How to Exit a Bad Investment

Around 2006-7 a friend told me it was easy to make money in the stock market. We asked "How?" At that time Dabur India stock was trading around 100rupees. It might rise to (105-103-102)rupees or drop back to (98-100)rupees.

He thought trading between 100rupees and 103rupees for a 3% daily return could yield a 30% return in a month if managed over ten days. However, stocks can break their range dropping suddenly to 80rupees blocking the invested money. The following method might help you profit even when the range is broken:
Small traders typically start in the stock market with the goal of making quick and easy money.

They manage some initial gains but later hear stories about investors who became multimillionaires by holding stocks for 20 years. During a bull market they feel they're wasting time on small trades and sometimes regret booking profits when their stocks double. This greed turns them from traders to long-term investors often without noticing when the market shifts to a bear phase and all profits disappear turning investments red.

Assume a stock is range-bound at (90-110)rupees. Traders make money buying at 95rupees and selling at 105rupees but later the stock breaks out to 180rupees. Regretting missed gains they buy at 180rupees hoping it will rise to 800rupees. When the stock falls to 160rupees in a bear phase they don’t book the 20rupees loss hoping it will rise back to 360rupees. Instead, it falls to 80rupees and sticks to a range of (80-88)rupees for the next 2-3 years turning their investment dead.

Suppose you bought 200 stocks at 180rupees investing 36000rupees. If the stock falls to 80rupees your investment value drops to 16000rupees. If the stock fluctuates between 80rupees and 88rupees sell enough stock to get 1000rupees. For example, sell 12 stocks at 85rupees getting 1020rupees. After adjusting 20rupees for brokerage and delivery charges you're left with 1000rupees. Remember you still hold 188 stocks.

Invest this 1000rupees in a NIFTY 50 stock priced below 1000rupees placing a limit order at the previous day's VWAP. Repeat weekly. Whenever you achieve a profit of 4.5% to 0.5% on your average holding book your profit and exit.

This process provides several benefits:

1. Incremental Loss Booking: You only need to book losses in small quantities of stocks at a time giving you a chance to book profits if the stock rebounds.
2. Generating Profits: Your dead investment may start generating profits helping to recover losses.
3. Shifting Investment: Gradually shift your investment from moribund stocks to dividend-paying NIFTY 50 stocks.
4. Using Moribund Stocks: Use moribund stocks for swing trading instead of investing fresh capital.

This strategy helps you manage bad investments more effectively reducing the risk of large losses and enabling potential profits even in a bear market.

What is Your Money Mindset

Now let’s delve into a straightforward yet effective approach to viewing your money and enhancing your financial situation. By adopting this mindset you can improve your financial life attract more money start saving effectively and make your money work for you.

To illustrate this consider an organization or factory with 1000 employees each earning an average of Rs 50000 per month. Do you think the owner of this organization also earns Rs 50000 every month? Not. The owner's income is likely much higher possibly in the lakhs or crores. Why is this? The answer lies in the concept of ‘Leverage.’

Understanding Leverage:

So what exactly is leverage? If a worker puts in 8 hours a day their salary is Rs 50000. This is the perspective of an employee. For the owner, however, 1000 employees working for 8 hours each amounts to 8000 hours of work per day (8 hours x 1000 employees). This leveraging results in a significantly higher income for the owner as the total output is 8000 hours per day. Thus leverage is fundamentally about the number of people working for you.

Applying Leverage to Personal Finances:

Now imagine if one of these employees decided to take a nap at work. Within a few minutes, someone would likely come and wake them up reminding them that they are paid to work not to nap. This is because the owner has implemented a system and hierarchy to ensure that each employee is productive and contributes to the overall output.

Translating This to Your Finances:

In your own life, you cannot hire others to directly leverage your income in the same way.  Think of each rupee from your Rs 50000 monthly salary as an employee. Every rupee that comes into your pocket should be viewed as a worker who needs to be productive and efficient.

Current Financial Practices:

Most people fail to leverage their money effectively. They often spend it quickly or it ends up in low-return investments such as fixed deposits (FDs) or public provident funds (PPFs). These investments typically offer returns of around 6.5-7.5% while the average inflation rate over the past 35 years has been approximately 7.5%. Consequently, your money is not growing as it should. This situation is akin to having employees who do not work effectively.

Improving Financial Leverage:

To improve your financial situation start viewing your money as employees. Create a system and hierarchy to ensure that each rupee is working efficiently for you. Just as an effective organization uses systems to maximize productivity you should ensure that your money is working hard and growing rather than sitting idle or underperforming.

It will help to grow your wealth with the improvement of your financial life.

Dont Bother About Bonus

In the stock market ignorance about bonuses is the reason for maximum losses to investors. For example, someone holding 100 stocks of a certain company in 1991 may have seen the company regularly paying bonuses to the extent that 100 stocks increased to 200 then 400 then 800, and eventually 1600 stocks. Over the years such holdings could grow to 50000 stocks and with a stock price of? 500 today the valuation of the holding could be? 2.5 crores. Such stories create unrealistic expectations among investors.

Whenever any company declares a bonus many investors buy and hold its stocks influenced by the greed these stories evoke. Companies with weak fundamentals often exploit this mentality by declaring bonuses leading to a temporary jump in stock prices. Promoters use this opportunity to exit leaving ordinary investors to suffer losses when prices decline.

A prime example is Unitech whose stock jumped from? 156.65 to? 14798.55 in 2006 after a 12-for-1 bonus issue. Another bonus issue in 2007 gave the stock another boost but the stock price eventually plummeted to? 1.05 by 2019.

In the case of large IT companies the growth in stock valuation from a few hundred to crores was due to the increase in the companies' income, not the bonuses. Bonuses result in a proportional reduction in stock prices. Had famous IT companies like Wipro and Infosys not issued bonuses their stock prices might be in crores today making them inaccessible to ordinary investors. That's why periodic bonuses are necessary to keep stock prices within reach of average investors.

As a company's income and prospects improve its market price also increases proportionately. However, when bonus stocks are issued the income per stock is diluted causing the stock price to decrease proportionately. Therefore investing in stocks solely based on bonus declarations should be avoided.

Instead, base your investment decisions on the income and profits of the company.

Dont Trade Based on Market News and Advice from So-called Experts

Stolen ideas never succeed. Experts often make dramatic claims like "The American President tweeted about a trade war; the market won't rise now" or "This bear phase will be long." They might even say "We told you this morning the market would go up today." Some go as far as to link stock market movements to a "blood moon" suggesting the market will fall. Relying on such advice will surely lead to losses. Don’t even follow my advice blindly.

Trust in your system and yourself. Remember this mantra: "There is no good or bad stock in the market. The market isn’t categorized as good or bad; it’s simply a matter of stocks either gaining or losing. The market will move up or down—this is the fundamental rule.

All other things are irrelevant.

Ups and downs in the stock market are constant. Blaming these fluctuations on tweets events or superstitions is pointless. These swings are fundamental to the market. How do you do business in the stock market when no ups and downs? Focus on using these fluctuations to your advantage instead of risking your capital based on news without any strategy.

To conclude the swing trade formulas explained in this book are among the safest and have the potential for the best returns. The Appendix shows how. 10000 can grow to? 1.24 crores after 360 trades earning just a 2% return on each trade. Please write a 5-star review for this book after reviewing that table as your feedback will energize me to work on my upcoming book on options trading with more enthusiasm.

Determination of Profit Targets

Let’s use a Zerodha account as an example to determine profit targets. If you have an account with a different brokerage or if charges change in the future, adjust your targets accordingly.

Suppose you have a capital of 25,000 rupees and you buy stocks for 1,000 rupees using a Zerodha account. There's no brokerage fee at the time of purchase, only STT and GST amounting to about one rupee. When the stock is sold, a 16 rupee delivery charge and one rupee in taxes are applied. Thus, buying and selling stocks for 1,000 rupees costs around 20 rupees, including a 15% short-term capital gains tax on profit. You can also save on this tax, which will be discussed under the income tax harvesting tip later.

If you book a 4.5% profit on 1,000 rupees, i.e., 45 rupees, you end up with only about 25 rupees as profit, translating to a 2.5% net return. Similarly, if you book a 4% profit on your next investment of 2,000 rupees, 30 rupees would be reduced for charges. Thus, out of  80rupees (4% of 2,000rupees), if you deduct 30 rupees for costs, you’re left with 50rupees or a 2.5% net return. If you book a 3.5% profit on 3,000rupees, you get 105 rupees and after deducting around 40rupees for costs, you're left with 75rupees as net profit. For an investment of 4,000rupees, booking a 3% profit would provide a net return of around 2.5% after costs.

Suppose you can't book a profit even after averaging out four times, i.e., averaging for four consecutive weeks. In that case, revise the profit target to 2.5% after averaging out the fifth time, resulting in an investment of 5,000rupees. If the investment amount rises to 6,000rupees, revise the profit target to 2%. After averaging out seven times, set the target at 1.5%. If a profit isn’t booked even after that, lower the target to 1% after averaging out for the eighth time.

If your stock is very weak and you don’t get a return of even 1% after averaging out eight times, maintain a minimum profit target of 0.5% after averaging out the ninth time or any subsequent times.

After averaging out nine times, your investment in the stock goes up to 9,000rupees. Exiting with 0.5% of 9,000rupees, i.e., 45rupees, is low, but after adjusting delivery charges and other costs, you can exit at 'no profit loss.'

Reaching a 0.5% profit is quite easy. For example, if your average price is 45rupees, even exiting at 45.23rupees meets a 0.5% profit target. This is beneficial because most of your swing trades will achieve 4.5% to 2.5% profit. A situation requiring a 0.5% profit is rare and arises only during a major stock downturn or prolonged bear market. However, this situation has four advantages:

1. Your core capital of 9,000rupees gets released for fresh swing trades.
2. After adjusting a 16 rupees delivery charge and other expenses of 18 rupees, you’re left with 11 rupees net profit. You don’t exit with a loss, providing mental satisfaction and avoiding being stuck with a specific stock.
3. You can earn profit by using this capital for fresh swing trades, while other traders might remain tied to falling stocks, eroding their capital. Here, you get a chance to exit within two months.
4. You can select a new stock after exiting a stock that has been falling for nine weeks. If you decide to swing trade the same stock, it would have dropped significantly. When you reinvest 1,000rupees in that stock, you could get a 4.5% return.

There's no need to panic.

Greed is a Curse in the Market

Greed is indeed a curse in the stock market. You've probably heard this saying many times while in school: "Greed is a curse." Yet, when trading stocks, many forget this wisdom. Most people in the stock market constantly search for tips that promise to make them millionaires overnight. This quest is futile because the future of any business is always uncertain, and it takes years for a business to grow. Similarly, substantial growth in stocks requires time. Therefore, no matter how perfect a tip seems or the period of investment, you should never invest a large amount of capital in stocks all at once.

Imagine you believe that company 'A' will perform exceptionally well and its stock price might double, providing up to 100% returns. If you get greedy and invest one to two lakhs of rupees in the company, and the price doesn't rise in the next one or two months or starts falling, you'll likely experience stress, frustration, and irritation.

Instead, a more prudent approach is to start by investing only 25% of your capital. Think, "If the company is truly strong, let it show at least a 5% gain before investing another 25%." If the stock shows a 10% gain over its current price, invest another 25%, and then invest the remaining 25% if the price increases by 15%.

This strategy can protect you from bad investments.

Another strategy for adjusting large investments is based on the 200-day moving average (DMA).

Keeping Greed and Fear under Control Do not Fight the Market

An English trader once wrote that humans are naturally unsuccessful traders because greed and fear are inherent instincts. Just as army training makes a person a soldier and scientific study creates a scientist, trading in the stock market is an art that requires constant practice and emotional control.

Two emotions that can make a trader unsuccessful are greed and fear. Let's see how.

When in a profitable trade position, the desire for more profit can take over, but then the profit starts to diminish. Greed prevents you from applying a stop-loss, resulting in a significant loss.

Next time, fear takes over. Upon seeing a small profit, you decide to book it immediately, fearing it will vanish, missing out on potentially larger gains.

To teach control over these emotions, it is suggested to keep a target of 1% profit and a stop-loss of 0.5% for trades.

Once you find yourself in a winning position during the day, you can raise your profit target and stop loss. For example, if you trade 10,000 each time with a 100-profit target and a 50 stop-loss, and out of your first 7 trades, 5 are successful, making 500, while 2 results in 100 losses each, you have a net profit of 400. In this scenario, even if you take new positions with a 2% profit target and a 1% stop-loss, you are unlikely to end up with a loss by the end of the day.

Generally, control your greed and fear and maintain a 2:1 ratio between profit and stop-loss. Start with low-profit targets and even lower stop-losses. As you gain profit, gradually increase your profit target and stop loss for the day to ensure you don't wipe out your entire day's profit.

Emotions like greed, fear, and ego should be avoided by a trader.

To become successful, trading should be approached like a robot, devoid of emotions. Mixing emotions with trading can lead to losses.

This lesson is illustrated by the story of Lala Raman. Lala developed a trading strategy where he would treat the previous day's closing price of a stock as a base. He decided not to take any position until the stock moved below that base price, at which point he would take a short position. This strategy worked well initially, and Lala made significant profits by shorting stocks that fell below their previous day's close prices.

Encouraged by his success, Lala doubled his margin money the next day and continued with his strategy. He took 'buy' positions when stocks moved above their previous close prices and 'sell' positions when they fell below. Again, he made a good profit.

On the third day, Lala increased his margin money further. However, that day, the market experienced high volatility, first falling and then rising sharply.

Lala took short positions for stocks that moved below their previous close prices, but the stocks quickly rebounded and closed higher. He suffered significant losses.

Lala, driven by ego, believed his method was not wrong but that he had failed to set a stop-loss. He decided to continue his strategy but with a stop-loss at the previous close price. To recover his losses, Lala planned to take a long position with double the quantity if a stock moved back above the previous close price after falling below it. He expected the double profit from this position to offset his loss from the stop-loss.

Many traders who have lost money by fighting the market might relate to Lala's story. It highlights the importance of not frequently changing strategies on the same day.

Remember, no strategy is 100% correct. If you do not make money in the market on a given day, remember that the market will open again the next day. Keep your stop-loss and profit targets fixed, and maintain control over your ego, greed, fear, and anger.

Trade Only in Liquid Stocks with High Volumes

The NSE website provides a list of stocks that are very active in the current session, meaning those traded in large volumes.

Traders should follow the crowd. Stocks traded in high volumes are either likely to rise sharply or decline significantly. Trading in such stocks can be beneficial as fluctuations in their prices are less.

With a large number of buyers and sellers, there is a lower chance of your stop-loss getting triggered.

Additionally, brokers usually have lower margin requirements for these high-volume stocks, often called liquid stocks. For example, for a mid-cap stock with low volume, a broker might block 3-4 thousand rupees for a trade of 1,00,000. However, for a high-volume large-cap stock, a trade of 1,00,000 might require only 1,800 to 16,00 as a margin.

Margin amounts vary based on stock liquidity. Therefore, only stocks with large volumes should be chosen for trading. It is advisable to select stocks from the high-volume list of the previous trading day to enhance your success rate. You can download the previous day's rates in Excel format from the NSE website and pick stocks with the largest volumes from that list.

Another method is to visit the 'Live Market' link on the NSE website and select 'Most Active Securities.' This will show the most active securities for the current session. You can choose from here also.

Trade today in stocks that had the largest volumes the previous day. Stocks bought the previous day in anticipation of profits may be sold today, causing the price to fall, and you can profit from short-selling. Conversely, if a stock is traded based on an expectation that remains today, its price may rise further, allowing you to profit by taking a long position.

Budgeting - Key to Financial Success

Let's discuss a crucial money management technique that can guide you to financial abundance: Budgeting. Many people resist budgeting, but when done correctly, it can transform the way you manage money, much like running your life as efficiently as a business. Let's discuss the process step by step.

Step 1:
Begin by identifying your income, which includes all sources of money. It consists of the main income from your job or business, as well as any additional income, such as rental income or some kind of royalty income or interest/dividends. At the end of this, you’ll find a tool in Tracker Guru to help you record your monthly budget.

Step 2:
Next, list and categorize all your expenses into four groups: Fixed, Variable, Periodic, and Discretionary expenses. The most effective way to calculate your monthly expenses is by recording them daily. Develop a habit to write each day,  your spending, ideally before going to bed. It will help you much.

• Fixed Expenses: These are regular monthly expenses that typically remain constant, such as rent/EMI, school fees, insurance premiums, and car payments.
• Variable Expenses: These occur monthly but vary in amount, including food, utilities, fuel, and household expenses.
• Periodic Expenses: These are regular but non-monthly expenses, such as insurance payments, medical expenses, and home/auto maintenance.
• Discretionary Expenses: These are non-essential expenses, or luxuries, like vacations, gifts, personal care, and entertainment.
   

Step 3:
Analyze your budget. Once you’ve calculated your monthly income vis-a-vis expenses, you can determine whether your budget is in a surplus or deficit. If you have a surplus, consider saving or investing the extra income, possibly with the help of a financial expert.

However, if you’re running a deficit, reevaluate your budget. Identify and cut back on unnecessary expenses. You should earn more if you are not reducing expenses. Remember to track every rupee as if your money were your employee. Just as companies create balance sheets and profit and loss accounts, you should do the same for your finances.

After you start tracking your cash flow with your budget, the next step is to follow the 60-40 rule we discussed earlier. Begin small and gradually build up. Prioritize creating an emergency fund and then focus on building long-term assets according to your goals. Regularly following this plan year by year will give significant financial gains.

This process works regardless of your income level. It doesn't require exceptional intelligence or wealth—just consistent action. The key to financial success is consistency.

Financial freedom is not accumulating enormous wealth; actually, it's having control over your life and goals. In the broader context of life, budgeting is the tool that paves the way to financial freedom. For young individuals in India, adopting a budgeting mindset tailored to their circumstances is the key to a future of abundance.

Note it, making a budget is not about only restriction expenses; it gives empowerment. With a well-crafted budget, you can shape your financial destiny and live a life that aligns with your dreams and aspirations. So, start your budgeting journey today, and let your financial freedom unfold in the vibrant landscape of India. Happy budgeting, fellow dreamers! May your financial freedom be as vast as the spirit of this incredible nation.

In India, we have a lot of great opportunities. The coming decades belong to us. It's time to soar high and live the life you love.

How to Live an Abundant Life

Now, let's discuss a simple method by which you can achieve financial abundance. Yes, it’s true. There is an easy way to live a comfortable and abundant life, and a key part of that is managing your expenses.

Everyone desires a good life. It's true that to live, we need to spend money. However, it’s often observed that people with high incomes sometimes struggle financially, while those with modest incomes manage to live comfortably with fewer financial challenges. Have you ever thought how that’s possible? Let us explain it now.

In reality, there is no direct link between how much you earn (your income) and the quality of life you lead (the way you live). The secret lies in how you manage and spend your money. The number one skill for living an abundant life is the ability to control your expenses.

Income

We are all educated, with some of us being doctors, engineers, astronauts, or professionals in various fields. Despite our diverse educational backgrounds, there is one common skill that education has provided us: the ability to make money. Regardless of the type of education received, the system is designed to teach us this fundamental skill: "How to earn money." The entire education system is structured to make us employable, equipping us with skills that we can later trade for money.

Unfortunately, no education system teaches us how to make the most of that money. There's no guidance system in our society or in the education system on what to do with the money once it's earned. The crucial question, "Now that I've earned this money, how should I spend it? How can I use this money to live the life I desire?" is rarely addressed.

Just as earning money is a skill, so is spending it wisely. Whether we accept it or not, you should develop the skill for spending money effectively. Sadly, our education system never talks about this essential skill of managing expenses.

Managing Expenses Effectively

To manage expenses effectively, the first step is to understand what they are. Expenses generally fall into two broad categories:

1. Expenses on Things We Need: These include essential items like food, clothing, and other necessities required to maintain a certain quality of life.
2. Expenses on Things We Want: These are items that we desire but don't require. For example, you might need a mobile phone that costs around 4-5 thousand rupees, but you might want an iPhone that costs around 1 lakh rupees. There are several reasons why we indulge in buying things we want, and understanding these can help in controlling our expenses.

Reasons for Spending on Wants

1. Comparison: One of the primary reasons we buy things we want but don't need is because of comparison. For instance, if someone you know has an iPhone, you might feel compelled to buy one too, even though you don't need it. This comparison drives unnecessary purchases.
    
2. Convenience: Another reason for spending on wants is the desire for convenience. For example, you might need a car, but you choose one with air conditioning because it offers a more comfortable experience, even though a car without AC would suffice.
    
3. Conditioning: The most subtle and influential reason is conditioning. We are constantly influenced by our environment to buy things we don't need. Malls, online shopping platforms, and advertisements are designed to entice us into purchasing items simply because they are available. A few years ago, buying something required effort—you had to leave your home, go to a store, and make a purchase. Now, with online shopping, you can browse and buy items with just a few clicks, often without fully considering whether you need them.

The Role of Credit Cards in Conditioning

Another aspect of conditioning is our relationship with money, especially in the context of credit cards. Spending hard cash creates psychological pressure, making it difficult to part with money. However, credit cards have made spending much easier because you don't see the money at all. This convenience can lead to spending money you haven't yet earned, contributing to financial strain.

Understanding well these factors—comparison, convenience, and conditioning—can help in controlling your expenses more effectively. By understanding the difference between needs and desires and being aware of the circumstances around you, you can make more proper financial decisions.

Understanding the Mental Trap of Spending

Another method of conditioning people into spending more is by introducing wallets, making it easier to part with money. When you don't physically see or handle cash, it becomes much easier to spend. The absence of physical cash means you might not even feel or analyze how much you are spending. This lack of awareness is why you don't hesitate to spend and often don’t think twice before making a purchase. It is intentional—they don’t require you to think, they want you to only buy, buy, and buy. Over time, this habit becomes an addiction, leading you to say "bye-bye" to your money. Can you see the mental trap now? The impact of this conditioning is deep, almost ingrained in your behavior.

Our environment is structured to keep us buying. This is why expenses tend to rise whenever your income increases—whether through a raise at work or profits in your business. But why does this happen? It’s because your brain has been conditioned. The mental "software" has been altered so that as your income grows, your spending does too. It is the result of mind-conditioning, and it's a major factor affecting financial stability by your decisions.

Now that the reality is clear, how do you save money despite this conditioning? There’s a simple method to reduce expenses, but it requires brutal honesty with yourself. The next time you go shopping before you purchase or even touch anything, ask yourself, “Do I need this, or do I just want it?” Take a moment to think. If the answer is "I need it," then go ahead and buy it without worry. However, if the answer is "I want it," be honest with yourself and ask, "Can I postpone this?"

If I simply tell you not to buy it, you might feel bad or rebel against the idea, and likely end up buying it anyway. Instead, tell yourself, "I'll postpone it and buy it next month." When you do this, the initial urge to purchase might fade, and you may find that you no longer want the item later. This practice can help you emotionally stabilize and prevent unnecessary purchases. Develop a habit of asking yourself by heart & mind whether you want or require an item.

Warren Buffett's quote fits here: "If you buy things you don’t need, eventually you’ll have to sell things you do need." This is true—spending excessively on wants can lead to a point where you must sell necessities. Buffett’s advice is especially valuable given his immense success.

However, simply saving money or controlling expenses won’t lead to financial abundance on its own. The next crucial step is to invest the money you save or the money you refrain from spending. This money needs to be invested in a way that generates returns greater than the rate of inflation, which might require professional guidance.

So, must develop a habit of asking yourself by heart & mind, "Do I need this, or do I desire it?" Train your brain to prioritize needs over wants, save the difference, and invest wisely. By practicing it, you can make extra wealth and achieve proper financial growth. This process doesn’t require extraordinary intelligence or a high income—just self-discipline. With self-discipline, a financially abundant life is within reach.

Six Mistakes You Must Avoid

Many middle-class families struggle to manage their finances effectively, often finding it difficult to make ends meet. It is prevalent because they do not manage their cash flow properly. With limited incomes and higher expenses, or even with higher incomes and little control over spending, they often find themselves in challenging financial situations. These individuals are typically found in Money Quadrants 2 and 3, as described below. It is crucial to identify which money quadrant you currently belong to.

The stress of financial difficulties can lead to a lower quality of life. To gain better control over finances, it is advised to consciously avoid these six common mistakes.

1. Emotional Buying and Lack of Negotiation Skills:  You should avoid emotional buying. You should negotiate well before buying. Many people feel that bargaining is beneath their dignity, especially in today’s world where shopping often takes place in malls. However, these same individuals might hunt for bargains on e-commerce websites. Developing the habit of bargaining is recommended, as it poses no risk of loss—only the potential for savings. These small savings from effective bargaining can significantly contribute to securing a better financial future.

Emotional buying is another pitfall to avoid. It not only creates financial strain but also leads to feelings of guilt once the initial desire to purchase fades. It is not a healthy emotional state.

A few decades ago, impulse buying was less of an issue. This was a time before malls became widespread, and before e-commerce apps were accessible on every mobile device. Reflecting on childhood experiences, when sent to buy a kilogram of sugar, one would visit the local grocery store, purchase only the required sugar, and nothing more. Transactions were made in hard cash, and there were fewer temptations to buy unnecessary items.

Avoiding these six mistakes can help individuals, particularly those in Money Quadrants 2 and 3, to manage their finances more effectively and reduce the financial stress that impacts their overall well-being.

In today's world, there are no salespeople in malls or on online shopping platforms, yet people are purchasing more than they actually need. If you observe individuals leaving any shopping mall, you'll notice them pushing carts loaded with items that no one actively sold to them, but they bought voluntarily.

The situation is similar with online shopping apps. Here, you don't even have to move from your seat, and nowadays, you don't even need money to make purchases. Various facilities like credit cards or pay-later options are readily available.

Whether we admit it or not, all of us are addicted to impulse buying to varying degrees. In our view, it is the worst kind of addiction. If someone is addicted to alcohol or tobacco, it will cause harm in the sense of health. However, shopping addiction keeps you feeling good without any immediate physical impact. It may take years before you realize the effects of this addiction. It ensures that you get a "feel-good kick" every time you shop, keeping your pockets empty regularly, like a cycle. You end up thinking that more money will solve the issue, but the real problem lies within you—specifically, your money habits.

In my first book, 25 Habits That Make You Rich, I discussed in detail the money mindset that controls your life. This blog will help you re-arrange your mind and guide you toward a good wealthy life.

Now, I'll share how you can break free from this shopping addiction. You need to apply this in real life and observe the impact yourself. It requires self-discipline and consistent effort.

When you're out shopping, make it a habit to ask yourself one question. Before buying anything, ask yourself by heart & mind too, "Do I require it, or do I just desire it?" Then practice postponing all your wants for as long as possible.

Most of the "nice-to-have" things in life are the root cause of long-term financial stress. As Warren Buffett said once, "If you buy things you don't need, you'll eventually have to sell things you do need." Another mistake to avoid is making large purchases before you're financially ready. Many middle-class families buy big items like a house or a car before they can truly afford them, often due to social pressure to appear successful. Such major spending early in life can lead to a financial downward spiral because the expenses are high and there isn’t much money left to invest.

Major expenses, especially those exceeding your annual income, should be avoided at all costs. They should only be made with careful planning and adequate financial backing.

One of the mistakes is to avoid having sufficient insurance. When it comes to purchasing enough insurance, many middle-class families act "Pennywise, pound foolish." They perceive the insurance premium as either unaffordable or an unnecessary expense, which leaves them vulnerable to major financial emergencies. A serious illness can easily wipe out 10 to 15 years of savings, or the untimely death of the primary earner can jeopardize the family’s financial security. One such event can financially devastate the family. Therefore, it is advisable to acquire adequate insurance after thoroughly understanding the risks that need coverage.

It is highly recommended to consult a subject matter expert when purchasing insurance. This step can safeguard your family during medical emergencies and prevent hard-earned money from being wasted. One of the significant mistakes middle-class families often make is relying on a single source of income. Even if there are multiple earners in the household, their combined income might barely cover the essential expenses. This lack of financial flexibility can lead to borrowing, resulting in compulsory EMIs that further strain the family's finances.

To prevent extra financial pressure, it's advised to be on the lookout for extra opportunities to generate extra additional income. Families should consider how they can utilize and monetize their existing skills in better ways. Finding avenues where these skills can be turned into a source of income should always be a priority.

Another common mistake is the poor choice of assets. Many middle-class families struggle financially due to a lack of financial literacy. Although they may be educated by some degrees/diplomas, they often lack the knowledge to make proper financial decisions. Security is a major concern for them, leading to decisions driven by fear of losing money. As a result, they often park their money in low-return assets like bank fixed deposits (FDs) or Public Provident Fund (PPF) accounts, and they might be inefficient in tax savings by relying on life insurance or PPF for tax benefits. Seeking professional advice in investing and asset selection is highly recommended, as many may not be equipped to handle these complex matters on their own.

Another mistake that commonly occurs is the failure to plan for the long term. Unfortunately, many middle-class families do not plan their financial lives effectively. While they see the value in seeking professional help for health issues, they often perceive professional financial planning as an unnecessary or unaffordable expense. This "penny wise, pound foolish" attitude is prevalent, yet professional financial planning is crucial for creating a meaningful balance in life and achieving financial goals and dreams.

If you care about your family's future and want to provide them with a prosperous life, it’s essential to reflect on these common mistakes and take steps to avoid them through proper planning and professional guidance.

5 Ways to Use Extra Cash Effectively

Occasionally, you might find yourself with some extra cash, whether from a salary raise, a bonus, or additional income from your business. Often, when you expect this influx, you already have plans for how you intend to use it. Usually, these plans revolve around spending—your mind quickly jumps to what new items you can buy with this money.

However, only a small fraction of people consider investing this money. In fact, less than 5% actually take steps to channel this additional income toward their long-term goals. Below are some strategies for using that extra cash wisely.

1. Build an Emergency Fund: Nobody knows the future, and emergencies can arise anytime that require financial resources. Use this extra income to establish or bolster your emergency fund. This serves two important purposes. First, it gives you confidence knowing you’re financially prepared to handle unexpected events. Secondly, it does not require to borrow money from others.

2. Invest in Your Children's Education: If you’ve already set goals for your children’s education, it’s wise to prioritize this extra cash towards those goals. Following a structured plan can help ensure their education is adequately funded. If you haven’t yet defined these goals, it’s time to consult with Tracker Guru to start planning.

3. Contribute to Your Retirement Savings: Many people start thinking about retirement only 8 to 10 years before they plan to retire, which can be too late. It’s necessary to start planning for retirement as early as possible. Allocating this extra income to your retirement savings can give you a head start. As earlier you start, you will have more time to build a suitable plan for retirement. Avoid spending this money on short-term pleasures and instead, invest it with a long-term perspective.

4. Pay Off High-Interest Loans: Use any extra cash to clear loans with higher interest rates, such as credit card loans or personal loans. These debts can quickly accumulate if not addressed. However, don’t rush to pay off a home loan unless the interest rate exceeds 12%. If you’re interested in lowering your housing loan interest, consider reaching out for guidance. For those who have recently taken out a home loan, it’s possible to reduce the interest rate to as low as 2% or even less.

5. Purchase Special Insurance: Consider using the extra money to buy specific insurance policies, such as those covering critical illnesses like heart disease or cancer. These policies can be invaluable if the need arises, potentially saving a lot of money in the long term.

In conclusion, it’s important to use any extra cash flow to invest in your future rather than spending it on fleeting pleasures. Delayed gratification often plays a key role in creating a financially stable and secure life. Prioritize long-term goals over immediate desires to make the most of your additional income.

Begin Your Journey Toward the Abundance Quadrant

We all aspire to live a high-quality life and to achieve that, we must move toward the Abundance Quadrant, a place where you can live life on your own terms.

Money Quadrant 4: High Income, Low Expenses

In this section, we will explore six straightforward ways to enhance your financial life. By applying these methods, you can start moving toward the Abundance Quadrant.

Having money working for you can greatly improve your life. You need to develop a habit of saving money and investing this saved money in a wise manner with expert guidance.

By consistently practicing certain habits, you’ll gain better control over your finances.

Step 1: Follow the 60-40 Rule

While many are familiar with the 50-30-20 rule, which allocates 50% of income to needs, 30% to wants, and 20% to savings, this rule is more suited for Americans. For Indians, a simpler rule is recommended—the 60-40 rule. This rule suggests spending 60% of your income on your current lifestyle, encompassing all your needs and wants, while saving 40% for future needs, such as your children’s education, retirement, and other life goals. Start implementing this rule from the moment you begin earning. In the long run, it will ensure a secure and prosperous future.

Step 2: Increase Your Investments Annually

This step complements the first. As your income grows, make it a priority to increase your investments each year. This practice not only ensures you adhere to the 60-40 rule but also helps you accumulate significant wealth over time.  You should save 35 % minimum and then increase it over the years. The more you save and further invest in a wise manner, the better your future will be.

Step 3: Invest in Yourself

Many people stop learning after formal education ends, but the key to a fulfilling life filled with health, wealth, and happiness is continuous self-improvement. Lifelong learning is crucial, encompassing both formal and informal education. Investing time and money in self-development through reading, training, seminars, and other empowering activities will keep you on the path of growth. In today’s information-rich world, there are countless resources available in various formats—choose what suits you best and incorporate learning into your daily routine.

Step 4: Live Your Passion

True satisfaction comes from activities that you are passionate about. Identify these activities and allocate your time and resources to them. Striking a balance between working for money and using that money to pursue your passions is key to a fulfilling life. Keep proper care for your health, do proper exercise, and take proper nutrition. But most people don’t care for this in the early years when they are young. You should not sacrifice your health to build wealth.

Step 5: Seek Good Counsel

To achieve success in any area of life, you need the right knowledge, experience, and support. Seeking advice from experts in critical areas can have a lasting impact on your life. By identifying the areas, you can add more value.

These are simple, effective, and grounded in common sense. By following these, you can come closer to the Abundance Quadrant and create a life financially secure and also fulfilling.

Do Your Financial Planning Early

Whether you're earning through a job, running a business, just starting out, or have yet to earn, understanding financial planning is essential. Often, our parents, schools, and colleges do not provide us with this crucial knowledge. But we should plan our finances well in advance and then need to strictly follow this plan.

1. Daily Expenses:

Your daily expenses depend upon your lifestyle, which means 'quality of life'. A major portion of your income is spent on day-to-day needs. Managing these expenses is essential, which is a part of the equation.

2. Future Needs:

Looking ahead, several significant expenses will arise:

• Children's Education: This encompasses school expenses over approximately 10 years and additional costs for college or university, which can last from 3 to 8 years.
• Plan for this in advance to be assured of a good education for your child without any strain.
• Children's Marriage: In India, weddings are grand affairs. Many parents save diligently for years, only to deplete these savings quickly. Some even incur loans to cover these marriage costs. Adequate planning can help manage these expenses without financial distress.
• Retirement: Most people, particularly those under 35, may not fully grasp how much money is needed to maintain their quality of life after retirement.
• More funds are needed for retirement as life expectancy increases proportionally to medical advancements. This challenge is exacerbated by the shorter working years due to a rapidly evolving job market.
   

3. Long-Term Health Care:

It is a point that should not be overlooked. Without separate planning for this, you might end up spending a significant portion of your retirement savings on medical costs. It’s wise to plan for these expenses well in advance.

4. Additional Quality-of-Life Goals:

Besides these essential expenses, several non-mandatory goals can enhance your quality of life:

• Buying a House: Whether building or purchasing, acquiring a home requires substantial funds.
• Buying and Upgrading a Car: Whether it's a two-wheeler or a four-wheeler, you might wish to upgrade every few years, which requires financial planning.
• Family Vacations: Regular domestic holidays and international trips contribute to a fulfilling life but need budgeting to manage these costs annually.
• Other Aspirations: These may include charitable works, investments in real estate, or creating some innovative entrepreneurship. passive income streams.
   

Importance of Early Planning:

Most people fail to plan for these expenses early enough. Only a small percentage of individuals globally engage in detailed financial planning and take consistent action. Many believe they can manage financial challenges with makeshift solutions, but this often leads to missed opportunities and inadequate preparation.

Reasons to Plan Early:

1. Manage Compulsory Expenses: Given the numerous compulsory expenses throughout life, early planning helps you address these financial needs effectively. Start it as early as possible that will be more beneficial for you.
2. Lack of Financial Education: While our education system teaches us how to earn money, it rarely covers how to manage, plan, or invest that money. This gap often leads to difficulties in financial management. Just as we consult a doctor when we're ill, consulting a financial expert—or a 'money doctor'—can help navigate these complexities.

Seeking Professional Guidance:

Many people bypass financial experts, opting to handle their finances independently. It may result in costly mistakes and missed opportunities. Engaging with a financial expert ensures you make informed decisions and have the funds necessary for future expenses. Relying on local solutions ('jugaad') will not be very effective.

Good financial planning will enable you to meet your goals. So, start your financial planning as early as possible and seek expert advice to secure your financial future.

Importance of Financial Planning

We all have various goals in life, and these goals can differ depending on our age, our society, our education, and circumstances.

Some goals may be universal but some of them are unique.

1. Kid's Education:

One of the primary goals for almost all families is the education of kids. This goal has three distinct phases:

• Schooling: Today, parents often aspire for their children to attend the best schools, which can be a significant financial commitment.
• Graduation: Higher education, including undergraduate degrees, also requires substantial funds.
• Post-Graduation: Further education, such as master's degrees or specialized programs, adds another layer of financial planning.

Planning adequately for these educational expenses is crucial to avoid compromising the quality of education for your children.

2. Children's Marriage:

In India, weddings are celebrated with considerable expense. Many parents spend years saving for this occasion, only to deplete their savings within a month. Sometimes, parents may even incur debt to cover the costs. Strategic financial planning is required to manage these expenses.

3. Retirement:

Retirement planning is critical, especially for those under 30 who might not yet grasp how much money will be needed once their income stops at age 60. With life expectancy rising due to advancements in medical science, the amount needed for a comfortable retirement is increasing. Planning for future needs in earlier years is very much essential.

4. Long-Term Health Care:

A commonly overlooked goal is long-term healthcare. Many people do not set aside special funds specifically for long-term medical needs. Because of this, they may face difficulty.

Proper planning for healthcare can help prevent this financial burden.

Quality-of-Life Goals:

Apart from these essential goals, there are other objectives that enhance our quality of life but are not mandatory. These include:

• Vacations: Planning for domestic and international vacations requires budgeting to enjoy these experiences without financial stress.
• Vehicle Upgrades: Whether it’s a two-wheeler or four-wheeler, you might want to change your vehicle every few years, necessitating financial preparation.
• Home Maintenance: Owning a house involves periodic maintenance, such as painting every 8-10 years, which requires planning.
• Charity, Property Investments, and Passive Income: Additional goals might include charitable contributions, buying property, or creating streams of passive income.

All these goals, while adding significant value to our lives, require thoughtful financial planning. Without it, achieving these objectives can be challenging or even unattainable.

At Tracker Guru, we help the general Indian public in setting these goals in terms of both time and money. We help create a comprehensive plan to ensure you can achieve them and enjoy a well-rounded and fulfilling life.

Take Charge of Your Financial Life Today

Since 1999, we have been dedicated to financial management, and over these many years, we've noticed specific patterns in how people handle their finances before they seek our guidance:

1. Passivity After Earning: Most individuals become passive or casual about managing their finances once they have earned their money.
2. Limited Financial Education: Education, regardless of the field—engineering, medicine, or business—typically imparts only one skill related to money management.
3. Self-Managed Finances: Many people attempt to manage their finances independently, despite lacking substantial knowledge or experience.

Let's delve into these points further.

Point #1: Passivity After Earning

Consider an employee in a factory. If this employee diligently works for an entire month but receives payment for only ten days without a valid explanation, he would likely become very upset, and frustrated, and might even argue with the responsible authority. This reaction indicates that the employee is highly vigilant and serious about earning money, tracking every rupee meticulously.

The same level of seriousness is observed in self-employed individuals and business owners regarding earning money. However, once their earnings are deposited in their bank accounts, these same people often neglect to actively manage their money for growth, especially beyond the inflation rate.

Consider this data: a person works 50 to 60 hours per week to earn their income. For instance, earning Rs. 20,000 by working 50 hours at their job. How much time does this person spend thinking, "What should I do with this money to live the life I love?" Our experience shows that people spend less than an hour per week on this crucial aspect of money management. Often, their money sits idle in savings accounts or is invested in "safe" investments like bank FDs or PPFs, which do not outpace inflation.

In India, fewer than 5% of people seek financial advice from experts, leading to a situation where their money does not work hard for them, and they end up working hard instead.

Point #2: Limited Financial Education

Most individuals spend approximately 15 to 18 years in the education system—10 years in school, 2 years in junior college, 3 to 4 years in graduation, and 2 years in post-graduation. Many parents believe that a good education will secure their children good jobs, which will lead to financial prosperity. While there are no guarantees, over 99% of people rely on this approach.

Regardless of the profession—engineer, doctor, or lawyer—the system provides minimal knowledge about money management. Despite one of education's main objectives being to enable individuals to earn well, the system only teaches one aspect of money: how to make it. The method it offers is straightforward: work to earn money. However, earning a good income does not guarantee a good life.

There is another crucial aspect of financial well-being that the education system neglects: what to do with the money after earning it to ensure a fulfilling life. Conditioned to work for money, people continue doing so for years without learning how to make their money work for them. This brings us to our third observation.

Point #3 - The 'Do It Yourself' Method

Our third observation is that most people manage their finances independently, following a 'Do it yourself' approach. This mentality stems from their confidence in their earning abilities. They believe that if they can earn money, they can manage it too. However, they fail to recognize that the skill set for earning money is different from the skill set for making money work for them.

When facing health issues, people consult doctors; for legal issues, they consult advocates. Similarly, management of finance requires consultation with an expert in the field. Unfortunately, in India, only about 3% to 4% of people seek advice from financial experts, while the rest continue experimenting with their wealth.

Imagine applying the 'do it yourself' model to your health. Most wouldn't dare, yet they do so with their finances. The immediate impact of health experiments discourages such practices, while the delayed impact of financial experiments makes people less serious about managing money compared to their health.

Given these observations, let's discuss why it's crucial to take charge of your financial life early on.

Why Take Charge of Your Financial Life Early

Reason #1: Self-Reliance in Old Age

The days of government support for old age needs are over. In the age of nuclear families, there's no guarantee that your children will support you in old age. As the saying goes, 'Jab tak aapke paas paise hai, log puchhenge aap kaise hai.' So sufficient money to have is essential for all of us.

Reason #2: The Market of Financial Product Sellers

The market is full of sellers eager to sell products without considering your needs. These sellers range from credit card promoters in malls to bank cashiers pushing mutual funds, and insurance agents with the 'best policy.' Often, these sellers are close acquaintances, making it hard to avoid them. It's necessary to differentiate between a seller and a counselor. A seller's goal is to sell their product, while a good counselor tailors a solution for you, allowing you to choose what's best for you.

Reason #3: Increased Longevity

Due to medical advancements, people are living longer.

As people live longer, financial planning becomes even more critical. Early in their careers, people often take loans and pay EMIs, leading to liquidity crises. As they reach middle age, they focus on promotions and career progression, often spending more time at work or pursuing additional education.

Later, the urge for freedom and entrepreneurship arises, but the path to successful entrepreneurship is fraught with challenges, leading to a high failure rate for small businesses. Eventually, people start wondering if the money they've accumulated will last a lifetime. This uncertainty underscores the importance of early financial planning.

People are busy earning money &  neglecting financial management. Although they recognize its importance, it is often not urgent. However, living with the regret of unmade financial decisions is a dire situation. So, it's time to think about your money management.

Ask yourself by heart& mind: Are you exerting most of your energy earning more and more money? Who is looking after your finances? Do they have the required expertise with experience or not? Have you analyzed your own financial goals? Have you strategic plans to achieve these goals? Reflect on your confidence level in living an abundant life and the life you love.

It is a serious matter, so act now before it's too late.

Where Do You Stand Financially Today

There are fundamentally two types of money problems in the world:

1. Insufficient money
2. Excess money

Interestingly, both these problems come with their own unique challenges, each without offering a simple solution to the other.

To delve deeper, let’s consider the situation of having insufficient money. This could be due to:

1. Low income
2. High expenses

Conversely, if one has excess money, it could be because of:

1. High income
2. Low expenses

Notice that the scenarios in both cases are inversely related. Combining these possibilities creates a matrix that looks like this:

Understanding the Money Quadrants

Money Quadrant 1: Low Income, Low Expenses

• In this quadrant, both income and expenses are low. Individuals here might feel stagnant. With limited chances for financial growth, the only viable solution is to enhance income potential and shift to a more favorable quadrant.
   

Money Quadrant 2: Low Income, High Expenses

• This quadrant is the riskiest. With high expenses and low income, individuals are likely to face severe financial strain, potentially heading toward bankruptcy or high debt. They often live off credit, spending future income today. For those in this quadrant, it is crucial to address spending habits by focusing only on necessities and working on increasing income. This quadrant is marked by a detrimental cycle of overspending and debt.
   

Money Quadrant 3: High Income, High Expenses

• In this quadrant, individuals earn a high income but also incur high expenses. They tend to spend excessively on luxury items and maintain an affluent lifestyle. Though they generate significant income, their expenses grow in parallel, causing constant financial pressure. This leads to high stress and a relentless need to earn more, creating a cycle of temporary happiness through spending, which is unsustainable in the long run. Managing habits and mindset is crucial for these individuals to achieve lasting financial well-being.
   

Money Quadrant 4: High Income, Low Expenses

• The most favorable quadrant is where high income is coupled with low expenses. Persons falling in this quadrant have good control over expenses along with great skill in money management.
• Achieving this quadrant requires financial discipline and knowledge, making it the ideal state for an abundant life. The key to thriving here is investing wisely, letting money work to generate more wealth over time.
   

In summary, the fourth quadrant represents the optimal financial situation, where financial abundance is achieved through smart investments and financial literacy. All individuals should aim to reach this quadrant, moving away from the problems of insufficient money and instead managing the challenges of excess money effectively.