This April Fool's Day Don’t be a Financial Fool: Beware of these 5 Financial Myths for a Secure Financial Future

Recently, we friends were discussing how we use to prank each other in college on April fool's day. During the discussion, my friend Rhea shared her recent experience saying, "I haven't been April fooled yet, but months ago, I was misled by a credit card agent and he began to ask sensitive financial details, while he somehow already had few basic details of mine, which kind of made me believe it's genuine. However, the moment he asked for an OTP, it clicked that this is a fraudster, and I hung up the call."

To which Sakshi replied, "Thank god Rhea! It's fine to be an April's Fool, but you saved yourself from being a Financial Fool."

Rhea said, "Yes, I learned a lesson. I am sure there are various aspects where one can be financially fooled or misled, and it could impact the financial future. Mitali, you are in a financial field, and you must be aware of these financial traps that could lead an individual to be a financial fool. Could you throw some light on this and please help us understand it in detail?"

To which I replied, "Sure Rhea, this April Fool's Day, let me help you prevent becoming a Financial Fool."

You see, it can certainly be entertaining to find out how gullible your friends and family are, but if you're the gullible one, it might not seem as fun. Falling for pranks and false information on April Fool's Day is understandable. However, it should not happen in the case of your finances, as the old saying goes: "fool me once, shame on you; fool me twice, shame on me."

Similarly, it could happen that you fall for bad investment advice or make a foolish financial decision which once in a while is bound to happen. What's important is whether you learn from your mistake, or do you keep falling for the same 'tricks' over and over again. You must have seen many advise you on do's and don'ts with your finances, this also builds up several financial myths which could influence your financial decisions and affect your financial well-being.

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Be aware of these five financial myths, and you'll be a little wiser the next time and save yourself from being a Financial Fool:

Myth #1: Credit cards are an emergency fund

Many individuals are under a myth that there is no need for an emergency fund as long as there is enough balance on the credit card. Yes, credit cards can be utilised in case of emergency, but it does not serve the purpose of an emergency fund at all.

A person who just lost his/her job will not be able to pay rent or home loan EMI through a credit card. It charges a heavy interest rate which could catch you in a debt trap and hamper your financial future. Having an emergency fund is a must. Even if the person loses a job, he will have sufficient time to search for another, while paying off his financial obligations through the emergency fund. It also reduced an enormous amount of stress during unemployment, financial crisis, or the recent uncertainties caused by the pandemic.

Even if you're financially responsible, scrimping all you can but still using your credit card frequently will lead to a debt trap and create a debt burden for you. Do not rely on credit cards to get you through any financial difficulty or fulfil your instant gratification; avoid being a financial fool and instead practice delayed gratification for a healthy financial future.

In case, if you need some extra surplus over and above your income, consider how to increase your income, whether pursuing a new job, taking on side hustle, etc., whatever it takes. Never max out your credit card limit. You may plan to use a credit card in an emergency, but it won't even be an option if you've already maxed out.

Myth #2: It's too early for a Retirement Plan

On the contrary, it's never too early to start saving for retirement. The present will become the future sooner than you realize. Retirement planning is about saving and investing to ensure you have things you would need during your retirement phase and protect yourself from financial stress.

Let time work in your favour, and let your money work as hard as you do. Over different lengths of investment time, for instance, if you decided to invest Rs 5,000 a month at a 6% rate of return from the age of 20, it will have turned into Rs 5 crore at the age of 60. On the other hand, even if you saved Rs 10,000 per month from the age of 40, you will only have Rs 4 crore in hand, at the same age. This means don't be a financial fool and benefit from the power of compounding. The earlier you start investing, the more you gain consistent returns, and it can significantly impact your retirement corpus. [Retirement Calculator]

Waiting until 40 years of age can cause a person to miss taking advantage of their highest earning years. Putting away money early for retirement allows those savings more time to compound interest or grow in value. The earlier you invest in retirement savings, the more time your nest egg will have to grow with minimal extra effort. Secondly, avoid cashing out your retirement savings at all costs. Not only will you be taxed heavily for early withdrawal, but you'll also be that much further behind on preparing for your future. Consider it off-limits until you need it (when you retire).

Investing a little every month towards retirement right from the time one starts earning reduces the financial burden. Also, since the financial responsibilities in the 20s are hardly any, one can take more risk by investing in equities and taking advantage of the power of compounding.

Myth #3: You Don't need Insurance If you are healthy

Life can be very uncertain, and the recent pandemic crisis has exhibited the significance of insurance cover for any individual. Even if you're healthy, unexpected medical emergencies or conditions can leave you looking foolish if you do not have adequate life and health insurance cover.

The objective is to have adequate life insurance and health cover that indemnifies the risk to life and covers the cost of medical treatments and healthcare for you and your family. An insurance cover will help your family and loved ones to fulfil any financial requirements in your absence. Enrol in a suitable insurance plan that covers your needs and make an informed decision.

Myth #4: You don't need an Emergency liquidity Fund

Many people have good intentions of starting an emergency fund but never get around to it, due to a laid-back attitude that things will work out. If you're earning a steady monthly salary and already have a healthy savings portfolio from FDs to MFs for retirement savings, you might think that you're all set, especially if you've invested in insurance as well. Many individuals in this situation subscribe to the myth that you don't need any emergency savings fund.

There are dozens of reasons why you should have an emergency fund: the sudden loss of a job, or the need to relocate, a medical emergency, etc. Not having a fund for these unexpected money-drainers can lead to borrowings which could create a debt burden, bad credit, or even bankruptcy.

Unfortunately, emergency situations by nature demand that you have resources on hand to address them. Through this global pandemic, many salaried employees with stable jobs realized that if the economy drives into recession and forces well-performing companies to start cutbacks and redundancy rounds, it will be financially stressful for them. No matter how many scenarios you're insured for, it's critical that you're in a liquid cash flow position across the month, and have immediate access to liquid assets. So start maintaining an emergency fund that covers 12-24 months of living expenditures, including loan EMIs.

Myth #5: You need large funds to Invest

Many of you plan to start investing when you have a specific sum, as there is a misconception that investment requires a large sum of money.

It's easier to say that we shall put in the effort to understand investments and make a good job of it when we have a 'large' sum of money. Hence this procrastination leads to a delay in starting your wealth creation journey, and you may lose out on the benefit of compounding. There is no real 'minimum amount' where it suddenly makes sense to start investing, and one doesn't have to be wealthy to invest.

You can invest with an amount as low as Rs 500 a month through SIPs in mutual funds. With more increased access to trading and investing through multiple platforms, investing has become as easy as online shopping. You can gradually increase your investment amount as you understand the investment world. It is not about the amount you earn, but the amount you save makes you rich. start investing regularly in small amounts with consistency for the long term to build a sizeable corpus for your goals. [SIP Calculator]

Ensure you regularly invest a part of your income towards long-term dreams and a part of your overall financial discipline. With digitization, even if you're just getting started, there are plenty of investment options to choose from.

There are many more financial myths that an individual can fall for, including financial fraud. You must be financially aware and conscious to avoid such traps and secure your financial future. April is national financial literacy month, and on this occasion, you should resolve to avoid being fooled and misled by banks, credit card companies, and other financial entities. This is only possible if you are financially literate and can comprehend the aforementioned financial myths to be avoided.

Financial literacy helps you better understand the nitty-gritty of financial planning and assist you in being financially aware. Don't be an April fool when it comes to your finances whether this month or the rest of the year; practice to enhance your financial literacy that, helps you to avoid financial myths and secure your financial future.

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Warm Regards,
Mitali Dhoke
Jr. Research Analyst