I am always eager to know how people behave when it comes to money-related decisions and I have figured out that people react emotionally rather than objectively when it comes to money matters,” said Chenthil R Iyer, financial planner and author who launched his book Everyone Has An Eye On Your Wallet at the recently-concluded Pune International Literary Festival 2017.
Over the years, Iyer has been giving financial perspective to people through his workshop titled Money is Child’s Play (Handling Personal Finance). “I want to create a financially-aware generation. We are not being formally educated in personal finance. We are taught subjects which we might not need later in life but not finance, which I consider a life skill just like swimming,” said Iyer, when we caught up with him post his book launch.
“The whole idea is to reach out to a large number of people and help them understand the basic of finance. In my book, I don’t just stick to the basics but give a more practical knowledge to people on how they can handle their money better,” he said, adding. “For example, I do not recommend insurance-cum-investment products. I always recommend pure insurance products.”
Talking about his book, Iyer who is the founder and chief strategist of Horus Financial Consultants Pvt Ltd said, “I have highlighted a concept called Sunk Cost Fallacy. For example, if you end up purchasing a wrong product and realise that it’s not the right product for you, you still tend to continue with the policy for a lifetime. You feel that, ‘If I surrender the product, nothing will come out of it in spite of putting two years of money.’ So you put in third and fourth year of money too hoping to recover your money by putting good money into a bad policy, which is very time consuming and inefficient.”
While doing mental accounting people tend to treat different sources of income with different values. But money, Iyer said, doesn’t have differential value or the quantity of money is the same. “For example, if you get Rs 50,000 as salary and another Rs 50,000 you win in a lottery, you tend to invest the latter in a risky investment even though the value of both is the same. So rather than being objective you think emotionally,” said Iyer, who has captured several such behavioural patterns in his book.
It’s not only about tax saving
When asked about some of the common financial mistakes that people make Iyer said, “People start planning their money management towards the end of the financial year when they have to file income tax return. They run around, pick anything that comes by. You should never make your money decisions based on whether you will be able to save tax or not. All of this should be well planned throughout the year so that you are well prepared at the time of filing tax return. Secondly, as I have said earlier, people mix investment and insurance. It shouldn’t happen because insurance in its purest form gives you the right amount of cover. If you blend the two, the premium becomes too big and you end up compromising on the insurance cover you are taking. Another mistake that people make is with investments. Either they are too conservative or too aggressive.
There are people who tend to invest their money in investments which are too risky. But Warren Buffet points out that a risky investment is one when you invest in something that you cannot understand. Risky investments can be profitable too if you know what you are doing.” He added that people need to create an investment which is balanced and aims at fulfilling their financial strategies.
Investments are not a one-time affair but an ongoing process. “There has to be a strategy behind investments. Also, you need to have asset allocation, which means you are spreading your investments into different asset allocations. So, a portion has to be invested into equity, another in debt, precious metal and some in real estate and you have to maintain it throughout,” he said, adding that sometimes people think the market is down so they invest their money. What if the market goes down further?” he rightly pointed out.
No matter how much a person earns, budgeting is the first skill that one needs to develop. “You need to be clear about your expenses even before the money comes in. If a person is earning Rs 25,000 and after all the expenditures has a surplus of Rs 4,000-5,000, they should remove the particular amount and spend from the Rs 20,000. One needs to do this because expense expands to fill the available money and that’s why people are unable to save,” he said before signing off.