Category Archives: Psychology

Credit Card ke Side Effects!

credit_card_ke_side_effects

How did you make the payment for your shopping bills, lately? Credit Cards, right, as these are usually more convenient to use & carry than cash. Well, if used sensibly, credit cards can be an important financial instrument but only if used sensibly.

There are numerous psychological reasons which prove that use of credit cards can be hazardous for your financial health and one of the biggest issues is “overspending”, let’s understand:

Use of credit cards stimulates Overspending:

We tend to spend more while paying through credit cards than spending in cash, it also arouse desire which ultimately compels us to go beyond our means. With the power of credit cards and EMI culture, each one of us can buy helicopters also, sounds strange but it’s very simple. All you need to pay is Rs. 6667/- per month……for the next 200 years.

Now one may laugh at this but if you delve further, you will realize that the use of credit cards has literally removed the difference between “Buying” and “Affordability”. It has made us believe that we cannot only buy but we can afford each and everything that is available on this earth. This phenomenon has extended to all the products we buy like Mobile, Car, TV, Camera and even apparels!

Pleasure of buying v/s Pain of paying

Whenever and whatever you buy, there always will be a pain and that is called the pain of “paying” and specially paying in cash. Parting with cash causes great pain in spite of the pleasure of owning your desired object and what is a better way out than using a credit card to avoid this pain. The use of credit cards delays the payment and ultimately the pain of paying.

 

Benefits V/s Costs

 

You pay more attention to the benefits of a product while paying through credit cards and focus more on the costs associated with the product while paying in cash. Credit cards prompt you to purchase things you really don’t need and way beyond your budget, it makes you lose control over your spending. Retailers surely know these very well and use various tactics to stimulate your pleasure points and desperately want you to use your credit cards so that your focus shifts towards the benefits than cost.

What should you do!

Start spending in cash or use a debit card if at all using plastic money is a necessity, Debit card would bring more alertness than using credit cards as the money is coming from your bank account balance only. If using credit card is a must then be alert about the price of the product and other factors as discussed and set aside cash immediately; it would stop you from spending money you don’t have.

And always remember the fact that it doesn’t matter how much you earn if you spend it all!

 

Small Stores V/S Shopping Malls

The proliferation of malls has led to increase in impulsive buying!

As highlighted in my previous article “The Secret to Saving Money” http://idiva.com/opinion-work-life/the-secret-to-saving-money/25858 , you earn enough every month, but where does it go? There are two strong reasons behind your inability to save money; these are chasing the “best” & “buying things beyond budget”. Today’s article delves in to how these tendencies further get a boost due to shopping malls & EMI culture. Let’s understand this by comparing how we shop from a super market and a local kirana store?

 Scenario 1: Shopping from a Super Market?

How much did you spend on your last visit to a super market; approximately Rs. 4000/- to 5000/- per month, right?

Let’s see, how you buy from a super market:

You come across an angel (salesman), who gives you a trolley the moment you enter and you are tempted to fill this trolley with products you had not planned on buying. For e.g. you buy a food item thinking that ‘guests keep dropping in’. Then there are shelves filled with a variety of beautifully packaged products that fuel impulsive buying, proving the point that “jo dikhata he vo bikta he”.

Why do you buy the way you buy?

Visiting a Mall has become an event in itself.  You plan in advance & travel around 15-20kms from your house. How can you then come out empty handed?  You get a feeling that “Khaya piya kuch nahi glass toda barana” . As a result of which you feel obliged to buy things you do not actually need.

Scenario 2: Shopping from a small kirana store!

Do you often buys things beyond your specific requirements from a local kirana store and indulge in impulsive buying? No, your main focus here remains on buying what is required and getting out of the shop as quickly as possible, right? There is always a struggle to get the space in a small shop and you just manage to get your hand out amongst the crowd and usually say “Bhaiyya, jara Jaldi karna”.   You are mostly engrossed in your cell phone & in all likelihood you leave your vehicle on start mode, if you are with a friend or spouse.

Conclusion:

The intention here is not to discourage you from shopping in malls but to explain how you buy and fall prey to various tactics rather than taking advantage of the same. If you can prepare a list and religiously stick to your requirements then shopping from a mall could prove to be more advantageous. Next, I will share the secrets to saving money for a couple with tips & tricks to help you invest it prudently while still upgrading your lifestyle. The whole idea is to first help you save & then explain ways to invest prudently.

Till then watch this space and shop smart!

5 ways to become a Crorepati

5 Secrets to become a Crorepati !!!

                     (1). Getting wealth in inheritance

 (2). Winning a Lottery

    (3). Become a Celebrity

     (4). Marry a rich person

&

(5). Save & Invest !

Well 4 of the out of the five ways are not  in our direct control but the fifth one is surely in our control and that is save and invest.

Eat less and exercise more, that is the rule to be followed if you have a weight-loss goal in mind, they say. Well, it is no different when there is money involved.

A parallel universal truth with regard to money is spend less, save more, for you to reach your ideal level of wealth. The earlier you start saving for your rainy day the richer you will be when it finally arrives.

In this context, you need not be a whiz in your attempt to make yourself financially secure for the future. You simply need to be consistent in saving a portion of your money and let it compound over time. The fascinating effect of compounding gathers up momentum over longer periods of time and becomes an avalanche of wealth.

How does compounding work?

When you save Rs 100 and get an annual interest of 10%, you will have Rs 110 at the end of one year. Due to compounding the next year you will get a 10% interest on Rs 110, which will then leave you with Rs 121. The next year, interest will be calculated on Rs 121 at 10% and so on. In time, these savings will grow exponentially.

The Rule of 72: 72 divided by your return rate = the number of years it’ll take to double your money.

There are certain number rules that have been evolved to figure out a quicker method for calculations, especially in finance. Rule 72, is one such quick method of calculating how much time it will take, for your investment to double.

So, if you invest Rs 100 with a compounding interest of 10% per annum, the rule of 72 gives 72/10 = 7.2 years as the approximate time frame required for the investment to become Rs 200.

like that way you can surely get Rs. 1 crore if you start today and invest 1444 per month for the next thirty years assuming a return of 15% per annum. lets look at the table with the different amount you need to invest to achieve your desire wealth!!!

Desired wealth & amount to be invested per month
Target for years 5 lacs 10 lacs 20 lacs 50 lacs 1 crore
5 5645 11290 22580 56450 112899
10 1817 3633 7267 18167 36335
20 334 668 1336 3339 6679
30 72 144 289 722 1444/-

Power of compounding and why you must start early

Let’s take an example to understand it better. Say ajay who is 30 years old and wants to retire at 60. He has 30 years to go. If he starts investing Rs 1,500 per month for the next 30 years, then at the rate of 15 per cent (assuming s/he is doing a systematic investment plan in equity mutual funds) s/he will have a corpus of Rs 1.03 crore.

Where as if Ajay doesn’t start at an early but decides to invest when he turns 50 the to have a corpus of Rs one crore he will require to invest Rs 41,500 per month, the reason for the huge difference in per month investment is the extra 20 years if Ajay starts early. when he starts at age 30 then with power of compounding his investments got a period of 30 years

While this may not be possible starting your retirement planning when young is. It is not necessary to start with a bang. You can start with small amounts and increase it as your salary increases.

That’s why Albert Einstein said about Compounding of Capital: “Compounding is mankind’s greatest invention because it allows for the reliable, systematic accumulation of wealth.” He called it the 8th wonder of the world.

Where to invest?

well I have assumed a rate of return of 10% and 15% in my above mentioned examples, if as seen above one plans to invest regularly and for long term then looking at the history of share market and mutual funds SIPs one can expect a return of 15-20 % per annum but even those who doesn’t want to take any risk then any invest options like PPF, increase in the amount of PF, FDs can get you 8-10% returns. the main purpose of this article is to let you know the power of compounding and we will see in next series of articles about where to invest and the best schemes available for the same looking at the age, income and risk taking appetite of the investor.

So what should You can do to benefit from Compounding?

You don’t have to be rich to invest. In fact, you can surely become rich; just by starting with a very small amount of money and letting it compound over a long period of time.

Here is a practical list of action steps that can help you benefit from Compounding:

  1. Start early: even if you start with a small amount.
  2. Invest regularly: consider investing through the entire period detected.
  3. Leave your money uninterrupted: don’t disturb the process of compounding.
  4. Be patient: Compounding works only over long periods of time.