DON’T MAKE THESE MONEY MISTAKES

Women not only need to have power over themselves but also over their financial decisions

My experience in dealing with families while doing their financial planning is the basis of this article and over time I have seen these mistakes being repeated time and again. I always encourage women to participate in the exercise of sorting out their money dynamics—through financial planning— even when they may not be working for money. Here I must acknowledge that actually a few of the financial blunders committed by families could have been avoided if the decision-maker had heard about the objections raised by their feminine counterpart.

Not participating in the financial decision-making process

I have witnessed women largely relegate the financial decision-making process completely to their male counterparts due to which the family ends up missing out on balanced money saving plans. I have an instance to quote, where the woman was a homemaker and had raised objections to a certain product/decision before it was made, which eventually had a huge fall out on their financials. The husband ended up investing, or should I say saving, nearly 50 per cent of his monthly inflows into whole life insurance plans. This meant that the policy would mature releasing the money invested along with its returns only when the client would turn 80. He had taken nearly 30 policies like these. While the returns of a few of them would be okay, all of them were illiquid till well after his post-retirement at 60.

What it resulted in

The problems started with a shortage of money while running monthly household expenses, with no money available for down payment for the house, they needed to buy. The man eventually ended up taking a loan on these policies, personal loans and loans at heavy rates from the ‘community’ (Marwari Samaj to which he belonged). He also started investing in multiple small under construction properties which talked about doubling the money in a few years. This was done with an objective of covering up on the poor returns earned on account of whole life policies. This led to his asset allocation being heavily skewed towards real estate.

What could have been done?

Just as two wrongs don’t make a right, it does not make sense to throw good money after bad money. My recommendations were clear. Come out of these policies even if at a high exit load. This way at least the future cash flow will not get locked in at inferior returns. Start pre-paying the loans taken at exorbitant rates. A heavy backpack (impending loans) impedes speed (returns on the portfolio) while walking. Initiate sale of houses and invest the money thus available (after squaring off the loan) by investing in equity markets through well-managed diversified equity funds. Money is supposed to serve two functions—of liquidity and returns—beating inflation and taxes. These steps would have helped in creating liquidity in the portfolio and enhancing the returns by investing in equity markets. This would also lead to correcting the bias in asset allocation.

Not taking enough risks

As Warren Buffet says, “Risk comes from not knowing what you’re doing”. And, at times not taking enough risks could be the biggest risk one could be exposed to. I have observed women, in general, being more risk-averse than men. One of my clients retired at 60 with a sizeable corpus recently. She had enough money to fund at least 45 post-retirement years without compromising on her lifestyle at a risk-free return of 6 per cent. She was so risk-averse that she went ahead and bought chunks of tax-free bonds with 10 years lock-in period. The remaining corpus is lying in short-term mutual funds since last three years. My suggestion of nurturing money towards it being selfsufficient, combatting inflation, fell on deaf ears. The belief is that money is a blessing and it is one of the highest forms of energies. The onus is on us to channelise it effectively in positively affecting our lives and those around us. If the corpus were managed optimally yet conservatively, it would have lasted much longer.