated risks. He knows that the odds in favour of prices going up are more. He overpowers fears. But our common man fails to act.
Similarly when the prices of these assets classes Property, gold, equities etc are at all time high, again our common man also knows that they are unrealistically high. But again our dear common man will not sell his assets and book profits. Because this time, the demon named greed has overpowered his common sense. His greed makes him think, that may be the prices can go further 10 percent up from here. So why to loose on that? Let’s wait and watch. On the other hand, our savvy intelligent investor sells his assets and books profits. He tells Mr. Greed, i have made much more profits than i had expected. So please don’t bother me.
I don’t need to tell you that our dear friend Mr. Common man could neither purchase any assets at the lower prices nor sell any assets at the high prices. You know that.
Earlier when our friend Mr. Common man was handling the issue of debt, at that time also Greed and Fear were playing their role. You will be wondering how? The answer is many of us buy big cars, big houses and go for lavish weddings and foreign trips because of peer pressure. We do it because our friends, colleagues, neighbours, relatives are doing it. We fear, they will make fun of us or will look down upon us if we don’t match them. Similarly as soon as we make money in any asset class, greed takes control of our head. Immediately we are ready to purchase many more similar assets to multiply our profits. We feel we have learnt the game. So we are ready to take debt and put all our eggs in one basket. The result is bound to come in the form of set-backs and losses.
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I hope, from now onwards, you will take all possible steps to use Common sense and won’t allow fear and greed to take charge of your life. However, let me warn you, though it may look simple but it is very difficult to practice. In testing times, controlling greed and fear becomes very difficult. But let me assure you, those common men who are able to control greed and fear achieve financial freedom.
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