Eight habits of financially successful people you should imbibe

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Time is enduringly elastic. Moulding to one's prevailing mindscape, an hour can stretch into a millennia or contract into a moment.
The knowledge helped us compress the volatility of these past four years into an important learning. The affluent and successful people have a common thread running through their financial weft: good fiscal habits. As ET Wealth celebrates its fourth anniversary, we bring to you this distilled wisdom in the form of 8 Habits of Financially Successful People.

As your pore through the following pages, you will realise that more than a secret strategy or investing tips, you need to streamline your behavioural and emotional patterns to secure your financial future. So, you may need to make goals on time, learn not to react impulsively and avoid today's pleasures for future gains. You may, of course, run into the wall of behavioural biases, which prevent one from developing these habits, but there are ways to overcome these.

"Financial behaviour is part of normal behaviour and it is difficult to reorient completely in one vertical. So if you need to unlearn a bad habit, give it time," says Jayant Pai, Mumbai-based financial planner. 

There is a good chance that you may not have to alter all your habits. After all, the chaos of the past few years has helped evolve the investing instincts of many a reader. This was evident in the mature responses of most of the 6,785 people who undertook the recent Economictimes. com survey on managing money. If you do need to inculcate these habits, try to understand the consequences of your actions, which is what we have highlighted for you in this package. We hope time flies as you try to imbibe the good habits, but holds still as you achieve financial success. 

They make a plan

By failing to prepare, you are preparing to fail,' said Benjamin Franklin. Planning is clearly the unstated commonality among winners and the first step to formulating a successful strategy. Its two vital components are budgeting and framing goals. Unless you know your current location, you will never understand where you are headed. Writing down income and expenses will tell you how much you can save to build your future and the way you can increase this amount by cutting down on discretionary expenses.

"Budgeting helped me undertake course correction in order to achieve my goals. It also enabled me to understand many things, such as the difference between investment and expense, and the necessity to reduce expenses if I was overshooting them," says Arun Mathur, who is in his mid-40s. He began planning only in his 30s, but has caught up since. In fact, according to the Economictimes. com survey, as many as 49 per cent of the respondents started planning in their 30s, but it may not be too bad a place to start if you stay on course subsequently.

The next critical stop is framing of goals. Don't just think about them without specifying the exact time frame and amount needed to accomplish each goal. This is exactly what 39 per cent of the survey respondents do. Write down all your goals, splitting them into short-term (buying a car or taking a vacation), medium-term (purchasing a house) and long-term (saving for children's marriages). Then assign a value to each. "My short-term goal was ensuring that by the time the month came to an end my corpus didn't, and I wasn't forced to put off my purchases because of this," says 66-year -old Brigadier (retd) Bhupender Dadwal, who began planning as a 19-year-old, and has achieved all his goals in a satisfactory manner.

The final step is to start saving for each goal by investing in the right instruments as per your risk appetite and time horizon.

They don't put off decisions

Have you put off retirement planning because it's too far away? Are you avoiding writing a will because it's too morbid to consider at 50? Do you typically wait till March to make tax-saving investments? Postponing important financial decisions can inevitably lead to losses and crises. "Saving in the tax season is one of the worst habits. Do not look at everything from the tax perspective," says Nitin Vyakaranam, CEO, Arthayantra, a Hyderabad-based money management firm. This is because you not only suffer losses in terms of the opportunity cost, but also end up with expensive investments that do nothing to help reach your goals.

The cost of procrastination can dent your financial future by significantly reducing your corpus for long-term goals. For instance, if you start saving Rs 10,000 a month in an equity instrument that grows at 12 per cent when you are 25 years old, you will have a corpus of Rs 5.5 crore when you retire at 60. However, this amount will be pruned to only Rs 91.9 lakh if you start at 40. If you park your funds in a lacklustre debt option that grows at 8 per cent, you will barely muster Rs 57 lakh (see graphic).

In another instance of dilly-dallying, not planning your inheritance or failing to make nominations for your bank accounts, insurance policies or mutual fund investments can lead to avoidable confusion, financial complications and legal problems for your dependants at a later date. In fact, hanging fire on any kind of paperwork, be it shifting or closing accounts, removing hypothecation or setting up ECS mandate, can cause fiscal irritants in the future.

The best way to tackle this bad habit is to prepare a list of financial tasks in the descending order of urgency, preferably at the beginning of each financial year. Then tick them off without delay.

The best way to tackle this bad habit is to prepare a list of financial tasks in the descending order of urgency, preferably at the beginning of each financial year. Then tick them off without delay. Gurgaon-based Samarth Sharma does not know the meaning of procrastination. He started his financial planning when he was in Class X and has successfully met each of his goals with the right investments at the right time, even buying a house at 26.

If you do, you suffer from: Procrastination Bias

You like performing less urgent tasks on a priority instead of the more critical ones. You keep putting off pending tasks and difficult decisions till the last minute, often paying a heavy price for the delay.

How to overcome it: Make a list of important tasks and fix a time frame for each. Set alarms for reminders. Do the most unpleasant and difficult task first and leave the easier ones for later. As an incentive, promise yourself a reward for completing the task. 

They are proactive

Unless you have run into a big inheritance, there is a slim chance that you will earn your fortune by being in an idle or static mode. Riches are churned out by people who put in time, effort and money into research. They are not satisfied with being satisfied, and so they seek out the best investing option, the best career avenue, the best way to achieve a goal. They do not compromise on the quality or suitability of a product or service because it meets their basic needs.

So they don't buy an insurance policy just because it helps save tax, invest in a stock because they want equity exposure, or a child plan because it qualifies as an instrument to save for the kid's needs. "Since I wanted to buy a house, I took a huge loan that ate up nearly 80 per cent of my income. My financial planning collapsed completely and I had to hold up my other investments because of it," says 35-year-old Piyush Dixit, who is only now emerging from the aftereffects of his folly. 

So what should you do? Spend time to understand not just the features of the product or service you are buying, but also its overall impact on your finances. Research the company whose stock you want to buy, find out if the insurance policy covers your risk adequately, take a loan after fully understanding the burden of EMI and the total cost of purchase, and spend on a credit card only after finding out the charges and fees. "I go through all the company reports while buying stocks and interpret these to see how they fit into my portfolio. This is the reason I have never made losses on my stock investments till date," says Samarth Sharma.

You also need to take the initiative to keep pace with the alterations in rules and regulation in every aspect of personal finance. Find out the changes in tax rules, new provisions in insurance, and Sebi regulations on stock trading and mutual funds. For instance, after the recent change in taxation rules on debt funds, fund houses are offering the option of extending the holding term to three years to avoid high tax. But you can avail of it only if you are aware of the provision. Be alert and you can optimise your gains and, more importantly, avoid falling a victim to mis-selling and scams.

If you are not, you suffer from: Satisficing

If you are confronted with an investing choice and decide as soon as an option appears satisfactory, you are satisficing. you aim for a choice that is 'good enough', not optimal or rational, because the latter would entail spending time, effort and money on research.

How to overcome it: In some investing options, it is better to approach a financial planner since he will take an objective and optimal decision for you. alternately, assess your needs in a more rational manner before taking a decision. 

They don't react impulsively 

Knee-jerk reactions are not good either for your emotional or financial well-being. So, be it buying stocks that have suddenly shot up, redeeming mutual fund units at the first hint of a market correction, or changing your job just because you are offered a higher pay package are all impulsive reactions.

A good fallout of the economic downturn and volatility since 2008 has been that it has helped investors condition their responses, as is clear from the Economictimes.com survey. As many as 72 per cent of the respondents claim that if their investment is not faring well, they don't dump it outright, but wait and analyse the reason before taking any action. Ludhiana-based Jasminder Singh belongs to such a class of evolved investors. "I never get excited or carried away by the market and my surroundings and always play it safe," says the 50-year-old who has achieved most of his goals. 

If you do, you suffer from affect: Heuristic

If feelings dictate your financial decisions instead of logic, you are a victim of this bias. You want to take a quick decision and analysis takes time, so you fall back on the prevailing emotion—joy, fear, shock. Inevitably, you live to regret it.

How to overcome it: Instead of taking a decision during an emotional high or low, write it down and keep it away. Return to the scrap of paper after a couple of days or a week, analyse the pros and cons, and then decide. Better still, research.

They review their portfolio

In terms of criticality, this habit is at par with planning. Your job is only half done if you draft a spectacular plan because, in the absence of a periodic review of your finances, you may never reach your goals. Monitoring the portfolio has a three-pronged impact: it helps weed out non-performing assets, recalibrate investments if the goal seems out of reach, and maintain asset allocation. "I review my mutual fund investments every quarter and dispose of the poor performers or buy new ones online," says Bhupender Dadwal, who owes his tech savviness to his daughter.

It is essential to review every 3-4 months for short-term goals and on an annual basis for long -term goals. Reviewing helps maintain the required asset allocation as well. For instance, if the market is doing well and your equity component is becoming overweight, you will need to bring it back to its original composition. "It is a must to take corrective measures and if you can't do it yourself, seek professional help," says Kartik Jhaveri, Mumbai-based financial planner.

If you don't, you suffer from: Status Quo Bias

If you refuse to alter your portfolio despite a drastic change in circumstances and the fact that it could adversely impact your finances, you are a status quo investor. You are afflicted by inertia and potential gains are not incentive enough.

How to overcome it: Follow a disciplined investment approach or seek professional help. You are not only losing out in terms of the opportunity cost but may even face a financial crisis.

They diversify their investments 

Given the unmitigated obsession Indians have for real estate and gold, it's a wonder that they spare any thought or funds for other assets. So far, these investments have stood them in good stead, but the developments of the past few years have turned many of these into shibboleths. 

If you don't, you suffer from :Familiarity Bias

If you are obsessive about a particular asset, say real estate or gold, and refuse to consider any other investment option, you suffer from this bias. This is because you feel secure with that asset despite the risk of putting all eggs in one basket.

How to overcome it: A methodical and holistic approach to your finances is possibly the only way to get over this bias. Frame your goals and invest in assets that help you reach these. Talk to a planner about the options in the market and calculate the optimal allocation to each.

They avoid bad debts 

Living in the present is an infinitely prudent outlook to life, but when it comes to your finances, you may need to alter this vision. To secure your future, it is important to learn the art of delaying gratification and considering the impact of your actions. 

Yet others make the mistake of overlapping insurance with investment. While such plans can form the debt portion of your portfolio, they do little in terms of risk coverage. So, even before you start working towards your goals, make sure you have adequate life cover (this should be 5-7 times your annual income, plus loans), health cover (Rs 5-10 lakh family floater plan in metros; Rs 3-5 lakh plans in tier II cities), accidental death and disability insurance, as well as a home cover.

To complete the risk cover, ensure that you have a contingency corpus equal to 3-6 months' expenses to take care of eventualities like job loss.

If you don't, you suffer from: Optimism Bias

This bias will force you into building a rosy picture about your future and financial situation. You firmly believe that you are less likely to be impacted by anything negative in life, be it health issues or monetary losses. So you do not take corrective or preventive measures to avoid such a situation.

How to overcome it: The only solution is to pore through the existing data, research well and conduct an analysis about the financial service or product in question in order to arrive at a true picture. Consult a planner and take preventive measures. 

Reference from : http://economictimes.indiatimes.com/wealth