David Ramsey in his popular book “The Total Money Makeover” makes an excellent point. Personal Finance is 80% behavior and 20% head knowledge.
I couldn’t agree more.
I have experienced this multiple times in my personal life. I have made some bad investment choices in life and many good ones too.
As I pondered about it, I came to the conclusion that although there are a lot of good qualities that are important, a key behavioral quality ranks highest, in making good financial decisions (from my own personal decisions).
And that is: “Asking the Right Questions” before you invest or spend your hard earned money.
Think about this. You earn money the hard way, spending months or years. With poor financial decisions, you are blowing away not only money, but all your efforts, energy and time that you spent on earning it. Remember you are emotionally invested in it already.
Answer honestly.
When it comes to savings and investments: How many times do you act hastily on financial tip-off from friends, relatives and media? How many times did you thoughtlessly plunge in to stocks and mutual funds that plummeted in value soon after or sold investments that skyrocketed soon after? How many times did you buy insurance policies clueless about the coverage or details, and whether you really need it? How many times have you been sold investment products that you have the faintest idea of, that have given you poor or no returns or blew your principal away?
When it comes to spending: How many times did you spend on products that you didn’t quite need or want? How many times did you have to throw out the products because you didn’t have space to store them or because another product that you had already addressed the need more effectively? How many times did you feel remorseful about buying wrong things, or overpaying for those and/or not being able to return or exchange them? How many times did you buy software when a comparable one was available for a free download? How many times have you made impulse spending decisions that you couldn’t even resell at a lower price?
Did you ever wonder Why? I think it is because you are not asking the right questions. You are either not asking anything or asking wrong questions or dumb questions.
How does “Asking the right questions” lead to good decision making?
(a) You do the research : In order to ask the right questions, you need the knowledge. Right? Hence you start doing the research before you invest or spend money. If you want to invest in stocks, for example you get to know the industry, the economic and business context, the business model of the company you want to invest in. What is their revenue? How profitable is the company? What is the P/E Ratio? What is the market capitalization? How does it stack up against competitors? Is it a growth or value stock or neither? How long has the company been around? Etc.,
Similarly before you spend, you begin to do the research. You begin to ask if you really need this or want this, if you can afford this, by how much are you postponing your goals achieving your financial or other goals, or if you have something already that can serve the purpose, what comparable products exist in the market, price comparison, reviews, quality comparison, Is some one giving away for free or cheap in Craig's List, or free cycle? You cover the whole nine yards.
You get invaluable information out of the research that will help you make a better decision.
(b) You take time to make decisions: You need and take time to do the research. That psychologically detaches you to an extent from the decision you are likely to make. With the additional time, you tend to get more rational than emotional or impulsive. You are not a kid in the candy shop any more. The time taken itself improves the quality of the decision. Even if you lose a specific opportunity because of the time taken for research, you are still better off, because you will be prepared the next time.
(c) You become an organized planner: You begin to realize that to make use of investment opportunities and to make the right spending decisions, you need time and research (as above). To do the research, you get the right tools. To not get overwhelmed you begin to prioritize and organize. You start planning ahead of time, set goals and milestones to measure yourself. In short, you organize your life smarter,
(d) You turn off bad advice, and attract good company: Because you are not naive anymore your bad friends and influences begin to retreat, knowing that you won’t listen or act on what they want you to bite off. They realize that you are not gullible anymore. You have developed some good habits and continue to build them. You have gone through a profound personality change with this habit.
On the hand, you attract people who share your philosophy. You are in the company of people who are sensible, and financially well-behaved. Your ability and chances of cultivating good habits are much higher.
You build synergy that leads to very wise investment decisions. All by Asking the Right Questions.
What is your experience? If you have to list One Key Quality or habit for better decisions what will that be? If you were to choose 1 good Habit what will it be? What’s your experience?
Showing posts with label Organize Personal Finance. Show all posts
Showing posts with label Organize Personal Finance. Show all posts
Tuesday, July 21, 2009
Friday, July 3, 2009
Why it pays to Organize your Finances? - Baby Steps to Organization
Last week my wife and kid were down with viral fever. Friends pitched in with food. I didn't want to bother them much. The prospect of getting food from restaurants didn't appear healthy, nor did I have the time for frequent trips. Therefore I decided to put my culinary skills to test.
I have decent skills in cooking from the past. I know a limited set of Indian recipes. However, I make it a point to prepare those limited items well . Plus I never hesitate to learn new things or improvise my cooking "on the go".
I must mention that it has been quite a while since I cooked full-fledged meals.
My wife is a fairly organized person. She takes great pride in keeping the kitchen clean. Despite all that, I still had to wake her up frequently and ask her a lot of questions about where the ingredients were placed in the kitchen. I felt bad to ask her for too many things when she was sick, but I wasn't patient to search also, plus I was making blunders. Although she knew where things were, it was not intuitive to me.
No wonder an impatient newbie like me, couldn't spot things easily in the kitchen (whether it was sugar or cashews or turmeric). Hence I used the marker to put labels on those containers for added clarity, and used certain other organizing hacks to improvise it a little better.
Anyways, within a day, I learnt the ropes and I was buzzing in the kitchen. I couldn't but help appreciate her ingenuity in the placement of groceries based on her need and style. And whether or not it because was my food, my family got well in the next couple of days.
When it comes to Personal Finance , things are no different from a kitchen. The more organized you are, the easier it is for you to focus on important Financial issues without feeling overwhelmed. You will feel a sense of control and purpose. You will feel secure in the belief that you know where you stand on Finances, know what your priorities in life are, where you need to invest your time and money in , where you need to cut down and make realistic decisions that are in your best interests.
You will not make stupid financial mistakes like paying overdraft charges, paying late payment fees, choosing wrong financial products or services. You name it . Above all, when something happens to you (even if temporarily), your loved ones can run the show.
If your Personal Finances are cluttered up, you will find it very uncomfortable and your loved ones will have a hard time sorting things out in your absence (should a need arise). Your bad organization skills will cost you and your family dearly and financially.
What are the essential steps in organizing your finances?
Eliminate : Before you try to organize your Personal Finance , you should really focus on eliminating redundant or unwanted accounts. Too many accounts are overwhelming to maintain. Plus by consolidating them in to 1 or 2 accounts, you are (a) reducing your administrative fees, (b) saving yourselves the pain of reviewing multiple statements and (c) address your minimum balance needs more effectively. You get a better leverage and customer service with the 1 or 2 banks.
Can you cut back to just 2 bank accounts (instead of a dozen that you may have)? Can you keep just 1 or 2 credit cards and close all others? Can you reduce the number of brokerage firms to just 1 and/or see if your bank itself provides investment services? What are other things that you can cut back on without losing the service? Please be ruthless about elimination.
Automate: Make sure to automate your payment infrastructure. When your pay gets deposited on a given date (say 1st of every month), provide online or standing instructions to let the money flow in an automated manner for various savings and expense buckets.
For e.g. Designate and move a certain % to Recurring Deposits meant for various purposes, a certain % to SIP (Systematic Investment Plans). See more in Organize section.
Make sure to schedule online bill payments for your service providers (electricity, water, gas, telephone, maintenance etc.,). You shouldn't be wasting your precious time standing in a line to make payments
Organize and Keep it Simple: Do some basic organizing. Open separate Recurring Deposits within the 1 or 2 banks for various things. As an example, you want an RD A/C each for your home maintenance, for your house construction, for your Personal Provident Fund A/C (for the next year) . Open 1 or more SIPs for a mutual fund and funnel some money in those (monthly) as well. Open Fixed Deposits where you don't need the money for the medium term (2-5 years).
Setup online access to these accounts, that consolidates and shows you all the various types of accounts in 1 portal. As an example, here's how my HDFC Bank portal looks like.
As you can view in the screen shot, this portal shows me my various types of accounts (RD, Fixed, Savings) on the left hand side navigation. My scheduled bill payments, HDFC Credit cards, Mutual Funds and Demat Accounts (for stocks) are available in the various tabs (to the right).
A portal like this, makes the process of getting a snapshot of your stocks, MFs, Savings, Fixed Deposits, RDs, SIPs all in 1 place consolidated. Simple. I believe most Indian banks provide this level of functionality and flexibility.
As another important step, get your statements delivered online to your personal e-mail id, instead of through regular mail.
Create separate folders for the various banks by various months and store the statements in those folders.
While the above will give you a reasonable idea of your Net Worth, it doesn't include your real estate holdings, gold and certain other types of investments like insurance.
If you are old school, then buy the necessary stationery (like folders, binder clips, post it, label maker etc.,) from an Office supply store and organize the physical statements. These statements should be stored in the respective folders, for your reference later, with an index page that states which statements reside in which folder. These come in handy, when you apply for loans, or file Income Tax returns.
In one of the later posts, we'll illustrate a simple spreadsheet that shows an approach on how to go 1 step further, and consolidate all your investments in to a single view. For now, this should be adequate.
As far as your stock, Mutual Funds Portfolios if you are not happy with what is offered by your banks, you can also setup your portfolio in portals like finance.yahoo.com using your yahoo id. The screen shots below show an outline of how to accomplish adding stocks to your portfolio step by step, so that you can easily track the performance of your stocks or MF since you bought them.
Payments:
For your bill payments , if you don't get your bills by e-mail , or get an e-bill, then please setup reminders in your google or yahoo or plain old traditional calendar to alert you for payments. (You can save loads of late payment fees and feel very good about it).
For your investment payments a similar approach will help. Get the reminder early so you can plan for the payment ahead of time.
Receipts:
I personally don't enjoy this much, but it is important for tracking your expenses and for income tax purposes. If you are a tech geek, then you can use a camera or scanner to scan the receipts, and store them electronically (by month). If you are old school, clip and store the physical receipts and retain them atleast for 1 year.
Educate and improvise Continuously: Keep your eyes and ears open for sites, books, people that keep you educated on how to simplify and organize on a continuous basis. If you have a spouse or loved one who may need to be educated on where your holdings are and how to view, access them, you must keep them informed and educated as well.
Remember, all human beings are mortal. It's important for family to move on with financial life after our life.
At the same time, there is not a single system that can fit all our styles. If you don't like to do it the way I outlined above, by all means develop your own. But don't ignore this important aspect of Personal Finance.
I have decent skills in cooking from the past. I know a limited set of Indian recipes. However, I make it a point to prepare those limited items well . Plus I never hesitate to learn new things or improvise my cooking "on the go".
I must mention that it has been quite a while since I cooked full-fledged meals.
My wife is a fairly organized person. She takes great pride in keeping the kitchen clean. Despite all that, I still had to wake her up frequently and ask her a lot of questions about where the ingredients were placed in the kitchen. I felt bad to ask her for too many things when she was sick, but I wasn't patient to search also, plus I was making blunders. Although she knew where things were, it was not intuitive to me.
No wonder an impatient newbie like me, couldn't spot things easily in the kitchen (whether it was sugar or cashews or turmeric). Hence I used the marker to put labels on those containers for added clarity, and used certain other organizing hacks to improvise it a little better.
Anyways, within a day, I learnt the ropes and I was buzzing in the kitchen. I couldn't but help appreciate her ingenuity in the placement of groceries based on her need and style. And whether or not it because was my food, my family got well in the next couple of days.
When it comes to Personal Finance , things are no different from a kitchen. The more organized you are, the easier it is for you to focus on important Financial issues without feeling overwhelmed. You will feel a sense of control and purpose. You will feel secure in the belief that you know where you stand on Finances, know what your priorities in life are, where you need to invest your time and money in , where you need to cut down and make realistic decisions that are in your best interests.
You will not make stupid financial mistakes like paying overdraft charges, paying late payment fees, choosing wrong financial products or services. You name it . Above all, when something happens to you (even if temporarily), your loved ones can run the show.
If your Personal Finances are cluttered up, you will find it very uncomfortable and your loved ones will have a hard time sorting things out in your absence (should a need arise). Your bad organization skills will cost you and your family dearly and financially.
What are the essential steps in organizing your finances?
Eliminate : Before you try to organize your Personal Finance , you should really focus on eliminating redundant or unwanted accounts. Too many accounts are overwhelming to maintain. Plus by consolidating them in to 1 or 2 accounts, you are (a) reducing your administrative fees, (b) saving yourselves the pain of reviewing multiple statements and (c) address your minimum balance needs more effectively. You get a better leverage and customer service with the 1 or 2 banks.
Can you cut back to just 2 bank accounts (instead of a dozen that you may have)? Can you keep just 1 or 2 credit cards and close all others? Can you reduce the number of brokerage firms to just 1 and/or see if your bank itself provides investment services? What are other things that you can cut back on without losing the service? Please be ruthless about elimination.
Automate: Make sure to automate your payment infrastructure. When your pay gets deposited on a given date (say 1st of every month), provide online or standing instructions to let the money flow in an automated manner for various savings and expense buckets.
For e.g. Designate and move a certain % to Recurring Deposits meant for various purposes, a certain % to SIP (Systematic Investment Plans). See more in Organize section.
Make sure to schedule online bill payments for your service providers (electricity, water, gas, telephone, maintenance etc.,). You shouldn't be wasting your precious time standing in a line to make payments
Organize and Keep it Simple: Do some basic organizing. Open separate Recurring Deposits within the 1 or 2 banks for various things. As an example, you want an RD A/C each for your home maintenance, for your house construction, for your Personal Provident Fund A/C (for the next year) . Open 1 or more SIPs for a mutual fund and funnel some money in those (monthly) as well. Open Fixed Deposits where you don't need the money for the medium term (2-5 years).
Setup online access to these accounts, that consolidates and shows you all the various types of accounts in 1 portal. As an example, here's how my HDFC Bank portal looks like.
As you can view in the screen shot, this portal shows me my various types of accounts (RD, Fixed, Savings) on the left hand side navigation. My scheduled bill payments, HDFC Credit cards, Mutual Funds and Demat Accounts (for stocks) are available in the various tabs (to the right).
A portal like this, makes the process of getting a snapshot of your stocks, MFs, Savings, Fixed Deposits, RDs, SIPs all in 1 place consolidated. Simple. I believe most Indian banks provide this level of functionality and flexibility.
As another important step, get your statements delivered online to your personal e-mail id, instead of through regular mail.
Create separate folders for the various banks by various months and store the statements in those folders.
While the above will give you a reasonable idea of your Net Worth, it doesn't include your real estate holdings, gold and certain other types of investments like insurance.
If you are old school, then buy the necessary stationery (like folders, binder clips, post it, label maker etc.,) from an Office supply store and organize the physical statements. These statements should be stored in the respective folders, for your reference later, with an index page that states which statements reside in which folder. These come in handy, when you apply for loans, or file Income Tax returns.
In one of the later posts, we'll illustrate a simple spreadsheet that shows an approach on how to go 1 step further, and consolidate all your investments in to a single view. For now, this should be adequate.
As far as your stock, Mutual Funds Portfolios if you are not happy with what is offered by your banks, you can also setup your portfolio in portals like finance.yahoo.com using your yahoo id. The screen shots below show an outline of how to accomplish adding stocks to your portfolio step by step, so that you can easily track the performance of your stocks or MF since you bought them.
Payments:
For your bill payments , if you don't get your bills by e-mail , or get an e-bill, then please setup reminders in your google or yahoo or plain old traditional calendar to alert you for payments. (You can save loads of late payment fees and feel very good about it).
For your investment payments a similar approach will help. Get the reminder early so you can plan for the payment ahead of time.
Receipts:
I personally don't enjoy this much, but it is important for tracking your expenses and for income tax purposes. If you are a tech geek, then you can use a camera or scanner to scan the receipts, and store them electronically (by month). If you are old school, clip and store the physical receipts and retain them atleast for 1 year.
Educate and improvise Continuously: Keep your eyes and ears open for sites, books, people that keep you educated on how to simplify and organize on a continuous basis. If you have a spouse or loved one who may need to be educated on where your holdings are and how to view, access them, you must keep them informed and educated as well.
Remember, all human beings are mortal. It's important for family to move on with financial life after our life.
At the same time, there is not a single system that can fit all our styles. If you don't like to do it the way I outlined above, by all means develop your own. But don't ignore this important aspect of Personal Finance.
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