Key Takeaways
- Stay away from debt
Better advice – Use leverage for situations that will directly improve your net worth. - Buy gold for investments
Better advice – Create a well-diversified portfolio that includes equities, bonds, commodities, precious metals etc. - Invest in real estate as it always appreciates
Better advice – Go for investments that you are knowledgeable about and are confident of managing effectively. Don’t put all your eggs in one basket. - DIY, don’t need to pay for financial advice
Better advice – Look for a financial advisor with fiduciary duty, who acts in your best interest. - Stop splurging on expensive items
Better advice – Have healthy spending habits and live within your means.
Bad advice always comes disguised as well-meaning, either from our well-wishers or so-called experts. Often, when it comes to finance, these advice are targeted at millennials, as they are the largest generation employed in the workforce. What’s supposed to be helpful, is confusing at worst and overwhelming at best, making it difficult to discern what to take in and what to filter out.
As the year wraps up, we take a look at some of the most commonly heard advice on personal finance. It turns out that some of these “good” financial advice are not all that good. In this blog post, we dissect the financial goals or outcomes that these suggestions are aiming to achieve and provide you better-informed and well-proven recommendations on how to realize them.
1. Stay away from debt
Many experts as well as self-made millionaires will swear by the rule of staying away from debt. Not only do they avoid getting into any form of debt, they even boast of having liquidated their savings and investments to pay up the debt in order to live a debt-free life. As romantic as a debt-free life sounds, and it may have even worked out for some, it is not the best advice to use your liquidity to pay off all debt, especially if the interest rate you are paying on your debt is lower and can be more than offset by what you are earning on your liquid investments. Moreover, in certain situations such as buying a house, it even makes sense to use loans to further your financial goals.
Better advice
Instead of fearing debt, what you need is a good understanding of it and how it can be used to your advantage. To use debt for situations that will directly improve your net worth, you will need to know the difference between good and bad debt and how much debt is healthy. It is helpful to have the power of leverage when it comes to long-term returns. If you’re able to use good debt to drive personal or business growth, it pays off (pun intended) in the long run.
2. Buy gold for investments
Indian households’ fascination with gold is no secret, whether it be for cultural reasons or for lack of better investment opportunities. The World Gold Council (WGC) has reported that Indian households may have stocked up to 25,000 tonnes of gold in total. Although it may first seem like good news for the economy and an effective tool to hedge against inflation, the sad reality is, gold is neither. Firstly, unlike shares or bonds, gold is an unproductive asset and does not contribute to economic growth in any way. Secondly, historical gold prices are proof that the price of gold fluctuates drastically and is more in line with recession cycle rather than with inflation. Gold prices tend to increase during recession as its value is determined by fear of shaky economies. Therefore, while it is tangible and fairly liquid as one can always pawn gold assets for money to fulfil basic needs of life, the evaluation of the fair value of your gold at pawn shops can be subjective. With drastic fluctuations in its value and no ongoing return, it is inferior to most other investment instruments in terms of long-term returns.
Better advice
Create a well-diversified portfolio that suits your risk profile and long-term needs, including equities, bonds, commodities, precious metals and many other instruments in proportions customized for you and your life stage. A small percentage of gold (around 3-4%) could help diversify and hedge against recessionary pressures but shouldn’t be your primary investment. Implement strategies that not only help you hedge against inflation but also give you ongoing returns.
3. Invest in real estate as it always appreciates
This is another favorite of the Indian population evident from the fact that 76.9% of household wealth in India is invested in real estate. Agreed, real estate has seen phenomenal growth owing to easier access to loans, increase in urban population and more disposable income. However, the property market is not immune to factors such as – financial downturns, regulatory measures and change in investor mindsets – that affect the overall yield on the property. Most importantly, what determines the property yield is its geographical location and the likelihood of that area’s development. Certain properties may take longer than predicted to give the desired yield for a number of factors – lack of public infrastructure in that location, delay in completion of the project and low rental occupancy in the area, to name a few. Another factor to consider is that even if it’s a high yield property, managing it may pose challenges if you are not the resident of the city.
It’s also worth remembering that the biggest problem with property investments is the lack of liquidity. When the cash is needed most, such as during financial downturns, liquidating the property can be a nightmare. Thus, the overall hassle of maintaining and liquidating the property may prove to be not worth the returns.
Better advice
While we should not completely rule out property investments, we shouldn’t solely make our decisions based on the fact that it will always appreciate. Go for investments that you are knowledgeable about and are confident of managing effectively. Don’t put all your eggs in one basket. Diversify among a few different asset classes including property. Look for REITs as alternative to property investments. This also helps circumvent the high capital requirements that property investments typically entail.
Most importantly, if it’s not your forte, better to leave it to professionals, which brings us to the next point.
4. DIY, don’t need to pay for financial advice
We hear this a lot, especially from those with a penchant for managing money. But really, how many of us fancy spending our Friday evenings looking through excel sheets of our budgets, financial commitments and investment performance? DIY may work for those with financial background or those with a passion for this subject. Left to most of us, we will either end up procrastinating, making uninformed decisions, or overlooking critical aspects of finance, which may cost us much more than actually having paid a financial advisor. For instance, did you know that just by leaving your cash in the bank and not taking any action on it, you are losing money to inflation? This and other similar not-so-obvious poor financial decisions end up costing Indians crores of rupees annually.
Better advice
Take a good look at your personal finance regularly. If you’re not a domain expert in this regard, there should be no hesitation in taking help from professionals. As they say, there are no free lunches, it will cost you something. But the value that you can derive from a good financial advisor would more than justify it.
It’s important to look for a financial advisor with fiduciary duty, who acts in your best interest. Fee-based advisory or cost structures that align the advisor’s interests with yours tend to be unbiased as the advisor will not be selling products based on commissions. Be sure to have transparency on fees and charges.
5. Stop splurging on expensive items
We are all too familiar with the countless editorials asking millennials to skip everything from expensive lattes to avocado toasts in order to buy a home or save for retirement. Truth be told, it takes a lot more to achieve these goals than missing out on small luxuries of life. What we mean is, not only do you have to spend within your budget, but also allocate the surplus into right investment instruments with the right time horizon. So, an advice that misses out such important aspects of planning for your future is not just meaningless, but for the less aware, it is even misleading. Don’t get us wrong, we do not promote the idea of spending mindlessly on luxuries. It is important to budget and make sure you save at least 20% of your salary. Having saved sufficiently, how you spend on your personal needs depends on your priorities and there is no absolute right or wrong.
Better advice
Have a healthy spending habit, live within your means and avoid getting into debt to fulfil impulsive desires. Instead of completely forgoing something you love, include it as part of your budget and stick to it. By all means, treat yourself with that latte or the avocado toast if you’ve earned it. And while you’re sipping on your latte, do take a look at your personal finance app to see how your investments are working hard to make your goals a reality.
Bottom Line
Personal finance matters vary from individual to individual in terms of situations, needs and capabilities. Any form of blanketed advice should be taken with a pinch of salt. You must analyse how the advice benefits you and what risks it poses.
We understand, in the world of technology where information is not only accessible but also abundant, it is becoming increasingly difficult to have a clear picture on anything, let alone a complex topic such as personal finance. Generic advice is not at all helpful as no one size fits all. That is why we are building a tool that will take these responsibilities off your shoulders and bring all your financial worries to an end by enabling you to make financial decisions suited to your specific situation. Stay tuned!