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Beware of bad advice: Educate yourself

Blindly following anybody's advice can be fiscally fatal because what works for somebody else may not necessarily work for you.

September 27, 2022 / 08:42 AM IST

As humans, we tend to get influenced easily, especially about subjects about which we have little to no knowledge. Now, in case the topic is appealing, we might take some interest in getting to know more about it. However, when it comes to personal finance or tax or savings, we simply believe in the person we feel has past success. As boring as it may sound, though, such topics must catch your attention, especially when your hard-earned money is on the line. Each individual has different aspirations, income source, liabilities and, most importantly, distinct financial conditions. Therefore, blindly following anybody's advice can be fiscally fatal because what works for somebody else may not necessarily work for you. Just like a medical practitioner prescribes different medications to each individual even for the same cause, financial advice should also be taken after consideration of our needs and condition. Let us check out some of the most common bad advice, which even you may have followed, and learn how to tackle them in future.

1. “Invest in risk-free opportunities”: This statement can be true only in a perfect world. However, as long as we live in an uncertain world, this cannot hold true. Yes, there are certain investment avenues that possess very little risk such as fixed deposits or a savings account or government securities. But it is pertinent to note that even these instruments come with the risk of a change in government regulations or the issuer’s own economic conditions. Compared with stocks, mutual funds or corporate bonds, FDs or G-sec instruments carry very little risk. On the flip side, they fare badly in terms of returns. Therefore, instead of getting lured in the fake cloud of zero risk, take an optimum decision according to your expected returns and risk-taking capacity. The advice here should be that every investment involves some amount of risk, so invest as per your needs.

2. “Never use credit cards”: Many of you must be surprised as to how this is a bad suggestion. Credit cards, if used properly, serve three purposes. One, it improves your credit score or creates a credit history; two, it gives rewards in the form of cashback or rewards points or discount which is nothing but indirect savings; and lastly, you are able to use interest-free funds for 35-45 days depending upon the service provider. Therefore, if used cautiously and if all dues are paid within time, credit cards cannot be harmful. The takeaway here is to use them wisely and pay the outstanding on them timely.

3. “Every debt is wrong or poor financial planning”: This is a totally poor piece of advice. Debt taken to purchase an appreciable asset can never be wrong. In such cases, the price of the asset keeps rising and the debt keeps reducing. Moreover, you can also generate income from some such assets, for instance, real estate. And some of these debts also help in reducing your income tax liability to a considerable extent. Therefore, the recommendation here should be to take on debt that will later contribute to your net worth and will be in line with your financial planning.

4. “House is the ultimate financial asset”: Can a house be termed an asset? The answer is yes but only if it has been bought in order to sell or generate income from it. Thus, a house bought to dwell in cannot be called an asset, it should not even form part of your investment since at some stage even if you sell it for a profit, you will have to use the majority of that money if not all in buying another house to reside in. In addition, to call it the ultimate financial asset is debatable because its appreciation and income generating capability varies depending on location. So not all houses are financial assets, let alone the ultimate one.

5. “Near retirement? Stick only to liquid or short-term investments”: This is an overcautious statement not sufficiently backed by financial reasoning. Liquid or short-term investment options often possess low rates of return, so it is more or less like parking your money in a bank account. With rising inflation, and loss of income post retirement, these savings will fail miserably in their objective. Retirement savings must always outlive the saver, only then will it be able to be termed good financial planning. However, keeping all your eggs in one basket is not a good strategy, hence as per your age and income-earning capability, you must spread your investments in both long- as well as short-term investment options.

With social media and advertisements, it is easy to run into some of the above bad recommendations. The only way to dodge them is to educate yourself and learn what is good for you. Nobody knows our financial conditions better than ourselves, so why let someone else sit in the driver’s seat and decide where to go in our car? To achieve financial independence, let us learn more about our personal finances and take some informed investment decisions.
Viral Bhatt is Founder, Money Mantra
first published: Sep 27, 2022 07:42 am