Category: Personal Finance

All our lives we have been taught to get into a high paying vocation so that we will get “rich and settled”.

Nothing is farther from the truth. A high income will not make us rich. Worse, it cannot even prevent us from going broke.

Look at the below names.

Michael Jackson – He ruled the pop music world for more than a quarter of a century. Approximate lifetime earnings around Rs.7590 crores. Debt at the time of his death in 2009 was Rs.3300 crores. (7 years after his death, his stake in Sony/ATV has turned things around).

Mike Tyson – Boxing legend in 80s and 90s. Lifetime earnings of Rs.1320 crores. Filed for bankruptcy in 2003 with unpaid debt of Rs.152 crores. Now living paycheck to paycheck.

Boris Becker – Tennis legend. The youngest Wimbledon champion at the age of 17 in year 1985. Ranked 7th in the list of all time highest paid tennis stars. Declared bankrupt in June 2017.

The above stories might be extreme examples.  But take an honest look at your own finances. Irrespective of our income levels, a lot of us live not very different lives.  We live paycheck to paycheck. If we don’t work for a month, we will struggle to pay our bills. We are stuck in the “Rat Race”.

Why has this happened to us? Because we were only taught how to make money. And not the habits needed to handle money.

And don’t let the odd insurance policy, mutual fund or fixed deposit which we have bought make us believe that weare an exception to the above. We just happened to be sold a “Lifebuoy” or “Dettol” without first making us aware as to why it was important to take bath; and what to do with the “Lifebouy” or “Dettol” which we have been sold.

The first step in cultivating sound financial habit is to understand how money is spent. Everybody, whether it is Bill Gates or the roadside beggar can spend money in only 4 ways. The sooner a person understands these 4 types of spending, the faster he will become financially independent.

You can only spend your money in any one of the 4 quadrants below:

Let’s look at these Quadrants in a little detail:

Quadrant 1 – “Roti, Kapda aur Makan” type of expenses

These are your basic living expenses. Example – Rent, clothing, groceries, child schooling, routine medicines, commuting, Gas, water, electricity, telephone etc.

Absence of any of these severely impacts the quality and dignity of your life. Hence, it is important.

Almost all of these are to be paid every month. Hence, it is also urgent.

When the price of things in this Quadrant increases, we crib of rising cost of living.

Interestingly, you don’t need to push yourselves to spend in this Quadrant. Others will automatically push you to pay. Like, if you don’t pay rent you will have the landlord ringing the bell. If you don’t pay the fees, your child will be sent back from school.

The expenses in this quadrant are very important and urgent. However, keep in mind that you will never again see the money which you pay in this Quadrant. It is gone forever into some other person’s pocket.

Quadrant 2 – “Onida” type of expenses

Remember the Onida TV ads of 80s and 90s where the devil asked you to buy the TV which will become neighbors’ envy and Owner’s pride. Well, the devil was stroking that part of your mind which deals with peer pressure, ego pampering, impulsive buying etc. The Ad and the TV became a huge success in those times.

You can find new avatars of the same psychology in the all too familiar scenarios below.

• Do you feel ashamed to pull out your “desi” phone when in the company of your colleagues who all flaunt Iphones?
• Do you park your old car a long way off so that you don’t feel small in front of your luxury sedan/SUV driving friends?
• Every year, 2 or 3 months after getting your bonus, do you wonder where it has all gone and ultimately trace it to the 48 inch curved HD LED TV adorning your living room?
• During your weekend shopping visits, do you feel the strong urge to buy a branded dress or a gadget and end up calculating the cost if converted into an 18 month EMI on your credit card?
• Have you taken a higher than required home loan to build a bigger than required home which forced you into a high and long EMI bondage leaving out little cash for anything else?

If you can relate to the above, you know the “Onida” type of expenses which I am talking about.

These expenses look very urgent to you. You will not have peace of mind till you match your neighbour‘s flashier car. You will not sleep till you get that gadget which you saw in the mall.

But the hard truth is – they are not at all important. They only pamper your own ego and nothing else. They make you feel good – Only till you see your next “Object of desire”.

While you hate spending in the Urgent and Important Quadrant 1,spending into the Not Important Quadrant 2 is highly tempting. It requires all your will power to avoid the temptation of giving into theQuadrant 2 expenses.

While you crib privately and publicly at the slightest increase in Quadrant 1 bills, a high Quadrant 2 bill though privately cribbed is publicly bragged about. You wouldn’t remove the price tag if you could help it!!

Similar to Quadrant 1, the money which you pay in this Quadrant also goes into somebody else’s pocket. You may argue that now you own that flashy car which is an asset. Reality – The moment you drive your asset out of the showroom, 30% has immediately evaporated from its value. Quite an asset!!

Majority of the high income earning population never become financially independent because they spend most of their lives paying into this Quadrant. Having said that, spending in this Quadrant is not by itself bad. We will see later as to when it is bad and when it is acceptable.

Quadrant 3 – “Devdas” type of expenses

This is a no-brainer. This Quadrant consists of spends on all your vices – smoking, drinking, drugging, gambling and others..

You have seen several examples of people around you from various social strata ruining their financial, professional and physical lives due to an addiction.

Even those who are not addicts but have only a moderate indulgence in this Quadrant, fail to have a correct perspective in relation to more purposeful spending. Example below:

One pack of cigarette or couple of drinks per day can total upwards of Rs.4500/- per month. You don’t think twice before spending this. But you will not spend Rs.1000/- to provide financial education to your child which will save her a lifetime of trial and errors with money management (Conflict of interest alert – I conduct Financial Education Workshops,  among other things). You will not spend Rs.1250/- p.m to take a Term Insurance Policy of Rs.1 crore which will ensure that you don’t compound the emotional trauma for your family with a daunting financial trauma as well (Disclaimer – I don’t sell financial products. If you buy, you gain; I don’t).

If you don’t spend in Quadrant 1 – The quality and dignity of your living will be affected.

If you spend in Quadrant 3 – The quality and dignity of your living will be affected.

To state the obvious – Any spending in this Quadrant is neither Urgent nor Important.

Quadrant 4 – “Your real salary”

Regardless of whether you are an employee who earns salary, a professional who earns fees or a businessman who earns profit – The spending in this Quadrant is the real salary which you pay yourselves. This is the only type of spending where you will get to see your money again.

The spending in all the other 3 quadrants was for somebody else’s salary, fees or profit.

The most common and basic goals in this quadrant are:

• Saving for child’s education
• Saving for Child’s marriage
• Saving for a financially free and dignified retirement

Other than this, there may be other goals which may differ from person to person such as Home, Car, second home, Family holiday, setting up own business, Supporting parents, Supporting a charity, Leaving a legacy etc.

Everyone agrees that these are the most important. However, everything in this Quadrant appears far away in a distant future and never looks Urgent. And because it never looks urgent, the deceptively urgent looking Quadrant 2 hijacks the money leaving little for Quadrant 4. And as a result, you are left with little when the really important juncture of Childs’s education, marriage or your retirement comes.

Every time you see the warning on your rearview mirror, keep in mind that it applies to your Quadrant 4 also – “Objects appearing in the rearview mirror are closer than they appear”.

Because this Quadrant is the most important but never Urgent, it requires a lot of discipline and motivation to effectively spend money here.

End note:

The above post will help you to identify and classify each of your expenses into the four Quadrants. I suggest you do this exercise which will be a revelation. Involve your family in the process so that the entire family starts becoming financially savvy and responsible.

Footnotes:

While creating the above Quadrant concept, I have been inspired by the “Eisenhower Box” which is used in Time Management. However, other than the broad concept, the thoughts that have gone into the above post are firsthand (or so I believe).

In the previous post, we saw that whatever money we spend invariably goes into one of the following 4 Quadrants. In case you have missed out to read the previous article, I suggest you to first go through the same by clicking here so that we are on the same page before we discuss further. A summary is given below.

It is obvious that Quadrant 4 is where the real game happens. Unfortunately, a lot of people would have also realized that they have a non-existent Quadrant 4.

Starting block – Quadrant IV = 0

The first step in getting on top of your finance is to figure out your Quadrant 4.

This involves clearly stating how much money you want to have, for what purpose and at what point of time. Your goals depend on a lot of things – your age, profession, dependents, dependents’ age, current and aspirational lifestyle, existing family cash flow, existing family savings, your personality type, individual ambitions, return expected, inflation assumed etc.

It is very important that you

• Write down the goals in clear rupee terms and
• Involve your family in this exercise.

This is because these written goal statements are going to be your main weapons to counter the temptations of Quadrant 2 and 3. They act as motivation for the temporary sacrifices which you and your family would need to make in the process.

Forget about being mathematically perfect at this stage. More important is to get started. Google will give you any number of calculators to project your goals based on future returns and inflation. They will also tell you how much money you will need to save monthly to reach those goals.

Now that you know how much money you need to put into Quadrant 4 every month, you need to find out where to get that money.

Unfortunately, money doesn’t grow on trees!!

Money for Quadrant 4 can only come from either of the following:

1) By increasing your income OR

2) By reducing your expenses

While the first option, ie, increasing your income is the ideal method, majority of the people doesn’t have this luxury or doesn’t realise that they have this luxury.

Hence, for most people, the practical option is the second one, ie, reduce your expenses.

Which brings us to the next question – Reduce expenses from where?

Let’s look at each Quadrant.

Quadrant 1

These are basic essentials. Hence theoretically, there is very little scope for reducing expense here. However, the meaning of the term “basic essential” can vary from person to person depending on the standard of living one has got used to.

The biggest trap most people fall into in Quadrant 1 is to raise the standard too high too soon.

Consider this scenario. It’s appraisal time. You get a good performance rating and as a result a good pay raise. Now that you have more disposable income, you proceed to change the place you live, you upgrade your mode of transport, you choose more swanky places to go for lunch. These are actually Quadrant 1 expenses but a bit of Quadrant 2 slowly creep into it without you even realizing it.

It thus becomes the new standard.

Once you get used to a standard in Quadrant 1, it causes a lot of heartburn to scale down and is done only as a last resort. Therefore, thinking very hard before you change the standard is better than trying to reduce the same afterwards.

Quadrant 2

In Quadrant 1 we found that though theoretically nothing can be reduced, practically there is a lot of excess present there.

Quadrant 2, or in other words the Ego spends, are quite opposite to this. Though theoretically, Quadrant 2 doesn’t matter at all, a bit of it is required practically. This is because human beings by nature are fuelled by the aspirations of their Quadrant 2. Everybody, deserves a good life. Which makes Quadrant 2 not altogether bad.

You have heard about the house called “Antilia” owned by Mukesh Ambani . 27 floors. Valued between $1billion and $2billion, it is the most expensive private residential property in the world. It has Quadrant 2 written all over it. If we consider it purely from a personal finance perspective, this hugely extravagant house by common mans’ standard becomes totally acceptable by Mr. Ambani’s net worth. That 2 billion is just 5% of his net worth of $40 billion. If he wished to be known as the owner of the most expensive private residential property in the world by spending just 5% of his money, financially it doesn’t look out of proportion.

Now consider this against your own house. If it’s worth Rs.50 lacs, going by the same proportion of 5%, you should be having a net worth of Rs.10 crores. If it is worth Rs.1 crore, you should be having a net worth of Rs.20 crore.  Do you have that kind of net worth? Which one is more out of proportion here – the $2 billion house or the Rs.50 lac house?

So, for Quadrant 2, it’s not the absolute amounts that matter. Instead, it’s the proportion of your Quadrant 2 spends that is more important. The trick to master Quadrant 2 is to ensure that your Quadrant 2 does not happen at the expense of your Quadrant 4 and  fix a proportion to meet this objective – whether it is your gadget spends, eating out spends, impulsive shopping spends or whatever. And stick to it relentlessly.

A note of caution – Fix this proportion consciously for both your regular monthly income as well as windfalls like annual bonus. For example, you know that you will get your annual bonus on May 31st. Even before the amount gets credited to your account, fix the percentage which you will splurge and fix the percentage which you will take to your Quadrant 4. And once it gets credited, waste no time in moving it into Quadrant 4.

Consider the most important Quadrant 4 as a marathon. You need periodical fluid/energy stops so that you get the energy to complete the marathon. Without the fluid stops, you will not finish the run. On the other hand, if instead of a fluid stop you go for a full course meal in the middle of the marathon, then also you will not finish the race. When your Quadrant 2 serve merely as fluid stops and does not end up as a full meal, you are on your way to finishing the race.

Quadrant 3

Quadrant 2 becomes acceptable if it’s proportion to Quadrant 4 is acceptable.

This rule does not apply to Quadrant 3. Irrespective of the proportion, Quadrant 3 is best eliminated entirely.

This is because Quadrant 2 cannot harm you but Quadrant 3 has the capacity to harm you physically, mentally, morally and financially.

Let’s again take Mukesh Ambani’s help to explain this. You would agree that Mr.Ambani can afford to have the best of liquors every day. Let’s assume that he consumes a full bottle of the costliest whiskey 365 days of the year.  It will barely impact him in absolute rupee terms per bottle. But more seriously it will destroy his physical and mental faculties which helped him to multiply the empire which he inherited.

Therefore, though this may sound preachy, it makes sense to make your Quadrant 3 spending zero. Period.

Money does grow out of thin air!

Remember – You started with Quadrant 4 = 0 and were wondering where to find the money from.

You now know the rules to create that money:

Quadrant 1 – Delay upgrading the standards

Quadrant 2 – Fix your limits. And stick to it.

Quadrant 3 – Eliminate.

If you diligently do what is stated above, you will find that you have the option to create a lot of money out of thin air. And all of this goes into your Quadrant 4.

Maybe, you will have to tweak some goals here and there. Maybe, you will have a shortfall now. But it is definitely a start. Keep at it and as years go by you will find ways to achieve all your goals.

All the best.

In my first post, we saw that there are only 4 possible ways that a person can spend money. Also that out of these 4, spending to achieve your goals is the most important. We called that Quadrant 4 expenses. You can find the full article here.

In my second post, we discussed how money can grow out of thin air which will eventually fund your goal based spending. Those who missed out can read it here.

Now, you know what is important. You also know how to create the cash flow required to fund what is important. You are about to start a long journey called investing.

Wait a minute!! Have you got your safety net in place?

If no, that’s the first thing that you should be doing before you even think of investing.

It will not be out of place to compare investing to Trapeze in circus. Both involve years of preparation, practice, timing, mastery over your fears, taking calculated risks and so on.

Have you ever thought of what the safety net means to the Trapeze artist? Of course, it protects him in case of a fall. But more importantly, it removes fear out of the equation. He will not be able to perform with fear at the back of his mind. The fear of uncertainty – What if a snatch doesn’t happen? What if the bar misses the timing?

It is a proven psychological fact that if one obsesses over something whether positive or negative, it materializes. Hence, it is in our interest that we obsess over positive aspects rather than negative thoughts.

The same concept applies to life generally and more specifically to our subject – Personal Financial Planning.

It’s not worth living in constant fear of uncertainties. If we have to live to our full potential we have to remove the fear element out of the equation.

This is done by replacing Known Uncertainties with Known Certainties. And there is only one product in this world which can do that for you. That is called Insurance.

From a personal finance perspective, I would classify Insurable Uncertainties or Risks into the following three broad categories:

• Personal Risk – This applies to the life, health and functionality of you and your family members
• Asset risk – This applies to your major physical assets like home or car
• Income risk – This applies to your source of income

Let us see why these become important in your overall financial planning.

Personal Risk

If you need to cover your personal risks comprehensively, you should ensure that the following three scenarios are taken care:

Scenario 1:

I know the exact amount which I need for each of my financial goals and I know the year in which the amount should be ready. Because it involves major goals like the education/marriage of my children and my retirement, the amounts are big which will take years to build. With my experience, skills, qualifications and hard work, I am 100% sure that I will have the required amount in my bank as and when the time comes.

That is – IF I AM ALIVE.

If I die this very minute, will my children get the same education which I wanted them to? Will they get married off in the same way I wished? Will my spouse be able to put food on the table for the family?

These questions are answered by Life Insurance.

I can see the smile on your face and I can read your mind – “Big deal. I already have Life Insurance”.

Almost everyone has been sold some or the other life insurance product thanks to the numerous Life Insurance Agents.

But I can bet that very few among you have ADEQUATE life insurance which will ensure that your goals or in other words, your dreams will be met the way you wanted if you are not around.

My bet is based on pure mathematics rather than any prophetic skills. Majority of the life insurance products sold currently are ULIPs, money back or endowment policies. These policies are mainly sold as investment and not as insurance. Hence the advisors tend to keep the insurance cover to the bare minimum stipulated by the regulator (IRDA).

The minimum insurance cover stipulated by IRDA in ULIPS, Money back or endowment policies is 10 times of the annual premium which you pay. This means if you need an insurance cover of Rs.1 crore you should be paying a premium of Rs.10 lacs per year.

Most of you who are reading this blog would need an insurance cover upwards of Rs.1 crore to effectively cover your goals. But how many can afford to pay a premium of Rs.10 lacs per year?

The solution to the above is called “Term Life insurance “which very few advisors promote to their clients. A 40 year old can get a cover of Rs.1 crore for a premium of less than Rs.18000/- per year which works out to approximately Rs.50/- per day. Costs less than half a packet of cigarette.

Scenario 2:

Unlike Scenario 1, I am very much alive and am slowly but steadily building my Quadrant 4, ie, my goal based fund.

One fine morning, I collapse and is taken to hospital. Doctors diagnose that I have coronary blocks and advised a By-pass surgery costing around Rs.3-3.5 lacs. Where do I get the money for this?

The whole family gets tensed up. Eventually, the money is taken out from my Quadrant 4. The money which I had put aside for my retirement now gets pulled out to meet this emergency.

This is where Health Insurance comes into picture. If only I had health insurance, my retirement fund in my Quadrant 4 would have been protected.

Similar to term life insurance, this doesn’t cost much. A family floater plan providing a cover of Rs.5 lacs for both parents in the age group of 36-45 and 2 children costs less than Rs.18000/-per annum. Again less than Rs.50/- per day.

If you really need to understand the value of a life insurance or a health insurance policy, ask the young father who had just undergone a heart attack and realized that he has missed to take health insurance to cover the treatment costs as well as life insurance to protect the future of his kids. No one is going to give him insurance now.

Forget heart attack, even if you have been diagnosed with the common diabetics, you will find getting insurance nearly impossible or exorbitant. Hence, if currently you are underinsured for Life or Health and if currently you are lucky to be healthy, don’t waste a day. Get insurance TODAY.

Scenario 3:

Let’s assume that I have taken adequate Term Life insurance to cover scenario 1. I have also taken health insurance to cover Scenario 2.

I meet with an accident. I was hospitalized for couple of weeks. Hospital bill came to Rs.1 lac which my health insurer promptly paid. I was discharged but my doctors told me that I will be paralyzed for life.

This puts me in a fix. I am very much alive and hence my life insurer will not pay me money. My hospital treatment is over and my health insurer has discharged their obligation. There is a glaring gap here.

This void is filled by a personal accident policy.

A personal accident policy in addition to covering accidental death also covers permanent total or partial disability. A cover of Rs.25 lacs costs less than Rs.4500/- per annum. Rs.12 per day.

Very few people have comprehensively and adequately protected themselves against all the three scenarios which I have mentioned above. Don’t think that this negligence applies only to non-finance professionals. I have worked in financial services industry for 17 years and the story is not different even for professionals working in the industry.

Asset Risk

Asset risk applies to your major physical assets like your house or car.

You have spent most of your life’s earnings into buying or building your house. If something happens to that house, maybe due to an earthquake maybe due to a flood, can you afford to re-build that house a second time? If yes, will the money again come out of Quadrant 4 which should have funded your goals like retirement?

Take the example of Chennai floods in year 2016. A lot of my friends had to leave their houses for months, stay in rented alternative accommodation, clean up for days after the water receded, repair the plumbing, electrical fittings etc. In addition to the hardships caused, these would have hit their Quadrant 4 by anywhere between Rs.50000/- to Rs.1 lac. All of which should have ideally been footed by a home insurance policy. If only they had taken it.

A home insurance policy also covers contents including electrical appliances and valuables. This means your 48” Television destroyed in lightning or your necklace which gets stolen will not hit your purse but that of the insurance company’s purse.

Do you want to know the cost? Buildings cover for a 1500 sq ft house comes at approximately Rs.2500/-per year. Add to this, Contents cover of Rs.5 lacs (including jewellery cover for Rs.1.25 lacs) and the premium becomes approximately Rs.7000/- per year.

Car insurance is anyways mandatory and hence you have to take it whether you like it or not. Irony is that people who wouldn’t mind paying a premium of Rs.25000/- to insure their Rs.9 lac car are reluctant to pay a premium of Rs.18000/- to protect their family’s future by taking a term life insurance for Rs.1 crore!!

Income Risk

“Lionel Messi insures both his legs for 550mn euros”. Hope you got the idea of income risk.

This protects your source of income. Mainly applies to people who are businessmen or self employed professionals like doctors etc.

Example – For a shop keeper, his shop is his source of income. If his shop gets destroyed in a fire, his income stops which ultimately devastates his Quadrant 4. If he has failed to insure his shop, he has only himself to blame.

Let’s take the example of a doctor. We are seeing more and more instances of patients and patient’s relatives accusing doctors of professional negligence. When such an incident happens, the public, the media, people in power all take a stand against the doctors irrespective of the facts. Even one such incident can impact the income and Quadrant 4 of a doctor severely. Taking a professional indemnity policy protects the doctors against this risk. In addition to covering the financial liability, a professional indemnity policy also brings in the expertise of the insurer in handling such cases. Cost – Approximately Rs.18000/- per year for a Rs.1 crore cover.

End Note

Let me take you back to a statement which I mentioned at the beginning of this article. In order to remove the element of fear, replace the Known Uncertainties with Known Certainties. Let’s map the scenarios under Personal Risk to this statement. The Known Uncertainties were possible death, disease and disability and the possible outcome was non achievement of financial goals for me and my family. Now we have replaced that with a Known Certainty that COME WHAT MAY, the goals will be achieved for my family – WITH ME OR WITHOUT ME. And at what cost? Rs.112/- per day!!

In short, when you take insurance it does not protect your life, health, home or profession. It actually protects your dreams irrespective of what happens to your life, health, home or profession. It protects your Goals. It protects your Quadrant 4. I wouldn’t mind starving for a couple of days. But I wouldn’t dare to miss the premiums on my life or health insurance even for a day. And for that same reason, I classify these premiums as Quadrant 1 expenses, the most urgent and important expenses.

Because performing a Trapeze without the safety net is not bravado but sheer foolishness.

You probably have heard that people lose money on their investments when markets crash. In fact, more people have lost money by not following the 10 points below than due to any market crash.

Read on and remember these when you buy your next investment.

1. Invest time before investing money

I know several people who spend enormous amount of time selecting a shirt, belt or a shoe. They don’t mind checking out store after store till they get the exact colour or fit which they had in mind. However, when they deal with their investment advisor, they suddenly become the busiest person in the world – “Dude, I don’t have time for this. Make it fast”.

A bad decision while selecting your shoe is not going to make a big difference in your life. But your selection of financial products can make or break it. By rushing your investment advisor, you are not helping him to help you.

Schedule the appointment at a time and place where you and the advisor can discuss undisturbed and unrushed.

2. Don’t take personal decisions over financial matters

Whenever you hear somebody complaining that they lost money on a financial product not suitable to them, ask them from whom they bought it. 90% of the time, you will hear the below answers or a variation of these answers.

“My friend had a target to meet”.

“My neighbour’s son needed one last sale to get his job confirmation letter”.

“Well, the bank manager was a nice guy and helped me to get the loan. So, how can I say no when he requests to take this insurance”.

I am not saying don’t buy from your friend, neighbor, relative or your bank manager. If he is able to explain to you clearly how the product can help you in your overall financial plan and if you are convinced of the same, buy it. But don’t buy a product just because a friend or relative needs a sale.

Rather, it will be better for you to clearly tell him that you will listen to their presentation but you will only buy if you are convinced of the suitability.

3. Ask questions

Human beings are natural at asking questions. And most people, even those with no financial background have the ability to ask the right questions regarding financial products. The problem is that they don’t ask them at the right time, i.e., before buying the product.

The first reason why people fail to ask questions before buying is a carryover of the previous point – “He was my close relative. How can I question him?”

Second reason – People especially those not from a financial background feel that the question which they have in mind might be common knowledge and doesn’t want to appear foolish asking.

Third reason – It’s weird but a lot of customers unknowingly put themselves into a trap by acting as if they are experts in financial matters. During the conversation with the agent, they liberally use financial jargons without really knowing what those words mean. What they are trying to convey to the agent is “Boss, I know these things and don’t try to cheat me”. A sales person worth his salt can see through this in a minute and can use the same things to sell the product to you.

It’s better to act foolish and ask whatever comes to your mind than to act like a “know all” thus putting yourselves into a position from where you cannot ask basic questions. Don’t use jargon which you don’t understand and don’t allow the agent to use jargon which you don’t understand.

A knowledgeable, professional advisor would always welcome questions because it gives him more opportunity to educate his customer. If you don’t know, it’s good enough reason to ask. It’s your money.

4. Encourage negative information

When you do all the questioning above, you are bound to learn the downsides of the product from your agent. If he is deflecting your questions and not giving you the complete picture, it’s a clear indication to change the person.

Likewise, when someone gives you the downsides of the product that he is selling, respect his professionalism and don’t use it as a reason to get rid of him unless those downsides genuinely make the product unsuitable to you.

There are no good financial products and bad financial products in this world – There are only suitable financial products and unsuitable financial products with respect to your specific goals.

To decide whether a product is suitable for your purpose, you need to know both the positives and negatives of the product and then take a call as to whether the positives make a difference to you and whether the negatives really matter to you.

I repeat – There is no product, financial or otherwise, with only positives in this world.

5. Keep expectations realistic

A big reason why a lot of people lose money on their investments is because of their selective obsession with the “return on investment” while totally disregarding the “Risk” involved. They fail to realize that “Return” and “Risk” are Siamese twins and one cannot exist without the other.

In their chase for finding the investment which gives the highest return, by the time they enter, the party is already over. This is because the highest return is always seen just before the bubble is about to burst.

Though your car can technically run at 120 kms per hour, you realistically don’t expect it to do so every time you drive the car. Past experience has shown you that because of traffic signals, blocks etc you can average only around maybe 50kms per hour.

Nevertheless, when it comes to investing, people love to hear and believe the 120 kms story and not the 50 kms reality. And as a result forget about “Return on Investment”; “Return of Investment” itself becomes doubtful.

6. Never sign blank forms

People have seen their fixed deposit becoming mutual fund, single premium insurance policy becoming regular premium policy, stock broker arbitrarily buying and selling stocks on their account and a lot more. Thanks to this one habit. And still people do it.

A combination of points one and two above are the main reasons behind this.

You have put yourselves in a position of “Busy Ness” from where you cannot allow the agent an extra 10 minutes to fill in the application. And the agent becomes extra helpful and says “Sir, you just sign here. I will complete the details for you”.

If you have signed the form, you are bound by whatever has been written there and cannot claim that it was somebody else who filled and you only signed.

I am not hinting that all agents are like that. In fact, only a minority resort to such practices. But you only need one such advisor to ruin you. Hence, make it a blanket practice not to sign unfilled forms.

7. Never pay in Cash

Never pay for your product in cash to your agent. Pay using account payee cheque, account transfer, pay on the company website using net banking, debit card, credit card etc – But never pay cash to the sales person. This is because agents cannot issue receipts and in case of any issue even the concerned financial organization will not be able to help you since there is no proof of payment.

If at all you need to pay in cash, pay it yourselves at a local branch of the financial institution from where you will be provided a bonafide receipt (provided the organization accepts cash and is subject to PAN Card requirements).

8. Check what happens next?

Clearly understand from the advisor as to the next step. Whether you will get any document? By when will you get it? Whether it will be hard copy or electronic? What to do in case you have any servicing requirements?

It is not just enough that you understand the above. If the committed document has not been received within the committed timeline, follow up with the agent. This is because only once you get the document you can read what is written there and feel sure that everything is like what you have been told.

This is especially important on products like insurance policies which come with a mandatory “15 day return window” called Freelook period wherein you can return the product within 15 days of you receiving it and your money will be returned. If you find the details of the product in the document different from what you have been sold by the agent, you can use this option rather than getting stuck with an unsuitable product for long term.

9. Use company website, call center , e-mail contact points

The fact that you are reading this blog proves that you are sufficiently tech-savvy to use these alternative communication channels effectively.

You can use company website to double check the information given by the agent at the buying stage. Now a days, you will get details of all the products on the respective company websites.

Post buying the product there will be several instances where you have servicing requirements. Your agent should help you with the same. However, in case you find him not responsive, use alternative channels like call center and e-mail.

The advantage of Call center and E-mail channels are that there is a clear record of your request or complaint in case you wish to take it up further. And the organization has to resolve your concern within a specified number of days.

10. Avoid Rebating

Rebating means the practice where an agent offers a portion of the commission earned by him back to the customer in cash or in kind to induce the sale. Avoid such an agent like plague.

First, it is illegal. Will you trust a person with your hard earned money who doesn’t hesitate to commit an illegal act?

Second – If an agent has to resort to rebating to make his sale, it is because he himself is not sure of how the product will be useful to you. The discount or kickback which he offers to you will be the only value which he will be providing during the entire tenure of the product. And when compared with the losses which you will be incurring from such an unsuitable product, you are better off not buying it in the first place.

Happy investing.