There is no such thing as perfect timing or perfect decision making – only hindsight can determine whether or not you’ve made the ‘right call’.

Today, it is easier than ever to become lost in indecision. Well let’s keep it simple –

1. Invest in Debt Mutual Funds for short term goals upto 2-3 years.
2. Equity Mutual Funds for long term goals like Retirement, Child’s Education etc.

In our day-to-day life, we find many people who will only buy a specific brand of clothes, go to the same store each time or take the same route to reach the store. These are examples of familiarity bias in our routine life.

The familiarity bias is very commonly observed in investing, too.

Raj, an IT professional, steered clear of equity investment for the first decade after he started earning. Instead, he invested in what he considered tried and tested “safe” investments like PPF and fixed deposits. “I had always seen my parents rely on these options, so I followed suit. I thought mutual funds were riskier, so I stayed away from them”.

Familiarity bias is like being at a party where it’s easier to chat with friends than mingle with strangers — but it can lead to sub-optimal diversification as investors stick to familiar ‘go to’ assets, rather than exploring the entire universe of options.

How to Overcome the Familiarity Bias?

The most important step in overcoming the familiarity bias is to accept that familiar is not necessarily safe.

For most of us, investing isn’t a full-time job. We don’t have time to understand the pros and cons of every possible investment. As a result, when making investment decisions, we try to make things simpler for ourselves by gravitating towards what’s familiar. For example, we may only invest in companies with brands that we recognize or in companies our family or friends invest in.

Sometimes the comfort zone can be a dangerous place.

For example, if you invest only in familiar instruments like fixed deposits, gold or real estate, and not diversify. Since you are not spreading your risk by investing in different avenues, a downturn in that asset class will bring down your entire portfolio. Also if you have chosen a class that gives low returns, you will run short of funds for a particular goal.

Benjamin Graham in ‘The Intelligent Investor’ has rightly said that the investor’s chief problem and his worst enemy is likely to be himself. All too often, people deviate from rational behaviour due to behavioural biases. A rational decision, however, is made by taking all available information into account and weighing benefits and costs.

I don’t know about you, but I’m always looking for ways that I can save a little money. A few bucks here and there can really add up—which means I can afford a vacation or a thing I’ve been wanting to buy for a while.

Whatever your money goals are, saving a bit at a time is easier than you think. It just takes a little sacrifice—let’s call it a mini-sacrifice—and you can save big.

Dinner with Friends

You meet your friends for dinner once every week. The dinner costs you Rs 1,000. Every month, this amounts to Rs 4,000. If you replace one of these dinner trips with cooking at home and invest the remaining, it will compound to Rs 2.6 lakhs ten years down the line.

Movie Night

A movie at a PVR or any multiplex costs approximately Rs 300. For a family of four, that’s Rs 1,200 per movie. Two movies per month cost Rs 2,400. Have one movie night at home which will cost approximately Rs 500. That’s Rs 700 in savings, that will eventually compound to Rs 1.8 lakhs in ten year time.

An Uncertain future

Some folks frown on frugality. They equate it with being “cheap”. Others are unwilling to make sacrifices today when the future is so uncertain. They’re not willing to “live like that” when they could get hit by a bus tomorrow. I think this is crazy for a couple of reason:

First, spending is not the same as happiness. Second, most of us are likely to live a long time.

Which would you rather do?

A. Prepare for a long life by saving and investing, but then die tomorrow.

Or

B. Spend money you don’t have now, and then be unable to afford what you need when you’re older.

Don’t confuse frugality with depriving yourself.

When we restrict our spending on the unimportant, we’re able to indulge ourselves on the things that matter most in our lives.

Finally would like to leave you with a famous quote “Do not save what is left after spending, but spend what is left after saving.”

Aditya was busy in office, when he received an SMS 📲 You have received a credit in your account. He thoroughly rereads and his face lights up🤩 He has received his bonus amount.

All of a sudden, that vacation to Thailand seems possible or how about that big screen TV.

Bonus money feels different from our salary. Since our salary comes regularly every month, we’ve already mentally allocated it for living expenses. Rent, food, and entertainment all come out of your paycheck.

Your bonus, on the other hand, feels like a windfall🎰—fun and exciting. And unfortunately, easy to spend.
However, our bonus can be effectively used to manage our financial well-being. The following are a few tips on how to fruitfully utilize your bonus money.

1. Emergency Funds for a rainy day☀🌂⛈☔ – It is essential to keep some funds aside for unforeseen circumstances. No one can predict the future and emergencies can come up anytime. Build up an emergency fund equivalent to 6 months of your salary.
2. Clear your loan – The very thought of debt is a cause of stress for almost everyone. The ones with no tax benefits and higher interest rates go first. It makes sense to clear off high cost loans like credit card payments or a personal loan. We can also use our bonuses to pre-pay part of our home loans.
3. Buy health cover for your family👨‍⚕👨‍👩‍👧‍👦 – Secure your family’s wellbeing if you don’t already have health cover. It is a good time to review your family’s insurance cover and buy more if you feel the existing one is inadequate.
4. Make a long term investment📆♟👨🏼‍🦳 – Start SIPs in an equity scheme through a liquid fund. Park your money in a liquid fund rather than your savings bank account then start an STP: systematic transfer plan into an equity fund. With the funds out of your bank account, you’re less likely to blow them away.
5. Reward yourself❣🛫🏖🍹 – Pampering yourself with your bonus money is not a bad idea at all. Spending isn’t evil but try not to go overboard. Set aside about 25% for a vacation or a special treat for yourself.

A rupee is a rupee, 🤑 whether it comes from your salary or bonus. Invest strategically so you can splurge when you want!