11 Personal Finance Myths You Should Never Believe

1. You cannot save money if you do not earn enough:

The most common excuse people give for not saving is that they do not make enough money. While it is true that the salary in the initial stage of the economic life cycle might be the lowest you make in your life, it is important to instil the habit of saving right from the beginning. Otherwise, living paycheque to paycheque becomes a cycle, which later becomes challenging to break as no matter how much you earn, it will never be enough for your increasing expenses.

Hence, you should always spend money after saving enough instead of saving whatever is left after spending. Making a monthly financial budget by listing down all your monthly expenses and sticking to that budget can help you save consistently. You may seek the help of various mobile apps that help you with budgeting.

2. You must have huge savings to start investing:

Many individuals make a plan that they will start investing once they save at least X amount. It is because they do not understand the financial area well and think investing requires a large amount of capital.

The fact is you will not be able to save that 'X' amount unless you actually start investing. Besides, contrary to this popular belief that you need a large sum of money to start investing, you can start investing in mutual funds through a Systematic Investment Plan (SIP) mode of investment with as low as Rs 500 per month.

Investing early in SIPs that offer the benefit of the power of compounding, which can help you achieve your financial goals sooner than expected. Even if you are just getting started, the advancement in technology and finance has opened plenty of options for you to choose from.

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3. You should not invest in life insurance because it does not generate adequate returns:

Banks and agents promote and sell life insurance as an investment product. Hence, many individuals consider buying life insurance to meet their financial goals, such as a child's education, retirement, child's marriage, etc.

However, such investment-cum-insurance plans may neither generate inflation-beating returns nor provide adequate life insurance cover.

Nowadays, there is increased awareness about mutual fund investment, and many investors think they can generate high returns through equity mutual funds and hence avoid investing in life insurance.

While it is true that investment-cum-insurance plans may not fulfil your financial goals, it is important to understand that they should not be considered as an investment tool. You can invest in carefully selected equity mutual funds to achieve your investment objectives, but it does not provide you with life insurance coverage. Hence, along with your other investments, it is advisable to buy a sufficient term life insurance cover, which will take care of your family's financial requirements in case of your unfortunate demise.

4. You do not need to buy life insurance if you are young and healthy:

You cannot buy life insurance when the need arises, and it needs to be purchased for the future when you might need it. Contrary to what many individuals believe, the best time to buy a life insurance policy is when you are young and healthy, as you can get maximum coverage at an affordable premium.

Life insurance is not a product only for those with families. If you are single, you can have certain unpaid loans like an education loan, personal loan, car loan, etc., which in case of an unfortunate event, becomes a financial burden to your parents.

Moreover, certain diseases and disabilities can stop you from your work temporarily or permanently, which may result in loss of income. In such challenging situations, having sufficient life insurance coverage can provide financial protection to your family.

5. You do not need to buy health insurance if your company provides group health insurance:

Many salaried individuals receive group health insurance or corporate health insurance from their employer and believe that it will be sufficient to meet their family's medical needs. However, the limit of the group health insurance coverage is governed by the group claim ratio.

Moreover, most employers provide only basic cover of 2 lakhs to 5 lakhs, depending upon the employee's position and the size of the company. Since the cover is offered only to the employee and their dependents, the other members of your family are required to buy separate policies. Considering the skyrocketing medical expenses, this cover might not be sufficient to meet your family's needs. Besides, if you change the company, you will lose all the benefits earned and have to survive the waiting periods again for specific diseases.

Therefore, in addition to the group health insurance plan, it is advisable to buy a separate individual health insurance plan or family floater plan, depending on your requirements. Click here to know how to make a claim with multiple health insurance policies.

6. Mutual funds can make you lose all your money:

First-time investors often hesitate to invest in mutual funds after hearing or reading the famous disclosure 'Mutual fund investments are subject to market risks, read all scheme related documents carefully'. It may imply to you that your mutual fund investment can reduce to zero or go negative. However, this is not true! Your mutual fund investment can never reduce to zero unless the world falls apart. And, in that case, no asset class will be in your favour.

However, mutual funds do carry market risk, and hence it is crucial to diversify your portfolio with different asset classes, select the right mutual fund schemes, review your portfolio periodically, and not make decisions under panic. If you think you lack the required knowledge, you can seek help from the professionals who will guide you throughout your investment journey. PersonalFN's Financial Planning Service can help you achieve your goals through a smartly done equity mutual fund investment that generates inflation-beating returns while reducing the risk with a diversified portfolio.

7. Gold is the best investment:

In India, gold is considered a symbol of Lakshmi, the goddess of wealth and prosperity. In the last couple of decades, it has evolved from being a precious commodity used for jewellery to one of the popular investment instruments. You might have heard from your parents and grandparents how they invested a large portion of their income in gold and it generated extraordinary returns or helped them during a financial emergency.

While in times of economic uncertainty and constantly increasing inflation rates worldwide, it is crucial to diversify your portfolio with different asset classes, putting all the eggs in one basket is not a good idea. Many experts advise considering diversifying your portfolio with at least 5% to 10% gold investment as it is an extremely liquid investment avenue that proves to be an effective portfolio diversifier. It is a worthwhile investment that helps you smartly hedge your portfolio.

Instead of physical gold, it makes sense to invest in gold bonds as it is a convenient and cost-effective instrument compared to physical gold. Hence, if you are looking for portfolio diversification with a low-risk investment avenue that provides a fixed interest rate, you should consider allocating a small portion of your investment portfolio to gold based on your risk appetite, time horizon, and investment objectives.

8. You do not need a contingency fund if you have credit cards:

We all have certain financial obligations that we must fulfil, regardless of our professional or personal situation. Loan EMIs, house rent, electricity bills, gas bills, child's school fees, etc., are some examples of such obligations. A contingency fund takes care of your emergency expenses in situations like loss of job, medical emergency, market crash, or any other unfortunate event that comes with an economic loss for some time.

Credit card holders often think that since they can swipe the card anytime, even when they do not have any funds in the bank account. Hence they do not find it necessary to save for a contingency fund. Instead of saving for a contingency fund, you create a debt for yourself when you swipe your credit card. Depending on how long or huge you have to face the economic loss, the debt can be high and become a burden to repay. Whereas making a provision for a contingency fund will not only help you avoid debt but also generate considerable returns over time.

9. Credit cards help you save your hard-earned money:

Individuals often get credit cards lured by different offers, such as a lifetime free card, zero joining fee, etc. However, these offers may come with hidden terms and conditions that the salesperson may not disclose upfront. Moreover, the discounts and offers, such as No Cost EMIs, Low-Cost EMIs, 10% cashback, instant cashback, etc., given on purchases made through certain merchants make you spend more than your budget and repayment capacity. Constantly shopping through a credit card inculcate a habit of binge borrowing that can slowly create a debt that becomes challenging to repay.

10. Renting a house is a waste of money:

After we reach a certain age, our parents and society expect us to settle down, which is often associated with getting married and buying a house. For years, owning a home has been considered one of the biggest achievements in life.

However, while buying a house has many benefits, it also comes with its own set of cons. Buying a house is one of the biggest financial decisions you make in your life; hence before opting for a home loan, you must consider your income, repayment capacity, chances of relocation, how disciplined you are financially, expected returns, tax benefits, other investment opportunities, etc.

It might not make sense to purchase a property as an investment to build a corpus in the long term because most properties generate below-average returns in the long term that are similar to or even lower than fixed-income instruments like fixed deposits. Besides, investment in real estate can face many liquidity challenges, and you could find it difficult to find a buyer in a buyer's market.

However, if you are looking for an emotional investment to make memories with your family and stability by staying in one place, it is advisable to buy a house after considering your income, credit score, debt-to-income ratio, affordability, life goals, future responsibilities, etc. It will help you make a decision that does not lead you to a financially burdensome life.

11. You should live completely debt-free:

With innovations in finance and technology, borrowing money has become much easier nowadays than it was a few years ago. A few taps on the phone, along with a quick online verification, is all it takes to avail of a loan. Having said so, individuals, especially millennials, are getting allured by easy access to credit, which is the primary reason for the lack of financial discipline among young adults. The reckless spending and lending can create a precarious situation of a debt overhang.

However, not all loans are 'bad loans', and you cannot avoid certain types of loans. For example, if, after considering all the factors, you have decided to opt for a home loan or education loan, then these loans should definitely be considered good loans. At the same time, availing of personal loans and excessive use of credit cards and credit apps for splurging on things you do not necessarily need are considered 'bad loans' as they can create a debt burden that you might struggle to pay.

Hence, it is not necessary that if you want to live a financially stress-free life, you have to live debt free. It is better to assess your needs, do a cost-benefit analysis, and then make a decision. However, it is always a good idea to get rid of the debt as soon as possible after considering the interest rate and prepayment charges.

To conclude:

While you may not be a finance expert, you can analyse your needs and certain basic parameters to make your financial decisions. In case you are not confident making your own decisions, it is advisable to seek professional help. PersonalFN's Financial Planning Service can take into account your current financial position and implement a financial plan to get where you want to be with all of your financial goals. You can choose to receive a financial plan for a single or multiple financial goals. Moreover, you can also choose to review your current mutual fund and insurance portfolio.

Warm Regards,
Ketki Jadhav
Content Writer