(Image source: https://goo.gl/gvN4sv)
I usually write about creating wealth. A humid Monday night deserves a post on wealth destruction.
Here are 10 simple ways to destroy wealth:
Taking an education loan: Planning to pursue MBA from that top ranked Indian B School which promises lucrative placements? Let not the tuition fees of Rs 20 lakhs hinder your plans. Go ahead and get that education loan which the friendly neighbourhood public sector bank is offering. Check this calculator out through which you can easily calculate your education loan EMI. At an interest rate of 10.25% and a repayment period of 7 years your EMI is Rs 33,461. Assuming your starting salary is Rs 1,00,000 per month and taking into account other expenses it would be interesting to note how much you can actually end up saving of investing. The worst part of an education loan is that you cannot pursue a break or any dream of starting up unless you pay that amount off completely. And it becomes worse if the economy suddenly takes a downturn as you are stuck with either a job that doesn’t pay well or you may not have a job at all!
Taking a housing loan: Had written about how it is better to rent a house rather than to buy one. There is also a popular joke:
Taking a housing and education loan destroy the opportunities you would have taken otherwise to create wealth rather than destroying wealth itself.
Timeshare: Timeshare is supposed to offer you benefits of spending holidays in the future at today’ cost. One has to pay an upfront fee which in the case of a popular Indian company varies from Rs 2.5 lakhs to about Rs 17 lakhs. Apart from this one also needs to pay a maintenance fee every year. This fee can begin at Rs 17,000 every year and can go up. Timeshare forces one to take a holiday every year to get the best ROI and also does not account for other expenses like food and travel.
Let us do the maths –
Buying timeshare holiday ->
Cost of Timeshare holiday will be Rs 3 lakhs + Rs 17,000 (During Year 1) +Rs 17510 (During Year 2)+….+ Rs 34558 (During Year 25) [Considering inflation of 3%] = Rs 9,19,807
Have not even added the other costs such as for travel, food and the cost of losing freedom to holiday elsewhere because your money is locked here.
Starting SIP ->
Assuming just the maintainence fee of Rs 17,000 is divided by 12, we get Rs 1416.
Starting an SIP with this amount and increasing it by 3% every year, we invest close to Rs 6,20,000 over 25 years.
A conservative return of just 14% can offer us a corpus of Rs 56.3 lakhs.
All this with the freedom of holidaying whenevr and wherever one wants.
Money back life insurance plan: This is the best way to destroy wealth. Purchase an endowment plan which, in any case, offers highly insufficient insurance coverage. Keep paying a huge amount as premium every year. Deal with the paltry yearly returns which are offered as scraps.
Not buying health insurance because your company offers it: Will you be covered when you are in your notice period? What if you suffer an accident then? Neither can you use your existing employer’s health policy nor your future employer’s policy. Some times the coverage might not be enough or certain aspects of the policy might have changed without you being intimated.
Not talking to children about money: This is one of the most popular ways of destroying wealth. Warren Buffet bought his first share at the age of 11. Business communities in India educate and expose young members in their families to the world of personal finance due to which they end up being financially savvy and literate as they grow older. This helps them preserve wealth over generations. The most important factor for creating wealth is time. The sooner children are taught about money and how it works, the better it is for their well being as adults. However in India discussing money with parents is almost as taboo as sex.
Trading without knowledge: Wish to make a quick buck on a hot tip? Does getting rich fast through trading in futures and options tempt you?
Your first few bets were profitable and you feel you have mastered the art of trading?
Check out the Dunning Kruger Effect:
There is nothing worse than your first few bets being successful while trading especially if you are doing it only by instinct. The moment the tide changes you may lose everything that you have.
You don’t automate it: Haven’t automated your SIPs yet? This is a sure shot way to spoil the returns that can be offered by long term investing through systematic investment plans. One may forget or just be lazy to deposit the cheque. Setting up a auto debit SIP mandate ensures discipline as well as consistency.