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.”

I met a college friend after a long time. After reminiscing about canteen, professors and the college beauty queen, I started complaining about my crappy job and how I would love to retire in ten years.

Yeah, said Aditya. That’s the trend these days. FIRE: Financial Independence, Retire Early.

Makes sense, I said. If I could do that. Then I could pursue my farming hobby full time. Everyone wants to retire early, but am I ready? Am I rich enough?

Learn this financial planning tool to know for sure. First of all, let’s ask ourselves how much money is enough? How much do I need to have to call myself rich?

Practically speaking, being very rich actually means that the amount of savings you have is more than sufficient to ensure that your lifestyle of choice is assured and there is little risk to that. Please note, the phrase is ‘lifestyle of choice’ and not ‘extravagant lifestyle’.

Assuming your annual expenses equal 10 lakh. The amount of savings required is directly linked to your yearly expenditure. One needs a minimum of 25 times your annual expenses (2.5 cr) to lead a comfortable retirement.

It is very important to note that when we say savings we are talking about liquid financial assets. Not illiquid business assets, gold or real estate which may or may not yield fruits. To be more specific, assets which beat inflation because your expenses will double every 12 years.

Calculate for yourself. Where you are currently on the Richie Rich Scale?