(Reviewed by Viji)
Overview
As the title suggests, this book explains 13 wrong decisions which otherwise-smart people make in financial matters. The kinds of mistakes and how to avoid them are explained using real-life examples along with a set of questions for each of these situations to help you. So, what are these pitfalls?
1. Complicated financial products 2. Financial advice from wrong people 3. Stressing too much on the importance of money 4. Too much college debt 5. Buying a house 6. Taking too much risk 7. Identity theft 8. Overindulgence in early retirement 9. Financial issues vis a vis bringing up kids 10. Plan for the care of ageing parents 11. Wrong insurance or no insurance 12. No will 13. “timing” the market
Complicated Financial Products
Let’s go through each of these, starting with complicated financial products. Almost all of us invest in some kind of financial product or the other. These can be simple stocks or mutual funds to reverse mortgage to sophisticated hedge funds and beyond. While the returns are extremely attractive and tempting, what goes unnoticed is the fine print on how these products work – liquidity, hidden charges, etc. How can you ensure that you protect your interests? 3 simple words: Ask more questions. When you ask specific questions on how these products work, then you get more details from the “investment advisor” or “financial planner” who introduced you to these fancy investment options. The more questions you ask, the more you understand about the product or the more you realize that it is too complicated to sink so much of your funds into.
Sample questions are: 1. How much does this investment cost 2. What are its alternatives? 3. How easy is it to take the money out 4. Tax consequences 5. What is the worst-case scenario of this product
As fancy funds are abstract to an extent, some people prefer gold. Yes, that shiny, yellow metal! Gold has its own disadvantages or downsides and does not fare very well as an alternative to traditional investment avenues such as index funds. History shows that stock markets had performed way better than gold had. Also, gold does not pay interest or dividends while you shell out money for storing it. If you are bent upon investing in gold, look for alternatives such as gold equity (shares of companies which mine gold) or Gold Exchange Traded Fund. While the liquidity and returns may not be very different from physical gold, there is no need to pay storage costs. And, cap your investment in gold to 5% of your total portfolio.
Financial Advice from Wrong People
The second dumb thing is taking financial advice from the wrong people. It is not necessary that all financial planners and advisers put your interests first while giving financial advice. For example, you would like to save for your child’s education. The financial adviser sells the financial product ABC, which does help you save for your child’s education. By selling that product to you, your adviser gets a big fat commission. However, there is also product XYZ which is much better in terms of better benefits and lower costs. Your financial adviser sold a suitable product to you – you asked for saving for your child’s future and you got a product which does it. But, is that the best plan out there?
To make sure that your financial adviser puts your interests first rather than their commission, make sure that you ask the questions.
1. Is he/she legally bound to put your interests first at all times?
2. What are his / her professional certifications?
3. Is he/she licensed and registered? Has he/she been sanctioned for unethical conduct?
4. Are there any conflicts of interest? That is, would any other person stand to gain from the advise given by him/her to you?
And, here are the warning signs that you need a financial planner/fiduciary:
1. You get a significant tax refund every year
2. You are obsessing about money
3. You and your spouse fight constantly about money
4. You are scared to go through your retirement numbers
5. You are not tracking your cashflow
6. You can’t stop spending even though you are aware of your financial problems
You may feel embarrassed and uncomfortable about approaching a financial planner regarding your issues with money. It is better to get it sorted out than let it go out of hand.
Over-obsession with Money
Money means everything to you. You compare yourselves to others in terms of how much you make, how much wealth you have, etc. It is also possible that your parents’ experience with money had a lasting impact on you – being too cautious with money, saving and scrimping on everything while there is no need to do so. What are the signs that tell you that you are over-obsessed with money?
1. You keep certain financial affairs or spending secret from your spouse or partner. 2. You regularly lose sleep over slight changes such as the value of property going down, even though you have no idea of selling it for the next few decades. 3. You compare your wealth with others, such as neighbours or siblings or colleagues 4. You check your investment account way too often than needed.
College Debt.
Higher education opens up opportunities for better, higher-paying jobs. So, what could possibly go wrong in taking on college debt? Well, a lot can go wrong. First of all, not all colleges are equal when it comes to the cost of education. Some are more pricey than others. The question is, are they worth so much of premium than those colleges which offer near-comparable quality with much lower fees. There are others who after obtaining expensive degrees go on to launch a start-up or do something else, which did not require that expensive degree. But, the college debt still needs to be repaid, whether education helped or not. Research shows that name-brand schools are not the first criterion for employers to choose between candidates. It is not even second or third but ninth. So, before you take on huge college debt, do yourself a favour and answer these questions:
1. Are there other colleges which can provide similar levels of education and opportunities? 2. How much college debt are you willing to take? Would you like to forego vacations because you simply don’t have enough money left if college debt sucks up a significant amount of your earnings? 3. Will you be able to get a waiver or scholarship that would reduce the cost? 4. Are you funding your kids’ education at a name-brand college because you couldn’t afford to attend one years ago? 5. Are you paying for your kids’ college education before taking care of your retirement?
Buying a House
The fifth one is - Rent a house or buy one? Aright, everyone has a dream home which they would like to buy one day, sooner than later, perhaps. But, are there options to rent your dream home instead of buying? Let’s see. What could go wrong with buying a home? These, for example:
1. You have put in all or most of your liquid savings into buying the house. What happens when there is an emergency? 2. In addition to taking in your savings, you need to pay for the mortgage. Can you afford it? Would you have to forego something for this? 3. If you need to move to another city or state, what will happen to this house? 4. What if you can’t sell or rent it out at an amount you like? 5. How much will it take to maintain / repair / renovate the house? Is it worth the money and the effort?
Taking Too Much Risk
Let’s say you have received huge stock awards from your employer and they are worth a lot of money and you are free to sell them whenever you like. Since the stocks are performing great, you hold on to them. Why sell when it keeps climbing? Clinging on to recent events and having excessive optimism – that-will-never-happen-to-me attitude makes you think that my stock is not going to fall. But, well, one day, it might just plummet and you could lose all your money that was in the form of that stock. Taking risks in avenues which you do not comprehend well, just because your sibling or neighbour or classmate made a fortune out of it, is not reasonable at all.
Of course, do take reasonable risks – the passive investment approach suggested by the author. What is passive investment approach? Plan ahead on where to invest and how much and keep them through the ups and downs. In the long run, this would yield better returns than actively managing your investments. Make quarterly adjustments to your investments to make sure that your allocation into different types of investments is maintained. Also, look objectively into your allocation when you go through significant events in life – like a huge inheritance, getting married, starting a family, quitting your job to pursue your passion, etc – to see if the allocation needs to change. Do you need to be more conservative or can you afford to put a little more into risky ventures?
Failing to Protect Identity
Breach and identity theft are real and cannot be ignored. Reusing passwords, connecting to unsecured Wi-Fi networks, falling for phishing, etc. are not uncommon. How do you safeguard yourselves?
Here are some tips:
1. Do not share sensitive information such as social security or national identification numbers
2. No need to share every moment of your life in social media.
3. Do not share personal information such as date of birth on social media
4. Have strong passwords and use two-factor authentication
5. Use only secure Wi-Fi networks
6. Check your credit scores annually
7. Be vigilant
If you still fall a victim of identity theft, contact the agencies/authorities immediately to report the identity theft.
Overindulgence in Early Retirement
The next big pitfall is when you overindulge during the early retirement. You have been planning on your retirement and one day, you feel that you have saved enough for your retirement and start “living” your life. Great, but, have you factored everything in?
Ask yourself these questions:
1. Do you know how much you spend currently (prior to retirement)? If not, start tracking your expenses for at least six months to get the answer.
2. How much can you draw from your retirement corpus or fund? Do you need to pay tax on these withdrawals?
3. Would you be working part-time after retirement, bringing in monthly income?
4. How is your lifestyle? Do you need to live in an upscale neighbourhood, need to drive a fancy car, eat out every other day in a high-end restaurant, need to travel to exotic locations, will the money be enough?
5. If you need to downsize or cut down expenses to suit the cash inflow, can you do it?
Also, think about what will you do once you retire. Of course, there is no need to chase deadlines or finish reports or put up with annoying colleagues but what exactly will you do? Do you have hobbies that you would like to pursue? Go around, collect stamps, attend forums and exhibitions? Any skills that you would like to learn? Art or music, perhaps? Or spend time with your grandchildren or ageing parents? Volunteer at a local animal shelter? Work or consult part-time, choosing the kind of projects or clients that you like to deal with?
Financial Issues vis a vis Bringing Up Kids
Dumb thing number 9 is saddling your kids with your money issues. People who had humble beginnings branch off into 2 kinds of parents – one kind which brings money into every conversation and every decision and continues to scrimp on everything even though they don’t need to. Their point? I struggled for every penny, I know its value. So should you.
The other kind is just the opposite. They lavishly spend on their kids, even after these kids have kids of their own. Their logic: I went through so many hardships, but you don’t have to. These kids do not have an opportunity to learn financial responsibility because mommy and daddy handle every aspect of finance for them – from summer camps to college education to down payment for a house to footing the bill for their new car. So, the kids of both these kinds of parents mostly choose one way or the other – over-obsession with money or spend lavishly without thinking.
What do you do? Strike a balance. Keep your money issues to yourself (and your spouse or partner). Explain the value and importance of money but don’t overdo it. Lest your kids should be over-obsessed with money – thinking that money is synonymous with success or happiness or overly anxious about money.
Plan for the Care of Ageing Parents
Have you planned for the care for your ageing parents? Not doing so is definitely a mistake. Have you had a conversation with them about this? If not, you need to have it soon. If you have siblings, you may need to include them too in the conversation. Let’s face it, no one wants to accept that they are getting old and they need care or support. But, if there is a plan for this, it becomes less painful to accept reality.
Examples are long term care insurance or a senior community living or moving your parents close to you or to one of your siblings. You cannot force a plan on them, but do give them options of various plans and let them decide. You could also help them decide by bringing in perspectives.
Wrong Insurance or No Insurance
The next mistake is about insurance – either you have the wrong type of insurance or none at all. Insurance deals with unpleasant events – death, disability, etc. Most people avoid talking about death or disability predominantly because of this. The other reason for not buying insurance is people feel that the insurance cover provided by their employer is sufficient. Sufficiency of insurance cover needs to be determined based on annual expenses of your family, the number of dependents, how long would they need to be dependent on the insurance money, inflation, would there be other factors to consider such as would your spouse work after your death or would he or she stay at home to care for your kids or a child with special needs would be dependent for longer than a normal child would be, etc.
Alright, now you understand that you need insurance coverage. What about your spouse? Also, make sure that you buy the right kind of insurance – term or permanent. Term life may be suitable for people in their thirties while permanent or whole life would be practical for people in their fifties or older. With every major event in life (marriage, divorce, kids, etc.), rethink your insurance needs and make changes as necessary.
No Will
Right, now that you have insured your life (and also your spouse’s), the next thing to take care of is your will. Get legal help and put a will in place to make sure that your loved ones do not need to spend their time fighting over legal title or entitlement while grieving, not to mention the time, effort and money it costs to prove title. Along with drafting a will, gather these in a box:
· Master list of bank accounts
· Usernames and passwords for financial accounts, emails, social media, etc.
· Safe deposits, automatic bill payment instructions
· Pension and other social security account details
· Insurance, title deeds to property, vehicles, etc.
· Tax returns, marriage or divorce papers, documents relating to business (tax registration, licenses, etc.)
It is an exhausting task but would come in handy for your heirs to take care of these after your death or disability. Also, if you have ageing parents, have a conversation with them about their estate planning and will, along with your siblings. Again, not an easy conversation to have, but an essential one.
“Timing” the Market
Trying to time the market is the last of dumb things. Why is it dumb? It is a sensible and smart thing to do, right? If you can time the market, you can enter at a low price and exit with huge returns; makes sense, doesn’t it? There are factors beyond our control. Sudden, unexpected events might bring in startling changes to the market. To avoid this, follow the passive investment approach, rebalance every quarter or immediately after every life-changing event. Regardless of the ups and downs, your investment portfolio would give good returns in the long run.
That’s it from the book.
Conclusion So, who needs to read this book?
Everyone - those who take risks in investing and those who don’t; those who spend a lot and those who scrimp; those who have huge college loans or credit card dues. Why so? Because it covers basic things such as making a note of your expenses, reviewing your bank account and credit card statements to having your estate planned.
I enjoyed every word of the book. I could relate to a lot of the events/scenarios mentioned by the author – right from why people avoid getting on the weighing scale to how our parents’ experience with money has moulded our relationship with money. And, I was reading this book while my husband and I were waiting to undergo medical examination for health insurance. Fortunately, my husband and I have avoided most of the pitfalls mentioned by the author. There are a couple of items that we need to work on.
Overall, this book gives a fairly comprehensive overview of what one must do or at least think of in terms of money matters. Regardless of your age or your choices of investment or the levels of your income, this book is a must-read!
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