Financial planning is an essential aspect of securing a stable and prosperous future, yet many misconceptions continue to misguide individuals. In 2025, it’s crucial to debunk these myths to ensure better financial decision-making. Let’s explore four common financial planning myths, understand their implications, and learn how to avoid falling into these traps.
Investment planning is not financial planning
Investment planning and financial planning are often used interchangeably, but they are not the same. Investment planning focuses on generating returns and involves proper asset allocation to achieve specific financial goals. While important, it is only a small part of the larger financial planning picture. Financial planning takes a holistic approach, addressing diverse aspects such as emergency funds, asset-liability management, cash flow, tax efficiency, and estate planning.
For instance, someone heavily invested in stocks might aim for high returns but neglect to build an emergency fund. In the event of an unexpected expense, like a medical emergency or job loss, they might be forced to sell their stocks during a market dip, locking in losses. Proper financial planning ensures such situations are accounted for by having an emergency fund in place, safeguarding investments, and providing peace of mind.
By focusing solely on investments, individuals risk mismanaging other critical financial aspects. True financial success lies not just in accumulating wealth but in ensuring overall financial stability and security.
Do not borrow and invest in debt or high-risk products
Borrowing money to invest may seem like a quick way to accelerate wealth creation, but it is fraught with risks. This strategy often leads to financial stress and poor outcomes, especially when the returns on the investment fail to cover the cost of borrowing.
For example, if you borrow at a 12 percent annual interest rate to invest in a debt fund yielding 7 percent, you’re already incurring a net loss of 5 percent annually, even before accounting for taxes. Over time, this loss compounds, leaving you in a worse financial position.
Similarly, borrowing to invest in high-return equity products carries significant risks. If the market experiences a downturn with a 20 percent drawdown, your investment value drops significantly. You still have to repay the loan with interest, but your portfolio might not recover in time, resulting in both a financial loss and additional debt.
It’s essential to evaluate the potential for drawdowns and the mismatch between borrowing costs and expected returns. A prudent financial strategy prioritises sustainable growth without relying on leverage, ensuring stability regardless of market fluctuations.
Also read | All-round mutual fund show: Defence, mid-cap, long-duration, silver funds, all turn chart toppers in 2024
Insurance is insurance—Don’t treat it as an investment
Insurance is designed for protection, not wealth creation. Mixing insurance and investment often leads to inefficiencies and compromises the core purpose of both. Insurance is meant to safeguard against life’s uncertainties, such as illness or loss of life, while investments aim to grow wealth over time.
For instance, life insurance policies that include a savings or investment component, like endowment plans, usually offer lower returns than traditional investment options like Fixed Deposits (FDs). This is because a portion of the premium is allocated toward providing life cover, leaving less to be invested. Additionally, these returns are adjusted for the costs of insurance, making them less competitive.
The smarter approach is to separate the two. Use term insurance for adequate life cover and invest in instruments like FDs, mutual funds, or stocks for wealth creation. This ensures you get cost-effective protection alongside better returns.
Also read | How add-ons can enhance your life insurance protection coverage
Financial personalities are unique like DNA
Financial personalities refer to an individual’s unique approach to managing money, shaped by their attitudes, behaviours, and preferences regarding spending, saving, investing, and risk-taking. Just as no two people have identical fingerprints, no two financial personalities are the same.
For example, someone with a conservative financial personality may prioritise low-risk investments like bonds or FDs, focusing on security over returns. On the other hand, an aggressive personality might gravitate toward high-risk, high-reward investments such as equities or cryptocurrencies. Similarly, some individuals may have a meticulous approach to budgeting, while others may lean toward impulsive spending.
Because financial personalities vary widely, there is no universal “thumb rule” for financial planning. Understanding your financial personality is crucial for creating a plan that aligns with your comfort level and long-term goals. A personalised financial plan ensures decisions are sustainable and feels natural, fostering confidence and financial success.
Also read | Indian equities may see time correction rather than a price moderation
Craft a plan that works for you
Financial planning is not just about following popular advice or chasing high returns—it’s about understanding your unique needs, preferences, and goals. Steering clear of these four misconceptions in 2025 can set you on a path to greater financial clarity and stability. Recognise that investment planning is only one piece of the puzzle, borrowing to invest is a risky gamble, insurance is strictly for protection, and financial personalities are deeply personal.
By adopting a holistic and personalised approach to financial planning, you can achieve not only wealth creation but also peace of mind and security for yourself and your loved ones. Remember, financial success isn’t about following a one-size-fits-all strategy; it’s about crafting a plan that works for you.
The author is Vice President, Financial Concierge, 1 Finance.
Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
