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20/07/2020

Busting the Top 5 Financial Planning Myths


Financial planning is undoubtedly tricky. It is a technical matter that requires at least a basic understanding of how things work, to begin with. At the same time, you need to identify your financial goals and future needs to plan for the long term. 

Amid all these requisites, you have to deal with a good lot of misinformation as well. There is a considerable lack of understanding of the subject of financial planning. This general ignorance has created many misguiding myths. Individuals who are starting in the domain can fall prey to such misinformation.

If you are looking to start strategizing your finances, then beware of these financial planning myths. Read ahead to debunk the top 5 myths surrounding financial planning to make an informed decision!

Myth #1: Financial planning is only for the rich

This belief cannot be farther from the truth. 

In the most basic terms, financial planning involves carefully managing your earnings and expenses. The amount or value of earnings and expenses does not matter so far as there is intent to plan. If you have certain financial goals, then you can go ahead and start planning your finances. There is nothing like an ‘eligibility value’ to begin financial planning. 

There is a strong belief that only the rich seek the services of financial advisors. This may not hold water in reality. Financial advisors and planners are available for anyone who wants to organize their finances. There is little correlation with the person’s net worth.

Moreover, hiring a financial planner is a subjective decision. You can create a plan on your own if you are clear about the fundamentals. If not, then there is always an advisor to consult. Multiple online portals offer counsel and support to those looking to make wise financial decisions. 

The bottom line is that there is a lot more to financial planning than what meets the eye. Do not overlook finance management simply because people say it is for the rich. If you aim to make the most of your finances, then you should go for proper planning. 

Myth #2: You should always pay off long-duration loans

You will hear financial advisors asking you to clear off your long-term debts. This seems like wise counsel when supplemented with the rationale of saving the interest costs. However, it is not such sound advice in real life.

Instead of taking this logic at face value, you must understand the fault in it. In the context of long-duration loans, you need to evaluate the tax benefits concerning the net cost of borrowing. In comparison to a high-cost personal loan, a long-term debt comes at a low cost and offers tax concessions as well. 

If you focus on servicing both debts together, then you are putting a burden on your finances. In case you concentrate only on the long-term loans, the personal loan costs will keep on piling over the years. It will ultimately cost much more than expected.

At the same time, you are blindly letting go of the tax benefits by choosing to clear the long-duration loans. This is particularly relevant in the context of home loans. Eligible earners can maximize their savings by smartly planning their long-duration home loan, availing tax benefits. 

Myth #3: Middle-class earners should not go for risk

One of the most common financial planning myths is related to the risk factor involved in investments. Many people, especially the middle-income group, shy away from trading in stocks simply due to the fear of all the risks involved. 

The middle-class is known to have limited resources. They invest in low-cost instruments to avoid higher risks. These products do not earn higher returns. As they say, the higher the risk, the more the returns. So, this myth ends up preventing a large section of the middle-class from increasing their wealth.

People who believe in this myth do not realize that their low-yield investments will not bear much fruit against the rising tide of inflation. That is to say, the returns received in less risky investments get minimum returns in comparison to the increase in inflation. To maximize wealth creation, you must invest in equities. 

Equities are risky but yield higher values in return. It is especially valuable for those with a limited net worth. How? This is because they can make more money by investing less and taking the risk instead of doing the opposite. If a middle-class individual takes the safer route, they will have to invest more and more to get the desired returns.

Investing in equities is a faster way to create wealth for your financial goals. The only question you need to answer is exactly how much you should allocate to equity. You can seek guidance from a financial advisor or do some research yourself to find the right answer. The point to remember is that the middle-class needs to go for the risky alternatives to maximize their wealth as opposed to what is widely believed. 






Myth #4: You should invest entirely in real estate

Gold is usually considered as the safest investment option. Real estate comes next in this list of safe alternatives for investment. There is a reason that justifies the safety. It is because these two options never depreciate. They are known for always generating income. Moreover, they offer fewer risks in comparison to other options. However, investing entirely in real estate might not be entirely prudent. 

If you consider real estate to be the only investment opportunity, you will indirectly lose more than you make. Financial planning involves smartly strategizing your investments. One of the key aspects of strategizing your finances is diversification of the investment portfolio. Make sure that your investments are well distributed across multiple segments and products.

Restricting yourself to just real estate to make a safer bet is not wise. Many consider it a risk-free investment alternative. Investing excessively in physical assets comes with its own set of risks and can prove detrimental. Make sure that you diversify your investments neatly while planning out your finances. 

Myth #5: SIPs are risk-free investment options

SIPs are known to reduce the risks involved by averaging the long-term investment. However, projecting as a risk-free alternative is completely false and one of the biggest financial planning myths. Many financial advisors will make you believe that there is negligible risk involved in a SIP investment. There is more to what they say. 

You should know that SIPs will nullify the returns from a few bad years through those of the good years. This does not, however, mean that there is no risk factor at all. If the market remains bearish for a prolonged period, then SIPs will not work their magic. You will get negative returns. It was evident in the 2001-2003 period when the SIPs bore negative returns owing to the adverse market conditions.

Just like every other investment tool, a SIP also comes with its risks. Wisdom lies in understanding the market conditions and researching about the prospects before investing. SIPs provide a good means to automate savings for those who earn monthly. They are undoubtedly important from an investor's point of view.

However, it is important to understand reality without adulterating the facts. SIP is not a risk-free investment option. It carries comparatively less risk. 

Summing Up

It is an undeniable fact that there are always some elements of half-truths one has to face when starting in an unknown domain. These are some of the crucial myths that can mislead anyone looking to plan their finances. Make sure that you do not fall into any of these traps while planning out your financial prospects. 

If you are here, then you are doing a great job researching the subject before you begin.

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