Won't you feel cheated if your financial adviser gives you incorrect information or makes you invest in an avenue that gives sub-optimal returns? But what about all those financial lies that we tell ourselves? Many of us are guilty of harbouring grave misconceptions about money matters.
Some of these myths are borne of sheer ignorance and laziness; others are a legacy of the past. We follow these ideas with utmost conviction, without exploring the basis of these attitudes. How many of you believe, for instance, that buying term insurance is a waste of money? Or that planning for your retirement and drawing up a will are better left for later years?
These are just some of the lies we are guilty of telling ourselves. Your mind tricks yourself into thinking that you are making the right financial decisions. Some people may even be fully aware of the lies that they tell themselves, but refuse to make any changes, as it would require them to step out of their comfort zone.
Our cover story this week looks at eight such financial lies we tell ourselves all the time. It's high time we stopped doing so because investments based on these misconceptions can hurt your financial wellbeing. Find out which of these lies you have been telling yourself.
"I don't have to save for retirement so soon"
Missing the initial years can rob your corpus of the magic of compounding.
A NEW car, the latest smartphone, foreign holiday... when young people start earning, saving for retirement is not among the options they tick. Why just the young set, even those who are well-settled in their careers believe that retirement planning can wait. They argue that they will be able to save enough later when they start earning more. But delaying the start can prove costly.
The longer you stave off saving for your golden years, the harder it will be for you at the end. As the graphic shows, if you delay retirement planning by 10 years, even a higher monthly saving will yield a smaller corpus than if you started early at 30. The delay denies the retirement corpus the magic of compounding. What you save in the first few years of your career makes up a huge chunk of your retirement corpus.
One reason people don't take retirement planning seriously is that they are still living in the past. They believe that their children will take care of them when they are older. But society is fast changing. In metros, joint families have already become exceptions rather than the norm they were some two decades ago. Also, relocating to another city for work is common now. So, don't lean too much on that hope.
A common fallacy is that "things will work themselves out in the end". If you are also among those who believe that you will cross the bridge when you get there, it's time to change the mindset. Start saving for your retirement now if you don't want to spend your sunset years in penury.
"My expenses will come down after I retire"
Many expenses come down, but healthcare and medical insurance costs shoot up.
FOR A lot of people, retirement means a life far simpler than that they led during their working years. It is also perceived to be easier on the pocket, as living expenses go down, children become self-sufficient and most loans are repaid.
But many other expenses start creeping up. While transportation, fuel and household expenses surely come down when one stops working, medical expenses shoot up as one grows older. Your healthcare costs are probably negligible in the early stages of your life, but once you hit 50, these will make a sizeable chunk of your expenses. According to estimates, almost 70-80% of the total medical expenses incurred by an individual during a lifetime happen after 70.
India's healthcare costs may be among the lowest in the world, but they are rising at a fast pace. Experts say that healthcare inflation is rising at 15-18% each year, nearly double the pace of consumer price inflation. At this rate, even regular surgeries like angiography, cataract, appendectomy, etc, will become more and more costly as you age.
The cost of health insurance cover will also see a rise in the coming years. The premium for a Rs 3 lakh health cover is just Rs 2,500 a year when you are 30, but for someone above 65, it is Rs 18,000 a year. Given this scenario, it would be wise to factor in these expenses in your retirement planning and target a higher sum.
"My employer health cover is enough"
Group plans are useful, but not enough because of the terms and conditions.
DO YOU have medical insurance? Most people in the organised sector are covered by group medical insurance from their employers. While such covers are definitely useful, they may not be enough. Group plans have too many strings attached and offer very low cover due to sub-limits on various heads. A person who depends only on his group medical cover is never fully covered. Besides, the cover is valid only till you are with a company. If you are between jobs, you and your family may not have any cover during the intervening period.
The group health cover may also become invalid if the company fails to pay the premium or if the insurer pulls out of the contract. In both situations, the employee has little say in the matter. Moreover, not all employer-provided health policies offer protection to the entire family. If you have dependent parents, you will need to buy a separate health cover for them. In recent years, many companies have cut costs on health care by reducing the coverage or introducing restrictions.
"I can pick winning stocks, so why should I buy a fund?"
Individuals will not be able to beat a fund manager in the long run.
WHEN MARKETS are on an upswing, as they are right now, everybody becomes an expert. Even newbies start behaving like stock analysts, and why not? The stock market has the potential to deliver huge returns and, therefore, many newbie investors try their hand at stock picking. Many also end up burning their fingers, but that doesn't stop them from trying again.
If they manage to earn good returns in the first instance, it is enough to convince them that they have the required expertise. It encourages them to hunt for more such stocks. However, the stock market often proves to be a great leveller and small investors usually end up with losses. There is no harm in trying your hand at this game, but do so in a cautious manner. Do not get carried away by a few good stock picks. It might be due to pure dumb luck. Mutual funds provide a much more convenient route to investing in equities.
Though there is no guarantee that a mutual fund will not lose money, its diversified portfolio and the expertise of professional managers will ensure your investment does not fall off the cliff. Yet, small investors continue to buy stocks directly because it makes them feel as if they are in control. As one expert has said, if your direct investments in stocks are able to beat the returns of a mutual fund over the long term, you are in the wrong profession.
"Pure term insurance is a waste of money"
It is more cost-effective than a policy with a maturity value.
WHEN WE make a payment, we are not satisfied unless we get something in return. This is why it is difficult to convince people to buy a pure term insurance. In a term plan, the entire premium goes into buying the life cover and you don't get anything back. Agents use this feature to brand term plans as a terrible waste. Instead, endowment policies and money-back plans are more popular among people, purely because they have a maturity benefit and offer something at the end of the term.
However, by seeking a return on your investment instead of pro- tection for your family, you are wavering from the very premise of life insurance. Pure term insurance plan is the simplest, unadulterated form of insurance. If the policyholder dies, it pays out the sum assured to his dependants and helps secure their financial well-being. Other forms of life insurance are savingscum-insurance products, which give very low cover and charge huge premiums. As the table shows, a term plan and PPF combo works better than an endowment plan.
"Bank fixed deposits are the only safe investment"
Other options are just as safe and offer much higher returns.
BANK FIXED deposits are considered the safest investment because they offer guaranteed returns. While this is true, the obsession with bank fixed deposits is not warranted.
First, these are not completely safe. The Deposit Insurance and Credit Guarantee Corporation (DICGC) insures deposits of up to Rs 1 lakh per customer across all branches of a bank. This means that any deposit amount higher than Rs 1 lakh with a bank is at risk in the event of default by the bank. Secondly, a bank fixed deposit is not a taxefficient investment. Don't underestimate the impact of tax on your returns. Interest from fixed deposits will be taxed at the normal rate applicable to you. For a person in the 30% tax slab, a fixed deposit fetching 9% interest would effectively yield only 6.3% after tax.
Keep this in mind before deploying a chunk of your money in bank fixed deposits. There are now several alternatives to a fixed deposit, some of which may not be considered safe in the traditional sense, but are nevertheless lowrisk investments. Tax-free bonds issued by government undertakings, for instance, are at par with bank FDs on the safety scale. These offer the same rate of return, but the income is completely tax-free for the investor, making them a more tax-efficient investment.
FMPs from mutual funds are another alternative. They offer roughly the same yield, although this is not guaranteed. However, these are also more tax-efficient as they offer the benefit of indexation, which reduces the tax to almost nil.
"It is better to buy a house than live on rent"
High property prices and oversupply mean you can live on rent comfortably.
A SURVEY of mutual fund investors shows that most of them plan to invest in property this year. Would that be a sensible investment? If you are shelling out a huge rent every month, you would probably say yes. Buying a home seems a better alternative to living on rent and getting bullied by the landlord every time your lease comes up for renewal. But consider these points before taking the plunge in the housing market.
A study by Arthayantra shows that buying is not always a better option. For instance, the high property prices in Delhi make renting a better option than buying. A 1,000 sq ft property will cost you roughly Rs 1.1 crore in Delhi, while the rent for a similar property will be around Rs 25,000 (see graphic). In Mumbai, rents are high but property prices are higher. According to Arthyantra, even those with an income of up to Rs 25 lakh a year will find renting more affordable than paying the home loan EMI. Of course, in some cities, such as Kolkata and Ahmedabad, the high rents and relatively low property prices make outright purchase a better option.
Before you buy, you must also consider your financial position. Where will you arrange the downpayment from? Will you be able to afford the EMI on the loan? Are you forsaking other financial goals to buy the house? After your monthly household expenditure, will you have enough savings for other financial goals? For someone in the middle income bracket and living in a metro, this is a highly unlikely possibility. It would be much cheaper to rent the house than to buy one, despite the high rentals.
"I have all the time to draw up my will"
There is no saying what happens tomorrow. Draw up a will now.
RETIREMENT PLANNING is not the only thing we tend to put off for later. People also give little importance to estate planning—the process by which an individual arranges the transfer of his assets to his legal heirs. Why don't people take this seriously? For many, the task of writing a will is best left for the later years, something they can do after retirement.
For others, a will is something only the super rich need to worry about. Both explanations are flawed. There is just no way to know when a person may die. That is why we have a multi-crore life insurance industry. If you have not taken the necessary steps beforehand, your loved ones will have to do a lot of running around to prove that they are the only legal heirs. They will have no access to any A SURVEY of mutual fund investors shows that most of them plan to invest in property this year.
Would that be a sensible investment? If you are shelling out a huge rent every month, you would probably say yes. Buying a home seems a better alternative to living on rent and getting bullied by the landlord every time your lease comes up for renewal. But consider these points before taking the plunge in the housing market.
A study by Arthayantra shows that buying is not always a better option. For instance, the high property prices in Delhi make renting a better option than buying. A 1,000 sq ft property will cost you roughly Rs 1.1 crore in Delhi, while the rent for a similar property will be around Rs 25,000 (see of the assets that you have meticulously built up for them over the years. It is wrong to assume that your estate will automatically pass to your spouse and children, because sometimes other relatives can also stake claim to your assets.
Simply naming a nominee in your investments will not suffice. Having a will ensures that your assets are distributed to your loved ones in the way you desire. In fact, you should make a will as soon as you start building assets. It can then be revised at any point to reflect any further additions to your estate, as well as modifying the distribution of assets among the heirs. Just remember that if you die without making a will, it will cause a lot of inconvenience to your loved ones. Do not put it off for tomorrow.