They say, “Nothing is more difficult than competing with a myth.” Instead of dealing with just one myth, we will be taking on the top 5 financial myths that every Indian grows up with, and most likely, continues to believe in for the rest of their life. Why is this important? Some myths can be left alone because they do not affect your daily life. However, these financial myths actually have a very negative effect on your financial well being. Do you believe any of these myths? Now is a good time to check.
Myth #1 Fixed Return Investments Can Make You Rich
Investing in Government bonds, PPF account, NSC, EPF, bank deposits, etc. is a very popular option because of these are low risk and fixed return products. In most cases, you can rest assured that you will not lose any of your original money. The myth here is that investing in fixed return products is a way to generate WEALTH—it is not. What we do not factor in is inflation.
For example, if you have invested in a bank fixed deposit at 8% rate of interest per year; your ₹100 will make ₹8 for you per year. At the same time, if inflation increases at the rate of 8% per year, the value of ₹100 saved today will decrease by ₹8 every year. The result is that your money does not grow at all, the interest and inflation just get cancelled out—real ROI becomes 0%. While Tax Saver FDs offer you IT benefits, remember that the interest you earn will still be taxed. In this scenario, instead of 0% returns, you will actually be losing money because of inflation and tax.
While you may make a little money through such fixed return investments, they cannot help your money grow enough for it to count as wealth.
Myth #2 Insurance is All You Need
I think it is some sort of mythical rite of passage—in India, we are only considered earning adults if we have multiple life insurance policies! Of course, you need insurance. It serves the purpose of ensuring that your family has a fluid cash flow even after you. A term insurance policy would cover this need at a nominal yearly premium. You do need medical insurance to cover for your health-related expenses.
But other than this, we need to stop believing the myth that insurance products are a good way to INVEST your money. Don’t be fooled by all the IT saving insurance and money-back policies. Insurance is a tool to secure finances in extreme situations; it is not a form of financial investment in your future.
Myth #3 Financial Planning = Retirement Planning
The myth that financial planning means planning only for your retirement is a strong one. This is why most of us put it off for later. However, this is very far from the truth. Of course, you can set a financial planning goal that focuses on your retirement and life post-work, i.e. retirement planning is a small part of financial planning. Whether you want to buy your first home, save for your children’s education, make a luxury purchase, or retire early, financial planning is the key to your success.
Set a goal, create a financial plan for it, and smash it out of the stadium.
Myth #4 It Is Too Late To Start
We spend many years of our life putting off financial planning because it is too early to “plan for retirement”. Strangely, most of us also seem to believe that as time goes by, it becomes too late to start. While it would have been great if everyone started investing as soon as they earned their first salary, there is nothing stopping you from financial and investment planning later on in life. Whatever your age may be, you are still alive. This means that you will require more money to maintain your standard of living. It is never too late to start investing.
Myth #5 Investing is Too Risky
You know what is riskier than investing? Not investing.
Most of us want to be rich someday but the only way we can think of becoming richer is by working harder at our day jobs than ever before. This is a faulty plan because try as you might, your monthly salary will grow at a proportional rate, and what you need to become rich is exponential growth.
Investing particularly in the stock market is seen as this complicated process, thanks to all the big financial words that “experts” and “managers” throw at us. Why else would you stick to whatever financial product they are selling?
This does not mean that investment is risk-free. “Risk comes from not knowing what you are doing”, as Warren Buffett rightly said. Without proper preparation and direction, even driving a car is very risky. This myth needs to be tackled because it creates a mental roadblock for us. It makes it difficult to think out of the box, and accept investment as a part of our financial wealth management plan. To make your money grow for you, this myth needs to go. Get educated about investing, so you can make the right choices for yourself.
These 5 are not the only popular financial myths. However, they offer a place to start rechecking your ideas. Treating these myths as the truth can and will hurt your finances, and take you miles away from financial freedom. It is never too late to change the way you think about money.
Author: Stephanie Colaco