Times change, people change, situations change, then why not your outlook and methods?
Free advice is of two types- ‘good’ and ‘bad’, and more often than not, the source of such free advice is none other than our parents. Parents are constantly worried about making sure that their children go down the right path, and hence the advises follows. We often hear from our parents and elders that they have experience and thus we must listen to them; no matter what, they know the best! But, is it really true, especially when it comes to financial advice?
Well, we do know for a fact that the times have changed, the costs of the same old products have changed, the lifestyles have changed, and a lot of other things have changed- thanks to technology and well, experience. Keeping all of these factors in mind, we asked around the city to find out the most common financial advice that 25 to 40 year olds are getting from their parents today. Then, we asked our financial experts to analyze those “supposedly” good financial advice to know if following these advises is really the right course of action.
After a rigorous exercise, we found out the 5 outdated financial advises that parents are still clinging on to, which, believe us or not, are potentially ruining their children’s financial health:
1. Get insurance policy as a strategy to make profit or build wealth!
We get it; life is unpredictable and every parent wants their kids to have a safety net. But when it comes to life insurance, the advice they give may be well-meaning but bad nonetheless. For instance, if your parents tell you to buy a life insurance policy because it offers good monthly cashback value, well, then, we hate to break it out but your parents are not that well-informed. It is important to understand that getting cashback is not the same as making a profit. All that happens in such a scenario is that you get what you put into the insurance. If you are really looking to make a profit or build wealth, then it is better to buy term insurance and invest the difference in other financial instruments like mutual funds.
Secondly, there is no ‘one size fits all’ solution when it comes to insurance. The amount of insurance you need may differ from what your father needed and depends on your individual circumstances. The same is true for the ‘additional riders’. There is no point in making your insurance policy unnecessarily expensive if the riders are of no real use to you. So, make sure you look at the big picture, and if you feel dubious about any other insurance advice you have gotten from your parents/ friends/ senior or are unable to figure out the right insurance plan for you, you can always ask for help from our experts at 5nance.
2. Invest in real estate because it is safe!
Most parents advice their children to buy a house as soon as possible since the real estate rates keep escalating with time. However, this is only feasible if the said person earns decent money, can pay his or her EMIs on time, and can still keep aside sufficient amount in savings to fulfill his or her important financial obligations. Secondly, this binds the person to that particular place; moving to another city or country for better career opportunities would only add to their financial burden as they would have to pay rent for the new place in addition to the ongoing EMIs.
So, do not buy a house just as soon as you start earning. Allow yourself some time to settle down and have a stable career beforehand; until then, renting would make more sense. Meanwhile, you can invest small amounts in mutual funds through SIP and build a significant corpus over time; all without messing up your current financial responsibilities.
Secondly, if this advice comes when you are ready to settle down and do earn enough to take care of the EMIs, be mindful of investment. Investing in too many properties will only cause unnecessary debt burden as real estate, as an asset, is not a reliable source for stable return and does not provide the required liquidity.
3. Invest in fixed deposits or gold to make a profit!
Investing in gold and fixed deposits was profitable when investment options were limited. However, in today’s day and age, there are much better options available. For example, the potential interest rate on fixed deposits today is limited to only 7 - 8% while an investment in mutual funds promises an ROI of up to 12 – 20%, provided you have a diversified portfolio in sync with your risk appetite.
In addition to this, mutual fund investments are more efficient than FDs. The most prominent reason is that other asset classes like equity are more likely to bring you a higher stable growth and ROI in the long run.
As far as gold is concerned, we would not agree with investing in physical gold per se. Instead, invest in gold as an asset class with a ratio of 10 to 15% in your mutual fund portfolio. It can bring you better returns while freeing you from the worry of securing your physical gold ornaments.
4. Share market is just a good way to lose money; I know it because I have tried!
Share market is inheritably volatile, so there is definitely some amount of risk associated with it. But, if you play your cards right and invest according to your risk appetite, you have a chance of getting better returns in the long run. For example, in the year 2008 markets crashed by 50% so the first instinct of beginner or inexperienced investors was to redeem or stop the investment, however, any investor who had stayed invested would have grown the wealth 3 times in 10 years, as the market corrected itself.
If long-term wealth creation is your goal, then equities are the best option; systematic investment and diversification can be your additional allies. All in all, contrary to popular belief, staying away from risk should not be the goal but handling it the right way. So, put some thought into how much risk you can handle and the best approach to go about it.
5. Loans are not good; pay them as soon as possible!
The purpose of a loan is to get what you want when you want, and without disturbing your day-to-day financial capacity and goals. More often than not, paying off the small EMIs is the better way to fulfill your goals while also having the required liquid cash within reach. Paying off your loans as soon as possible only makes sense if you have a surplus amount of money lying around so that paying off a loan does not affect your daily life, savings, or emergency funds.
Moreover, suppose you have extra money and instead of paying off your loan, you invest in equity mutual funds. Since home loans also have tax benefits associated with it, you can claim up to INR 1.5 lakh on the principal amount (including stamp and registration) in rebate under section 80C. You can also claim an additional deduction of up to INR 2 lakh on the interest paid for a self-occupied house (there is no limit on the tax deduction for a let-out house) under section 24 and up to INR 50,000 on the additional interest (for 1st-time buyers) under section 80EE. So, taking this approach, you can fetch higher returns than the interest paid on a loan; so by this way, pay off your interest, keep your savings, and build wealth at the same time.
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