Why do people struggle managing their Personal Finance?

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 What is your FQ, Financial Quotient?

John received his paycheck today. Though the figure is same as last paycheck he has ambitious plans. He is buying a new apartment in the suburb. The house is for 300,000$ and he is paying upfront 30,000$. The rest is funded by the bank. John is drawing a monthly salary of 6000$. The loan of 2.70k$ is going to add an EMI of 2800$. His monthly expense is 2000$ and he also holds a personal loan that he pays 1000$ every month. His net outflow is going to be 5800$. Good news he saves 200$.J. This may sound a bit dramatic. Our personal finance situation may not be as grave as John’s yet some of us are close to this situation.

 John will be moving in this new house in another month. He is getting furniture done. John is happy that he has made the right decision of investing in house asset. The price of this house will grow over years and his investment will multiply.

 The story of John takes a turn when his friend who is a finance adviser asks John to re-consider his decision of buying a house. This one decision will vaporize his cash flow. With just a few points change in interest rates or inflation he will have serious issue meeting his daily expenses.

 This is unfortunately a situation of many people. Many people choose to be ignorant about their financial requirements and trust the advisers who rip them off their hard earned money. It just takes a few steps to educate self of financial IQ or FQ.

 John was lucky to have a friend who would tell him what’s good for him. He helped John understand that what he is considering an asset that is his house is actually a liability. Since he is going to live in this house the rise in house price he cannot realize until he sells it. For John to sell his house 5 years from now, assuming its price has increased, he will have to move to another house. He may probably have to go for a bigger house as he would like to maintain his lifestyle and that house would also have price which would be multiple times of what it is now. So, the net is that what he earns selling in a house goes towards buying new house and additional loan. Another fact that John missed was that he will be paying interest on house mortgage. This interest almost doubles the cost of house every 5-7 years. This house shows as asset in the bank’s asset column while for John it is still a liability. It does not mean he can’t buy a house. Since it is his first house he would be emotionally attached to it. So instead of considering it as financial asset, it is his emotional asset. He has to create some real assets that would pay for the house loan. It could be generating some passive income through part time work or when he receives perks he can invest them wisely so that they grow and pay off the loan.

 What are the avenues available for John to create passive income?

 If his source of income is only through salary, he will have limited options of creating assets in above equation, however if he receives some perks he can invest them in instruments that generate wealth. There are 3 buckets that he needs to bucket his investment. The first bucket is the safety bucket. In this bucket he puts 25% of his perk amount in safety investment options like bonds, fixed deposits etc. The other bucket is growth bucket. Here he puts another quarter. This growth bucket is invested in mutual funds, gold, SIP’s. The 3rd bucket is aspirations bucket. In this bucket the remaining 50% of the investment is made. It is high risk investment. Without the high risk one cannot expect quantum returns. The high risk investment could be buying directly the stocks of valuable companies, buying small portion of land, private lending, commodities and derivatives. If one doesn’t know about derivatives he shouldn’t be investing in it.

 The miracle of this investment is that the second and third bucket investments will give quantum returns while the risk will be offset by the first bucket. This is a simple hedging tool to grow and yet be safe………………

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