What not to do with money! - REAL LIFE STORY.

 Background:

Age-52. 

Only earning member of the family.

One son (18Y), one daughter (12Y) and a loving housewife.

Living in a Metro city of Western India doing job in a private sector company.

I've known this family for more than 12 years. I've seen the ups and downs of this family and will explain my insights on the money management decisions they made over this time period.

(Representative Image)

Early life & Direct Selling:

The man is from South India and comes from an extremely poor family. Graduated and started working in South Gujarat. He moved to a bigger city about 20 years ago. He started working in a huge private sector company, initially in the administration department.

About 15 years ago, the family met someone who was involved in direct selling for a global top corporation. The company provides FMCG products through network marketing tactics. This business's products and trainings were extremely expensive. But they were shown a wealthy future that anyone would have fallen for.

The business plan requires you to continuously buying their items (which are at least 25 to 150% more expensive than market competition). One must buy their things for personal use, to demonstrate to prospects, and, of course, to show off!

Over the last 14 years, the family has spent or lost over ₹20 lakh on this activities. This business's overall income is insignificant in comparison to this figure. 

Impact: If this money was put in diversified equity mutual funds during the last 14 years, it would be worth around ₹50 lakh (assuming a CAGR of 12%).

Crypto-mania:

By 2021, the man was fed up with this business and had invested a lot of money and time into it with no tangible results in sight. The team that has grown over the years in this business has already scattered.

About three years ago, the man met a relative who was conducting a similar type of company but using cryptocurrency. The corporation (Hyperverse) was situated in Hong Kong and traded its own cryptocurrency. Members must purchase a membership through a sponsor and receive allotted coins in their digital wallet. This currency has doubled in just a few days!

In this firm, the man created a network from scratch and formed a team. The family invested over ₹18 lakh in this business over a two-year period.

During this transaction, he approached me to check into and assess it for him. I communicated my thoughts with him, along with an initial investment I made to watch the firm. 

I observed that, 

1) The company's website is a single page website! 

2) Company's promoters all were of chinese origin. 

3) And the biggest red flag for me was the business model claims to double the money in about 21 days!

I expressed my concerns to my friend and recommended him to stay away from this firm. However, emotions have a greater impact on our financial decisions than reasoning!

The family's primary goal was to get wealthy and fulfil their ambitions as quickly as possible.

All dreams were dashed when we learnt one terrible morning that the company had closed. All of the money invested by all team members has been gone. A fraud occurred involving all persons, and some of these people are well educated, while others are extremely well connected, with the majority being corporate personnel throughout India.

Impact: The family lost approximately ₹18 lakh in this enterprise. Future savings of ₹50 lakh will be depleted once more. All because of earning money through unorthodox business ventures. To fund this, my friend took out a large mortgage loan on his property.

Futures and Options:

Aahh!! The darling of the middle class! The only way to become rich in no time!

I recently learnt that a friend has begun learning how to trade options. He paid for an online course (he is a well-known influencer, so I will not use his name) to learn about options trading tactics. Our friend has about 6 years of active job and he aims to learn everything about Options trading and is planning to do trading when he retires from his regular job.

Trading in F&O for a regular monthly income or as a full-time career is not recommended because the winning probability is very low or negligible when compared to the risk of losing funds. Fewer than 2% of traders worldwide are considered successful. 

Latest research report released by SEBI on Indian markets are an eye-opener:

1. Retail traders' losses: 92.5 lakh retail traders and proprietorship firms incurred a trading loss of ₹51,689 crore in FY24.

2. Speculative trading: 71% of total F&O trading value is attributed to speculative trades, indicating excessive speculation in the market.

3. Retail traders' participation: Retail traders' participation in F&O has increased from 11.4% in FY18 to 24.6% in FY24, indicating growing exposure to high-risk trades.

5. Loss-making traders: 72% of retail traders and proprietorship firms incurred losses in FY24, with an average loss of ₹56,322 per trader.

Even after considering all of this, the man remains undeterred and want to continue his financial escapades.

Impact: I can't write about the impact because he plans to trade full-time after retirement. However, as we can see from historical data, the possibilities of gaining money (on a regular basis) are extremely low when compared to the risk of losing funds. I'm not sure how much my friend may lose this time.

Shocking phone call:

After a week of our personal meeting to discuss about a car loan having EMI of ₹10,200 one fine evening I got a phone call from my friend.

Our appointment was to address withdrawing money from mutual funds and repaying his auto loan, as he is having trouble sleeping because of the EMI. He wanted to withdraw money from the Provident Fund to pay off his auto loan, so I suggested he take it from Mutual Funds. And we completed the transaction that day.

After about a week, he called me in the late evening to say he had received the money and would be closing the auto loan shortly. And his family's long-held desire is to get a Royal Enfield motorbike, which he intends to purchase in a week. The vehicle costs around ₹2.25 lakh with an EMI of approximately ₹6,000.

That was a shocker for me! The guy was having restless nights about a loan a week ago, and now he's talking about getting another vehicle loan! I did everything I could to assist him in making sound financial decisions. However, he and his family decided to pursue this dream at all costs.

Without getting into too much detail, I realised that I couldn't help this family make smart financial decisions since they just wanted to make emotional and unwise choices. So I told him to do whatever he thought was best for the family!

Impact: Clear impact is waiting for more sleepless nights!

Mutual Funds:

Throughout these years, one prudent choice was to make systematic investments in equities mutual funds. After losing approximately ₹38 Lakh in both incidents, the family's mutual fund portfolio worth is around ₹35 Lakh.

This sum will now be used to pay for two children's marriages, education fees, and retirement plans. It is just not possible to execute all of these from such a little corpus. 

Conclusion: The financial decisions we make throughout our lives determine whether we are rich or poor. My financial aim is not affected by the quantity of salary or business revenue I receive, but rather by the decision to invest the investible surplus from this regular income. It is quite difficult to grasp this concept, but it is the only way. Trading in stock markets, cryptocurrency, and other assets will not make you wealthy.

And there is no single technique to become wealthy rapidly; there are no shortcuts. If you want to become wealthy, focus on your normal job or business and invest any extra funds on a regular basis, as advised by your financial advisor.

I only pray to God that my friend will grasp this soon and make better decisions in the future.