If you’re anything like us, you’d be tired of reading those preachy articles with headlines like ’22 Money Resolutions for 2022′, ’10 Personal Finance Resolutions You Can Keep’, or ‘Financial Resolutions for a Healthy 2022’ by now. Like those in the business of making annual Sensex and Nifty predictions, there are many who, year after year, keep repeating the same old personal finances every time the calendar year comes to a close. Let’s face it: telling people to cut expenses, increase income, invest in mutual funds, and reduce debt isn’t rocket science. New India and investors require practical knowledge. Here are five practical money lessons for 2022 and beyond.
FOMO is not a reason to invest
The fear of missing out, also known as FOMO, is a strong trigger for many to ultimately invest in high-risk bets. With the advent of cryptocurrencies, NFTs, and international currency derivatives, access is no longer an issue. But the freedom to invest and make money can also mean room to lose money. Investors often suffer from the remorse of not investing in something. For example, those who bought Bitcoin in January 2021 would have 60% YTD gains. Profits exceed 400% for those who opted for Ethereum and more than 1200% for those who bet on Binance Coin. Those who didn’t will suffer from FOMO. Dizzying returns can force you to change your perspective.
And, before you know it, you will be thinking about making a big crypto bet. If you experience such symptoms, take a moment and step back. Assess why you didn’t invest in those assets in the first place and get a status check on whether the same reasons exist today. As far as cryptocurrencies are concerned, cryptocurrencies were unregulated a year ago and remain unregulated. There is already talk of a crypto ban and all eyes are on a government bill that aims to alter the crypto landscape. Net net, if your reason for not investing in crypto was due to lack of proper legal recognition, don’t jump headfirst now. Every investment opportunity comes with pros and cons, and it would be foolhardy to bet money on historical returns. If you still want to give cryptocurrencies a try, invest a sum that won’t give you heartburn if you lose it all. The flip side of this is that even if you get a 4-5x return, your net worth won’t be affected much!
Stress, your name is day-trading
Once you enter the circle of purely speculative investments such as cryptos, stock day trading may be another temptation for you. You could even argue that stocks are much less volatile than cryptocurrencies. Since the stock markets have more than doubled in 5 years, many new retail investors have entered the markets. Demat account holders have more than doubled in 3 years to Rs 7.38 crore. A large portion of novice demat account holders are young, 20-year-olds who have seen a bull market for the first time. When IPOs come along and listed stocks rise 10% to 20% per session on a regular basis, many believe that making daily profits in stocks is easy. The desire becomes greater with so-called gurus sharing daily P/L screenshots on social media. But whether it’s day trading stocks or dabbling in futures and options, you have to prepare for a lot of stress if you decide to do it in 2022.
The smart thing to do would be to avoid day trading altogether, but novice investors wouldn’t want to listen. Success in day trading requires 3 things: targeting the right trade, the right entry, and the right exit. Unfortunately, these 3 things don’t happen in the order you want them to. Therefore, stress levels increase day after day. Intraday trading is more complicated because often the price reaches the desired level for a small second; This means you can’t even go to the bathroom without keeping the trading app open on your smartphone! Many people take paid consulting services cheaply, but advice is only as good as its execution. And with many inexperienced traders becoming ‘trainers’ overnight, you can’t get on their backs. Only a small percentage of people can consistently make it as successful day traders. The rest lose their capital and eventually exit. So keep an eye on your blood pressure if you join the ranks of day traders.
Hire a Registered Investment Advisor
Each year brings with it new complexities. There will be new risks as well as opportunities. But not all movements in the markets must be accompanied by some action at the level of your investment portfolio. Just because you liked a video criticizing actively managed funds doesn’t mean you’re doing it for your portfolio, unless you’re a savvy DIY investor.
If you’re an average citizen with low to moderate levels of financial literacy, don’t do anything with your portfolio without consulting your investment advisor. If you don’t have an advisor, 2022 may be the year you actually engage the services of one. Just to be clear, your wise friend, neighbor, or colleague is not the advisor we’re talking about here. Choose a SEBI registered investment adviser who will charge a fee for their work, just like other professionals such as doctors, lawyers and CAs. Money advice is deeply personal and has to be highly personalized. What works for you may not work for me. Therefore, be wary of any robo advisor that generates tips based on templates.
Don’t get into debt without knowing it
Cheap loans and leverage appear as free money. But they are not. In India, credit growth improved to 7.3% (December 3, 2021) from 5.5% in FY21, mainly due to an acceleration in retail, with mortgages and other retail lending. These contribute 64% of the incremental credit. Credit card growth is accelerating again, buoyed by the holiday season, easing stress over asset quality. Clearly, people are ready to borrow big once again. But that doesn’t mean you have to join the club. Loans taken out simply for consumption, rather than building an asset, are just a poor excuse not to save. Many new borrowers argue that taking out loans can improve your credit score. If you can. But loans are tomorrow’s savings borrowed today.
Without knowing it, you may end up in debt today. Previously, there were only irritating phone calls asking about your need for a personal loan. Today, flush with cash, lenders have come up with new ways to sell loans. Concepts like Buy Now Pay Later (BNPL) that require you to take them during the checkout stage on e-commerce platforms, and digital loans available with 3 clicks, have made it very easy to obtain funds. Lenders want you as a borrower to take out loans for all possible expenses like travel, health care, etc. There are platforms that allow you to pay the rent by credit card! But, they are still debts and need to be paid.
New forms of lending are trying to fundamentally change habits in ways you don’t understand. By encouraging you to buy things right now, regardless of whether or not you can afford them, lenders are trying to instantly meet your needs. When you practice this several times, you will no longer have the patience to save and buy goods. You can argue that the BNPL ticket size is smaller, but that’s only because lenders currently want to limit their credit risk. When they’re ready, they’ll increase loan sizes to whet your biggest credit appetite. The same goes for digital loans. Although the RBI is putting in place rules to control the digital lending space, you as a borrower should be extremely cautious when using these facilities.
Add nominees, make a will
People talk about a lot of things with their family, but financial details are always a less communicated area. Covid-19 has shown how the sudden death of many has left their families completely in the dark about finances. If you are also in the same club, change this way of doing things in 2022.
More than Rs 80,000 crore in unclaimed bank accounts, life insurance, mutual funds and PF. One reason is that claimants may not have been told. To avoid this, explain to your spouse all the details about your bank accounts, insurance, investments, etc. Write down the details and save them in a physical file marked ‘my investments’. Simply sending an email or an excel sheet may not work today when a tsunami of emails arrive daily. Specifically tell recipients to save those details.
Make sure all financial assets have a representative. Add a nominee (preferably someone younger) to your bank accounts, deposits, mutual funds, provident fund, etc. It’s a one-time hassle, but having a nominee is a big step. A nominee is a person who can receive income from your account in the event of your unexpected death. The candidate can be anyone you want, ie parents, spouse, children, siblings. When you nominate, you make it easier for dependents to access investments.
A nominee is only a custodian of your assets, and not the legal heir. If you want complete peace of mind, make a registered will to be doubly sure that the investments go to the right person in his absence.