Money management is really not hard. Yet most people struggle with it. Why? There are two common mistakes that most people make. If people start avoiding these two mistakes, a good chunk of their money problems will be resolved.
Mistake 1: Investing in equity mutual funds or stocks to get rich quick
Equity markets are known to provide the highest returns (that is, 12-15 per cent). Lately, influencers and experts have been promoting investing in stocks. At times, they even recommend preferring stocks over fixed deposits. It paints a picture that equities are the solution to all the money problems. Wrong!
Equities do have the potential to give the highest returns, but they do so in the long run — over a period of 10-15 years. But people often invest (read gamble) in equities expecting to double their money in a year or two. This especially happens after a bull run. A lot of people doubled their money during the bull run of 2020-21. But that’s not going to happen every year.
There will be market corrections and crashes as well. Statistically, we have seen that the risk of losing money through equity reduces significantly for an investment period of more than 10 years. So, if you invest in equity to get rich quickly, you will end up poorer, sadly. Invest in equity with patience and see the magic of compounding.
Another mistake that people make with equities is following the (100-age) rule blindly. This thumb rule says that percentage of your money allocated towards equities should be 100 — your age. So, if someone is 25 years of age, 75 per cent of the money should be allocated towards equity. This rule only factors in the age of the person, ignoring their goals altogether. If someone at the age of 25 has some short-term goals to take care of, parking 75 per cent of the money in equity will be a sure-shot way of not achieving that goal. Practically, the allocation should be done at the goal level.
Mistake 2: Expecting returns from a life insurance policy
You need life insurance so that your family gets sufficient money to live comfortably in case of your untimely death. But funnily, I’ve seen most people buying life insurance policies primarily to either save tax or earn safe returns. This is the biggest irony because a lot of us buy life insurance for all the other reasons but life cover.
The purest form of life insurance policy is term life insurance. In terms of life insurance, you are supposed to pay a small premium and if you die during the policy period, your family gets the sum assured. If you survive, nobody gets anything. People don’t feel comfortable with this arrangement. They want something back if they survive.
So, insurance companies sell endowment plans, money-back plans, and ULIPs that give you both insurance cover and returns. But the problem is, these kinds of plans neither do justice to your investment returns nor the insurance cover. Returns are low, insurance cover is a tiny amount and premiums are significantly higher as compared to a term life insurance.
Typical life cover provided in such kinds of policies is just 10 times the annual premium. So, if you need a cover of one crore rupees, which is a reasonable amount for someone earning 10 LPA, you will need to pay an annual premium of Rs 10 Lakh just to get a one crore rupees cover. That’s just insane. A cover of one crore rupees will cost about 10-20K per year in pure term life insurance for someone around the age of 30.
So, you will be much better off by buying pure term life insurance and investing your money for returns in things like mutual funds, stocks, PPF, or other things based on your risk profile and goals.
Conclusion
Investing in a scheme with the highest returns isn’t always the wise decision. You need to see the time duration for which you may need to wait to earn that kind of a return. And, never mix insurance with investment.
(Anmol Gupta is Founder , 7Prosper)
