There're many myths about wealth creation and management. We're here to change that. Let's dispel 5 popular myths for you to avoid financial blunders.
Many of us have our own opinions when it comes to wealth creation. While some might have emanated from our experiences, we often get influenced by suggestions from our circle of friends and relatives. While some of those suggestions and advice are popular, they are not necessarily true.
As a result, we tend to believe them without properly checking the facts. So, if you're someone who believes in everything that people tell you about wealth management, give this blog a good read and see if you're on the right track or not.
Busting Financial Myths Around Wealth Creation & Management
According to a study by the Atlantic, 75% of people don't know how to manage their money or fulfil their financial goals.
This is because they believed in fallacies about wealth management, which led to their demise.
Understanding these myths will help you avoid making the same error as most people and make conscious decisions about your financial future.
Myth 1: Only saving money is enough to create wealth
Reality: Capital erosion caused by inflation will eat up your savings if not invested correctly
Ideally, you should save 20% of your paycheck every month. But in reality, it is not enough to survive in this inflation-riddled world.
Just keeping your money in a savings account can only get you 2-3% returns. Since the inflation rate in India currently is 7.01%, it ultimately erodes your savings.
Thus, you become a victim of capital erosion.
Even if you invest in bank FDs, the maximum interest you get is 7%, which is also taxable income. Coupled with inflation, your wealth will still erode.
Investing in tax-saving investment schemes like ELSS (Equity Linked Savings Scheme) is the best way to protect your savings from inflation and create wealth in the true sense. It offers you 12-14% interest.
To create wealth, you must invest in an asset class that produces higher returns than inflation. Otherwise, you may be conserving money but not creating wealth.
Myth 2: You should know how to time the stock market to earn money from it
Reality: The stock market is forever changing; perfect timing is a myth
Investing in the stock market is undoubtedly the most lucrative way of creating wealth since it offers immense returns, often even 18-20%!
You may have heard from people or social media that you should wait for the perfect time to buy and sell stocks based on the expected price changes to earn the most profit.
But in reality, there is nothing called ideal timing in the stock market. If you wait for the perfect timing to do your trading, you will keep waiting.
Hence, if you are interested in investing in the stock market, be in the market for a long time. Let your money grow slowly and steadily.
It will give you better results. Timing is irrelevant if you're in it for the long run.
You may say investing in stocks is a risky business because the market is volatile. Here's a trick. Invest in small amounts every month.
Many retail investors underestimate the value of SIP (Systematic Investment Plan).
Investing in equity consistently every month allows you to buy more units when the market is down and fewer units when the market is up.
Thus, you average the risk in the long term and make profits when the stock market moves upwards gradually.
Myth 3: Investing in assets = Higher returns = Secured in emergencies
H4: Reality: Only liquid cash comes in handy in emergencies
Emergencies come knocking at your doorstep unnoticed. If you are not careful and prepared well, it might create a ruckus in your financial life.
Withdrawal policies of most assets are not favourable for emergencies. It may take up to 72 hours to receive the money.
So, be it a medical emergency or an unexpected job loss, finance gurus all over the world suggest keeping 6-9 months' worth of money from your monthly salary saved in an easy-to-access account like a savings account.
Alternatively, you can invest this amount in a liquid mutual fund. These funds do not come with any lock-in period and have instant redemption facilities.
Hence, you can withdraw up to 90% of your invested amount within 30 minutes.
Myth 4: Your pension and the provident fund are enough to spend your retired life
H4: Reality: Old age brings many age-related ailments. Coupled with inflation, you need more money to live a comfortable retirement.
Thanks to better healthcare facilities, life expectancy has increased significantly. Furthermore, due to inflation, the value of money is decreasing at a rapid pace.
As a result, it is not wise to depend on pension and provident funds to survive your retirement.
Many older adults work even after retirement, but can you expect the same zeal to work and earn money at 64? Therefore, youngsters today are taking retirement planning more seriously.
Myth 5: Diversifying your investments intensively is the only way to mitigate risk
H4: Reality: Over-diversifying creates confusion. Only limited diversification can give a steady financial future
Beyond a point, intensive portfolio diversification doesn't work. Imagine having ten equity funds, and all of them are either larger cap or small cap.
It overlaps the returns, and you'll get immense losses when the market falls.
So, when you are planning for investments, invest in diverse assets. Such as, if you want to invest in an equity fund, diversify it among large cap, mid cap, and small-cap funds.
Diversify in 3-4 asset classes – such as REITs (real estate investment trusts), equity, ETFs (exchange-traded funds), gold bonds, government savings schemes, and cash for appropriate wealth creation.
We hope the information has made your investment decision-making process easier.
After all, saving money and investing it in the financial market systematically helps establish a financial future.
While investing, remember Warren Buffet's legendary quote, "If you don't find a way to make money while you sleep, you will have to work till you die."