I am a 25-year-old software developer. I started my career 3 years back with a decent salary, but not decent enough. The taxes that I had to pay on my salary were negligible, so I never took a keen interest in the taxation process and how my money is being spent. My major focus point was to grow as a software developer as much as possible and reach a point (salary-wise) wherein I had no choice but to get hold of my personal finance.
The day came 2 years post my career commencement and when I sat with my calculator, the tax laws in my country, and my investments (which were practically nill) — time just froze!
How you handle your money is a reflection of how your parents handled it
At least initially. I never lived frugally because my dad never did. And because he is my role model (so proud) I can say that I also inherited a few good and bad habits — majorly around money-handling. Your family is the first place where you encounter money-habits. Our minds are so impressionable that we, unknowingly, learn tricks and to-dos around money management, both good and bad. If you saw your parents bribing at a very young age, you’ll learn that as well and then you’ll practice it too.
Yes, you do eventually grow up, you do start differentiating right from wrong, black from white, and build a set of morals and principles, but initially, we all do what our parents did, knowingly or unknowingly.
So, in the first 2 years of my career, my money management was:
- Eat whatever you feel like, how many times you feel like
- Go wherever you want to go, whenever you can go
- Shopping, gifts, and movies — at least 4 times/month
- Taxes? what are they?
- Investments: nill
- Savings: only in cash
Trust can make or break your personal finances
One thing that I learned the hard way, and hence writing this so that you don’t have to is that:
The only person who can help you save money and get your personal finances in order is — YOU.– Self realization
You can get “advice” and “suggestions” on a plethora of money management topics, but they are too vague. I say this because personal finance is an extremely personal topic (which is evident from the term itself — duh!)
So, finally, after 2 years, when my salary became significantly taxable (significant at least to me), I started reading about personal finance, investments, taxes, and savings. And boy I was in a deep hole!
Losing $2,048 (Rs. 1,50,000) by trusting relatives
My dad bought 2 life insurance policies through a trusted relative. Now, because my dad is a bit gullible and tries to find good in everyone, he did not read the “fine-print” of the insurance policy. My dad paid $682 (Rs. 50,000) for each of the two policies for 3 consecutive years.
One fine day, I stumbled on the book “Let’s Talk Money: You’ve Worked Hard for It, Now Make It Work for You”by Monika Halan while trying to figure out my personal finance.
In one of the chapters, Monika pointed out how she had been sold numerous insurances and retirement policies, which in hindsight were “Endowment Policy”. She further went on to tell that she faced huge difficulty and financial loss in order to surrender these policies.
An endowment policy is a life insurance contract designed to pay a lump sum after a specific term or on death.
After reading this, I had an epiphany. I enquired about the policies my dad had bought from the relatives and asked for the policy documents. To my surprise, both of the life insurances were “endowment policies”.
I immediately calculated the inflation-adjusted returns on the policy over a period of 12 years (the policy term) and was shocked that the policy actually gave 1.25% returns on the investment. In order for you to understand how bad it is, consider that a savings account gives a 3.25% return. In a parallel universe, if my dad invested this money in:
- A mutual fund (12% returns): $36,869.23 (Rs. 27,02,910)
I brought this up with my dad. He was reluctant at first but finally gave in to surrender both policies. On surrendering the policy pre-maturely, the insurance company partially returns your money. In our case, it was 50%. Therefore, we received $1,023 (Rs. 74,916) for each policy and we lost the other half.
This is how we lost approx. $2,048 (Rs. 1,50,000) while surrendering the policy. But the good news is, a $3.43 (Rs. 251) book saved us $35,884 (Rs 26,27,910), considering my dad was paying $682 for each of the two policies.
Losing $1,242 (Rs. 90,953) by trusting roommates
I lived away from my home for 2 odd years. In these 2 years, I had to pay rent (for obvious reasons). Now, according to the Indian Tax Laws, if you are paying rent, you are eligible for House Rent Allowance (HRA).
HRA means House rent allowance in income tax. It means the component of salary received towards the rent payment and is allowed as deduction from taxable salary under section 10–13A.
To get the reimbursement, an employee has to show the rent receipts. Now, you can call this “sheer ignorance” on my part, but my roommates never gave me the rent receipts. Every month they asked me for my share of the rent, which I contributed, but they never told me about the HRA or that they are using my rent receipts to gain an additional tax advantage.
I believe this was an err purely on my end. Had I been exposed to personal finance, this would not have happened and I would not have lost $1242 (Rs. 90,953.90)
Getting started with personal finance
After getting burnt by losing close to $3,291 (Rs. 2,41,005.85) I realized a few things:
- No amount of salary is less salary. Start saving, investing, and taking taxes seriously from your first paycheck
- Read the fine-print of every policy (life, health, or retirement)
- Do not mix insurance with investment i.e. never go for endowment policies
- Trusting someone with your money is a dangerous game. Understand the rules of the game and then play it.
- You and only you can help figure your personal finance
I still not consider losing $3291, but learning a lesson of personal finance for $3291. This lesson will serve me for the rest of my life. Not only that, after getting exposed to the gold mine of personal finance books like that of Monika Halan, I started reading blogs, watching videos and bought 20+ books on personal finance and investments. From mutual funds to stocks, from F.I.R.E (Financial Independence, Retire Early) to behavioral finance I dived into the world of personal finance with full force.
And discussing this with friends, family, and relatives, I soon discovered that this is a topic that no one really talks about openly. Money is taboo, especially in Indian society. Hence, moving forward I’ll be writing extensively on personal finance, investments, and my journey to F.I.R.E
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