Here's how to avoid man-made financial disasters

Mumbai experienced a 'man-made' crisis where the authorities, even after multiple experiences in the years gone by, have been tardy when it comes to protecting the city from rains. In 2015, illegal development and inadequate levels of flood preparedness led to large parts of Chennai getting submerged. A man-made crisis can happen to your personal finance as well. Like a man-made disaster, a major money issue can be very damaging. Top brains that DNA Money spoke to list out such man-made mistakes and how to avoid them.

Behaviour bias floods: Behaviour Biases is one of the biggest problems with investors. Tarun Birani, founder and CEO, TBNG Capital Advisors, says, "Based on a recent survey done in the US that by overcoming behaviour bias, returns can be enhanced by 2%. Biases like herd mentality and familiarity bias, often leads to accident as one realises closer to his retirement or children education that they don’t have adequate corpus." Familiarity bias forces us to usually select the asset class or investment avenue with which the person is familiar. Indians purchased more than $250 billion worth of gold in the last five years compared to FIIs who net invested almost a similar amount to buy Indian stocks. The behaviour management requires constant coaching and an open mind to educate oneself on new opportunities, Birani adds.

Wealth Cyclones: Cyclones do not come with a warning, but when they occur they cause massive damage to unguarded assets. As an individual, your biggest asset is the accumulated wealth. Brijesh Parnami, CEO, Essel Wealth Zone, says, "If you want to make sure that all of your hard-earned money doesn't vanish, you'll need to take steps to protect it. You'll need to protect your money from taxes, which is easy to do with a retirement account, and inflation, which you can do by making sure that all of your money is earning interest through vehicles like high-interest savings accounts, money market funds, stocks, bonds and mutual funds." Starting an emergency fund is also important. One of personal finance's oft-repeated mantras is pay yourself first. "No matter how much you owe in student loans or credit card debt, and no matter how low your salary may seem, it's wise to find some amount of money in your budget to save in an emergency fund every month," says Parnami.

Retirement landslips: Just like landslides are aggravated by human activities, such as deforestation, a retirement disaster can happen when you don't commit to an effective and realistic retirement plan. "Very often, starting a retirement corpus is something that gets postponed time and again. The 20s seem too early and 30s too busy. By the time you start building your corpus, there just isn’t enough time," says Ajit Narasimhan, category head - savings and investments, BankBazaar.com. The earlier you start, the more time you give your investments to grow, allowing you to accelerate towards your retirement goals. If you’re 30 now and invest Rs 1 lakh in a mutual fund growing at 15% annually, you get Rs 16 lakh when you are 50. If you make the same investment at 40 to be redeemed when you are 50, your corpus would be Rs 4 lakh. Delaying investment would force you take on higher risks later, or increase your retirement age to meet the same goal.

Health Droughts: If meeting monthly health insurance premiums seems impossible, what will you do if you have to go to the emergency room with a massive stroke? Modern financial planning that includes risk management tools like insurance, is not embedded in our culture. Mahavir Chopra, head - health, life and strategic initiatives, Coverfox.com says, "The mass in our society, who has depended on joint families, communities, have still not evolved enough to adopt insurance into their way of life or business." The poor and middle class are in a continuous war of survival, while the people who are well-off, are subconsciously in a happy mindset, who keep de-prioritising something as important as financial planning to something else. "People are in the procrastination mode not realizing that, when a claim arises, you are better off having a slightly substandard insurance policy, rather than having no insurance at all," Chopra adds.

FINANCIAL LIFELINE

• Biases like herd mentality and familiarity bias is problematic as you may realise you do not have enough corpus later
   
• Protect your money from taxes with a retirement account, and from inflation by ensuring interest benefits
   
• Retirement disaster can happen when you do not commit to an effective and realistic retirement plan