One of the best feelings in this world is usually when you start to win. With this, the shopping checklist is expanded, the search for dream vacation sites is crammed into your phone, and many more very “important” additions. And finally, accidentally, the idea of saving comes to your mind. So if you have won, it is equally important to invest and use it properly.
We all also come across random personal finance advice and some of us may have followed it blindly. But not all advice is practical. Here are some personal finance myths that need to be busted.
1. Myth: Savings = Money to keep in the savings account
I started saving – just see my savings and fixed deposit (FD) balance. It is the safest place.
Let’s be honest. We keep dipping into our bank account for different things, including the “important” ones like the new cell phone. Expenses have a habit of consuming whatever is available, and your savings account comes first.
Even if we are the rare people who keep money in FD and don’t “break” it, is it really savings? Since inflation is higher than yields, we are effectively exchanging any real yield for “safety”. To take an example, the FD rate is around 5% today and consumer inflation is around 6%, we are eroding our purchasing power.
So it’s vital to go beyond the savings account and invest money as a portfolio, across different asset classes, that align with your goals and needs.
2. Myth: A retirement plan before 40 is too soon
What is retirement? Is it not working or doing the work because you want to, not necessary? And saving isn’t just about making sure you have the things you’d need in retirement, it’s about everything to help make your dreams come true, whether it’s a dream home, the best education for your kids, or that coveted car. Let time work for you and your money work as hard as you do.
We often hear that “money begets money”; Simply put, savings in turn helps you save less. Over different investment timeframes, this means exponentially different results. For example, if you decided to invest only INR 5,000 per month at a six percent rate of return starting at age 20, it will have become INR 5 million by age 60. On the other hand, even if you saved INR 10,000 per month from the age of 40, you would only have INR 4 crore on hand at the same age.
What does this mean for your personal finances? The earlier you start investing, the more you’ll invest on a regular basis, and consistent returns can have a significant impact on your savings as you reach each of your financial goals.
3. Myth: you need a lot of money to invest
I will start investing when I have ____ amount.
So how much have you filled in the blank?
And the list goes on, but you never invest. Many people have the misconception that investing requires a large sum of money. Part of this is that investing is often not an area that we understand well. It is easier to say that we will try hard to understand, and do a good job, when we have a “large” sum of money. Hence this procrastination, which usually ends up in hasty decisions later on.
There is no real “minimum amount” in which it suddenly makes sense to start investing. It’s best to think of personal financial management as part of your outlook on life, to ensure that you regularly invest a portion of your income in long-term dreams and a portion of your overall financial discipline. And with digitization, even if you’re just starting out, there are plenty of options to choose from.
4. Myth: risk is risky, it’s just savings
Investments are risky. You can lose all your money.
As humans, we have a natural tendency to fear the unknown. Investments are usually just one such area. We often exaggerate and reproduce the stories we hear of fortunes being lost. Interestingly, just as often, we are afraid of missing out when we hear about great investors like Warren Buffet. The key to addressing this is to remember what Morgan Housen says in his book The Psychology of Money: “Everything has a price, nothing is free.”
Likewise, if we want our money to work hard, we must strive to understand what the risk is, what the reward associated with the risk is, and then design a portfolio that we are comfortable with.
The first thing to understand is that the stock markets are NOT the only way to invest. The next truth is, of course, that there are experts who are there to help you find the right opportunities. Doing nothing is not the option.
They will help us plan things intelligently, one of which is risk reduction. To reduce investment risk, you can invest your money in multiple locations. Diversifying investment areas will save you from market risk, not putting all your eggs in one basket. Diversification can also be activated at different points in life.
When you’re in your 20s and your risk appetite is relatively high, for example, it’s a good idea to focus on higher-yielding equity investments: and as you age, however, you might gradually diversify away from equities to give the same weight to debt financing, mitigating risk at a time when it is a key priority.
5. Myth: You don’t need emergency liquidity
If you earn a steady monthly salary or income and already have a healthy savings portfolio, from FD to MF to retirement savings, you may think you’re ready, especially if you’ve also invested in insurance. Many people in this situation subscribe to the myth that it is not necessary to have access to emergency savings.
This could not be further from the truth. Emergency situations, by definition, require that you have resources available to deal with them. What if you get injured while on vacation in a country that isn’t covered by health insurance (seriously, take coverage when you go on vacation)? Or, as many salaried employees with steady jobs realized, what if a global pandemic threw the economy into a recession and forced well-performing companies to initiate cutbacks and rounds of layoffs?
No matter how many scenarios you are insured for, it is critical that you are in a liquid cash flow position throughout the month and have immediate access to liquid assets like gold to help you get through any Black Swan event in your career or the economy in your set.
You may not be an economist, but you can plan ahead a bit. Make baskets for bills, investments and savings and spend accordingly.