Among the best feelings in this world is often when you start earning. With this, the shopping checklist expands, search for dream vacation sites is crammed on your phone, and many more such very “important” additions. And last, accidentally, the idea of savings hits your mind. So, if you have earned, it is equally important to invest and use the same properly.
We all also come across random bits of advice for personal finance and some, we may have been following blindly. But not all advice is practical. Here are some personal finance myths that need to be busted.
Table of Contents
1. Myth: Savings = Money to be Kept in Savings Account
I have started saving – just see my savings balance and fixed deposits (FDs). It’s the safest place.
Let’s face it. We keep dipping into our bank account for different things – including “important” ones like the new mobile phone. Expenses have a habit of eating up all that is readily available – and your savings account is the first one.
Even if we are the rare person who keeps money in FDs, and doesn’t “break” them, is it actually a saving? With inflation being higher than the returns, effectively we are exchanging any real returns for “safety”. To take an example, the FD rate being around 5% at present and consumer inflation being around 6%, we are eroding our purchasing power.
Thus, it is vital to go beyond the savings account and invest money as a portfolio – of different asset classes, that align with your goals and needs.
2. Myth: A Retirement Plan Before 40 is Too Early
What is retirement? Is it not working or doing work because you want to, not need to? And saving is not only about making sure you have things that you would need at retirement, but everything to enable your dreams to come true – be it a dream house, the best education for your children, or that coveted car. Let time work in your favor – and let your money work as hard as you do.
We often hear that “money begets money” – simply put, savings in turn help you to save less. Over different lengths of investment time, this means exponentially different results. For instance, if you decided to invest just INR 5,000 a month at a six percent rate of return from the age of 20, it will have turned into INR 5 crore at 60. On the other hand, even if you saved INR 10,000 per month from the age of 40, you’d 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 regularly invest, and consistent returns can have a significant impact on your savings by the time each of your financial goals are reached.
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 misconceptions that investment requires a large sum of money. Part of this is that investments are not usually an area we understand well. It’s easier to say that we shall put in the effort to understand, and make a good job of it, when we have a “large” sum of money. Hence this procrastination, which usually ends up in rash decisions being made later on.
There is no real “minimum amount” where it suddenly makes sense to start investing. It’s better to think of personal financial management as part of your life outlook – to ensure you regularly invest a part of your income towards long term dreams and a part of your overall financial discipline. And with digitization, even if you’re just getting started, there are plenty of options to choose from.
4. Myth: Risk is Risky, It’s Only Savings
Investments are risky. You can lose all your money.
As humans, we have a natural tendency to fear the unknown. Investments is usually just such an area. We often exaggerate and replay the stories we hear – of fortunes being lost. Interestingly, just as often, we have the fear of missing out when we hear of great investors like Warren Buffet. The key to addressing this is to remember what Morgan Housen says in his book The Psychology of Money, “You pay a price for everything, nothing is for free.”
Similarly, if we want our money to work hard – we need to put in the effort to understand what is the risk, what is the reward attached to the risk, and then design a portfolio that we are comfortable with.
The first thing to understand is that stock markets are NOT the only way to invest. The next truth is, of course, that there are experts who are present to help in finding the right opportunities. Not doing anything is not the option.
They will help us in planning things smartly, one of which is risk reduction. To reduce the risk of investment, you can invest your money in multiple locations. Diversifying investment areas will save you from market risk – not putting all our eggs in the same basket. Diversification can also kick in at different points of lifetime.
When you’re in your 20s and your appetite risk is relatively high, for instance, it’s a good idea to focus on higher return equity investments: and as you get older, however, you could gradually diversify away from equity to give equal weightage to debt funding, mitigating risk at a time when that’s a key priority.
5. Myth- You Don’t Need Emergency Liquidity
If you’re earning a steady monthly salary or income and already have a healthy savings portfolio from FDs to MFs to retirement savings, you might think that you’re all set, especially if you’ve invested in insurance as well. Many individuals in this situation subscribe to the myth that you don’t need access to emergency savings.
This couldn’t be further from the truth. Emergency situations by definition demand that you have resources on hand to address them. What if you’re injured on holiday in a country that’s not covered by health insurance (seriously, do take a cover when you go for a holiday!)? Or, as many salaried employees with stable jobs realized, what if a global pandemic drives the economy into recession and forces well-performing companies to start cutbacks and redundancy rounds?
No matter how many scenarios you’re insured for, it’s critical that you’re in a liquid cash flow position across the month, and that you have immediate access to liquid assets like gold to see you through any Black Swan events in your career or the economy on the whole.
You may not be an economist, but you can plan a bit in advance. Make baskets for bills, investments, and savings and spend accordingly.