While there is no dearth of lessons on the money ” must-do’s”, more often than not we ignore the fact, that doing certain things with your money can potentially hurt your financial health in the long run. Now whether we do these consciously or under undue influence, it is time we no longer overlook the ” must-don’ts”. In this article, I will elaborate on things you should never do with your money, to maintain your financial well being, and what should you do instead. Read on!
Buying Insurance As Investment
Most people buy Insurance considering it as their first investment. This is generally pedaled by a pushy relative, an over-friendly neighbor or a bank representative. The plan is either a money-back or endowment policy, with ‘guaranteed returns’.
Don’t fall for a plan that promises you a mix of both.ULIP premiums are multi-fold higher than normal term insurance premiums and you will not get a good return on your investment when you buy such a product.
The illiquidity and limited choice of funds only add to the woes. Consider this, insurance is a cover against the risk of occurrence ( or nonoccurrence) of an event. And should be treated just for that.
Buy a good term and health insurance that provides you adequate cover, so that you don’t have to dip into your emergency funds or stop your SIPs/redeem your investments to meet healthcare costs, jeopardizing your long term goals.
Confuse Liabilities With Assets
Understand depreciation, and differentiate between assets that will give you money and the ones that will require money from you. The car or the fancy gadget that you have been thinking of buying starts losing its value as soon as it is out of the showroom or store.
These are to be considered as high-cost liabilities as in most cases these have been financed and the EMIs can continue for a few years.
While buying a car is not a bad thing in itself, directing a majority of your money towards the purchase of depreciating expensive assets, that tie you down to heavy loans is not prudent unless you meticulously plan for them. So if at all you have to, buy depreciating assets that are within your means and don’t require you to take a high commitment loan.
On the other hand, if you are using a loan or debt to create some asset- like a loan for expanding or starting a business, which yields good returns, it can still be considered as good debt.
Your PPF account, Fixed Deposits, NSC, Mutual funds, stocks – these are the assets that pay you dividends or return the principal with interest.
Do Not Buy Things You Do Not Need Or Invest In Things You Do Not Understand
There have been many instances of people losing their money after ‘investing’ in fraudulent schemes or marketing plans where the ‘business model is very easy to understand and scalable’.
Understanding the risk associated with a certain product or investment along with your own risk tolerance is a must. Don’t come under peer pressure and invest in a product that doesn’t align with your goals.
Needless to say, stay away from Ponzi ” get quick rich” schemes. Building wealth requires a certain amount of discipline and wisdom, and there are no short cuts to this.
So educate yourself, or take professional help before zeroing on the best investment avenues for yourself.
Warren Buffett famously said – “If you buy things you do not need, soon you will have to sell things you need”.
Buying something on credit or on EMI is essentially spending money which you actually do not have. So if you have a habit of whipping your credit card out at each purchase and are addicted to swipes, its time to pause and ponder.
Credit cards are appealing and understandably so because they delay the financial repercussions of your purchase. However, if left unchecked, you may find yourself in a debt trap, which may take years to break free from.
So change your approach a bit. While its good to pamper yourself and the occasional splurge doesn’t hurt, don’t make impulse purchase a routine. Use your credit card judiciously, clear your credit card loans diligently, in full at the due date and not just the minimum amount. By all means enjoy the luxury a credit card provides, but keep the outflow in check.
Also, instead of EMI, you can take the SIP route. For instance, you want to buy the latest iPhone. Give yourself a 3-6 months window to build up the corpus. You can put the amount you set aside to buy the phone in a liquid fund, that will give you way better appreciation than your savings account, and enable you to reach the target amount faster.
You can also withdraw your money any time you want. So a little planning can spare you being tied down to EMIs and the other hidden costs banks charge on your cards.
Summing up, the ideal approach should be, “Pay yourself first, save, invest and then spend.
Delay Investment And Retirement Planning
For most earners in their 20s and 30s, retirement seems to be a very long-term goal and thus they tend to move it away, waiting for the ‘right time’.
These are the same people who do not focus on investment either as they think that they do not earn enough money.
However, delaying both these important aspects proves to be quite detrimental in the long run. Starting early gives you the most significant advantage of ‘Compounding’ which works its magic over long periods of time quite effectively.
Do not stand on the sidelines and wait for the perfect market timing to begin because there isn’t any. Predicting the market is a futile activity. SIP is your weapon against market volatility and the best way to start your investing journey. If you are new to investing and are apprehensive, start a SIP with a small sum, in liquid funds. If you are confused about what to start with in equities, you can go for tax saving ELSS funds.
They have a lock-in period of just 3 years and allow you to claim tax exemption upto Rs 1.5 Lakh under Section 80C. Since they are equity funds, they also have the potential to fetch high returns in the long run. So start with one or two funds under the equity and debt category and get a taste of investing. Then as you gain more knowledge and experience, start diversifying your portfolio and take up investing actively.
Don’t Forget Inflation
Money in a Savings bank doesn’t pay anything when you consider the effect of inflation. Inflation, in very simple terms, is paying more for the same products or services with time.
It reduces the purchasing power of money over a period of time. In India, it has stayed low for some time now but it cannot be wished away and that is why you should put your money in inflation-beating assets/investments. Do not let the value of your money get eroded due to the ill effects of Inflation. With decreasing bank rates, the yields from bank deposits are set to go down further.
Put only the minimum required amount in a Savings account. Invest in a mix of investments that can make your portfolio ‘Inflation proof’, providing both stability and security. For instance, if ease of access to your money is an important criterion for you, you can invest in liquid funds that will also provide a better appreciation to your money.
To Sum Up,
Moderation is the key, it ultimately boils down to how effectively you utilize your money and learn what to do with it. Be prudent, arm yourself with the necessary financial know-how and you will be able to navigate the world of investing with ease.
Disclaimer: The views expressed in this post are that of the author and not those of Groww