Peer Pressure - Don't let it direct your Financial Decisions
Peer groups include family, work colleagues, friends etc who influence our decisions with respect to several aspects of our lives. It is natural behavior to conform to general norms followed by these groups. Unfortunately pressure to conform to peer group norms can cause severe damage to financial wealth. Common money mistakes that one makes due to peer pressure can be avoided if you can recognize them and taken corrective and preventive action. I have enumerated such mistakes that investors make due to peer pressure.
1) Making money decisions to maintain status in society:
Here's an example of a client who was born into a rich business family, lived in South Mumbai and had a roaring family business. In his mid forties a family dispute broke up the entire business and he found himself left with no assets and no business. He had no means of starting afresh and had taken heavy private loans at ridiculously high rates of interest to fund high living expenses. He did have one asset and that was his home in one of Mumbai's plushest localities. I suggested he sell, buy a cheaper apartment in the suburbs and using the balance funds to repay debt and fund future living expenses till he could find work or set shop again. It was completely doable from my point of view, but my client couldn't agree. For him such an action would mean admitting his despondency and quitting his high flying circle of friends and clubs. Such a move could cost him his reputation and status in society. Sadly none of his friends/society or reputation would help fund his living expenses, nor would they care for his child's education or pay for medical bills.
Spending on extravagant marriages/parties/religious functions, buying a car you cannot afford , buying a larger apartment or the latest gizmos to impress friends or family, or putting your child in an expensive school because there is where the neighbors kids are enrolled are all examples of spending to maintain societal status. Living beyond your means is like cancer. You can only accept the reality of your problem, nip it at the bud and start anew, else it destroys all your wealth and with it, all your happiness and peace. Not all the status in society is worth the loss of your own family's well being and future prosperity.
2) Making investments to avoid feeling left out:
Peer pressure plays a notorious role in making people take wrong investment decisions. Humans are genetically built to work in groups. We like being part of the herd and there is a sense of safety in following one. It is therefore natural for us to feel very safe and confident to buy a product which everyone around us has taken. Besides we do not wish to be left out. The truth however is that a product suitable for your colleague, friend or your cousin need not be suitable for you. I know live cases of well paid senior executives in a cash crunch. They invest in long gestation investments, like property (on an EMI of course!) and Insurance products, and end up stifled for cash expenses. All this because they kept taking investment advise from one colleague after another without looking into the differences in personal financial situation and cash flows.
3) Taking loans to fund fancy expenses or purchases beyond your means:
I am a great advocate of work - life balance and always make space for expenses related to vacations and luxuries in any financial plan. However the underlying principle is to spend for such expenses from savings and not from loans. Taking a large loan to buy a fancy car may be great for your colleague. However what if you still have a huge EMI going on, while he doesn't. You could get into severe distress if you follow a 'Me too' approach with respect to purchases that require huge financial outlays and hence loans. People make these mistake all the time especially when it comes to expenses like vacation homes, land purchases, electronic gadgets and time share schemes.
4) Giving loans to friends and Family -
This is a unique problem faced by Indians . The Great Indian Family works in strange ways where the well off are expected to give loans or gifts to their not so well off cousins , aunts , uncles and miscellaneous relations not forgetting friends and colleagues. There is no harm in financially helping friends and family, but in my experience , you cannot treat such aids as repayable loans, because they are rarely repaid .Give only as much as you can possibly afford , without any damage to your immediate family's welfare. If you must consider giving a loan , atleast have a fair assessment of the persons repayment capacity. If you don't , the result will be disappointment and anger when the loans are not paid back.
Most of us will find it difficult to access the impact of our money decisions on long term wealth. It will be nice to consult a Financial Planner who can give you a clear view of your situation. Bottom line is that you are unique and so is your financial plan. Your investments and expenses must reflect your unique situation and cater to the fulfillment of those goals that really matter.A plan will give you a fair idea of how much you must save ,where to invest and how much you can spend or give away,thus helping you take logical decisions rather than those based on external expectations . Finally it's about enjoying everything ,but within your means.
1) Making money decisions to maintain status in society:
Here's an example of a client who was born into a rich business family, lived in South Mumbai and had a roaring family business. In his mid forties a family dispute broke up the entire business and he found himself left with no assets and no business. He had no means of starting afresh and had taken heavy private loans at ridiculously high rates of interest to fund high living expenses. He did have one asset and that was his home in one of Mumbai's plushest localities. I suggested he sell, buy a cheaper apartment in the suburbs and using the balance funds to repay debt and fund future living expenses till he could find work or set shop again. It was completely doable from my point of view, but my client couldn't agree. For him such an action would mean admitting his despondency and quitting his high flying circle of friends and clubs. Such a move could cost him his reputation and status in society. Sadly none of his friends/society or reputation would help fund his living expenses, nor would they care for his child's education or pay for medical bills.
Spending on extravagant marriages/parties/religious functions, buying a car you cannot afford , buying a larger apartment or the latest gizmos to impress friends or family, or putting your child in an expensive school because there is where the neighbors kids are enrolled are all examples of spending to maintain societal status. Living beyond your means is like cancer. You can only accept the reality of your problem, nip it at the bud and start anew, else it destroys all your wealth and with it, all your happiness and peace. Not all the status in society is worth the loss of your own family's well being and future prosperity.
2) Making investments to avoid feeling left out:
Peer pressure plays a notorious role in making people take wrong investment decisions. Humans are genetically built to work in groups. We like being part of the herd and there is a sense of safety in following one. It is therefore natural for us to feel very safe and confident to buy a product which everyone around us has taken. Besides we do not wish to be left out. The truth however is that a product suitable for your colleague, friend or your cousin need not be suitable for you. I know live cases of well paid senior executives in a cash crunch. They invest in long gestation investments, like property (on an EMI of course!) and Insurance products, and end up stifled for cash expenses. All this because they kept taking investment advise from one colleague after another without looking into the differences in personal financial situation and cash flows.
3) Taking loans to fund fancy expenses or purchases beyond your means:
I am a great advocate of work - life balance and always make space for expenses related to vacations and luxuries in any financial plan. However the underlying principle is to spend for such expenses from savings and not from loans. Taking a large loan to buy a fancy car may be great for your colleague. However what if you still have a huge EMI going on, while he doesn't. You could get into severe distress if you follow a 'Me too' approach with respect to purchases that require huge financial outlays and hence loans. People make these mistake all the time especially when it comes to expenses like vacation homes, land purchases, electronic gadgets and time share schemes.
4) Giving loans to friends and Family -
This is a unique problem faced by Indians . The Great Indian Family works in strange ways where the well off are expected to give loans or gifts to their not so well off cousins , aunts , uncles and miscellaneous relations not forgetting friends and colleagues. There is no harm in financially helping friends and family, but in my experience , you cannot treat such aids as repayable loans, because they are rarely repaid .Give only as much as you can possibly afford , without any damage to your immediate family's welfare. If you must consider giving a loan , atleast have a fair assessment of the persons repayment capacity. If you don't , the result will be disappointment and anger when the loans are not paid back.
Most of us will find it difficult to access the impact of our money decisions on long term wealth. It will be nice to consult a Financial Planner who can give you a clear view of your situation. Bottom line is that you are unique and so is your financial plan. Your investments and expenses must reflect your unique situation and cater to the fulfillment of those goals that really matter.A plan will give you a fair idea of how much you must save ,where to invest and how much you can spend or give away,thus helping you take logical decisions rather than those based on external expectations . Finally it's about enjoying everything ,but within your means.
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