The biggest hurdle to financial security is your reluctance to start saving and investing. Here are some common justifications people use to explain the delay. Identify your excuses and see how you can work around them so that you don’t put your goals and needs at risk.
It is complicated
Investing may seem to be a complicated process, with many formalities for each type of investment or service. But when you break it down, broadly the same set of formalities have to be followed: you need to establish your identity and provide proof of address, provide your bank account details to route payments and receive investment proceeds and fill up the application form related to the investment or financial service. The central Know Your Customer (KYC) process to establish the identity and address of investors makes complying with the KYC norms a one-time exercise across the financial sector. Application forms typically require standard information to be provided and include details such as name, address and contact details, age, status, bank information and such. Compile this information as a one-time exercise and you are all set to make investments.
I don’t have the skills
The need to identify, evaluate and select investments and financial service providers may be a barrier to people with limited skills and information in this area. But it is possible to keep it simple so that this does not become an obstacle to investing. Use the goal horizon to decide how your investments should be distributed between equity, debt, real estate, gold and other assets for growth, income and liquidity. Once you determine the asset allocation, select simple vanilla products where the evaluation needs are minimal in each category. Go with bank deposits and savings schemes of the government, and bonds with superior credit rating for debt products. For equity investments, stay with lower-cost index products where you earn returns in line with the market without the risk of selection and expectations.
Sovereign Gold Bonds issued by the Government of India are a convenient way to invest in gold without the storage risks associated with holding physical gold. The bonds have a fixed tenure (the 2017-18 Series I had a tenure of 8 years) and are denominated in multiples of grams of gold with a basic unit of 1 gram. The price at which gold bonds are issued and redeemed reflect the prevalent market price and the bonds also carry a nominal coupon paid twice a year. Limit real estate to residential needs and postpone investment in it till the finances are more secure. Make changes to the asset allocation to reflect changes in the needs and goal horizons, and don’t let recent return numbers or market movements influence you. Stay with the basic products till you become better acquainted with the risks and returns in investments. After that, move to managed investments such as mutual funds for better returns.
One way to make better investments, without the long process described above, is to use the services of a financial adviser: to make your financial and investment plans.
My savings are insignificant
If your goals are important to you then you need better control over your expenses and income. Start with a budget and assign at least 10% of your take home income to savings before you meet expenses.
Stay with the budget. Even if you fail initially, build the discipline to live within your means. No savings is too small to invest. Most investments—including deposits with banks and the post office, small savings schemes, mutual fund investments and stock market investments—can be made with amounts as low as Rs1,000.
Apart from reducing expenses, also explore options to increase your income. Use the skills and talent you may have to generate additional income in your spare time. Start small and set targets to increase savings at steady intervals.
I have outstanding debt
Debt and investments both have claims on your income. You need to deal with the debt because it can corrode your financial situation. But ignoring investments will leave you unprepared to meet the future. Balance and prioritize between the two.
First, contribute to mandatory savings such as the provident fund and retirement account to the maximum extent possible. Next, deal with high-cost debts such as credit card debt and personal loans on an emergency basis. For other debts, especially lower-cost loans with tax benefits, such as home loans and educational loans, focus on meeting repayment obligations rather than on closing them early to have money for investments. Along with meeting debt obligation, assign savings and lump sum funds such as bonus to build an emergency fund. Stay up-to-date on servicing your debt and don’t add to it. As your income expands, increase the allocation to investments to catch up on the time lost when you had to focus on debt.
Investments can wait
This excuse can cost you a lot. Even when some goals are way into the future, postponing savings and investments may mean that your contribution to the goal from savings will have to be much larger than what it would be if you had started early. For example, if you delayed saving for retirement by 10 years, then your monthly contribution to reach the same goal value will be three times higher because, over time, compounding accounts for a significant portion of the corpus. And there is no way to recover lost time. You may have to settle for less if you are not able to make higher contribution to your goals and needs. To give your investments the benefit of time and compounding, start saving early. Maximize your contributions to mandatory savings schemes, which remain invested for the long term. Don’t let funds remain idle in low-earning accounts such as savings accounts. Set up systems to regularly invest surpluses, such as by signing up for systematic investment plans and other facilities offered by banks to move the surplus over a set limit to higher-earning products. Build an emergency fund so that you do not have to break into your long-term investments to meet urgent needs.
Recognise what is holding you back from your investment goals. Once you identify the problem, take simple doable steps to correct it and make it a habit. Over time, you will develop the financial discipline that prevents poor habits and beliefs from affecting your financial security.