(This article was first published in The Economic Times.)
The financial rules our parents and grandparents swore by hardly hold true for us today. Saurin Parikh delves into the conventional financial wisdom the previous generation lived by to understand why the new-age wisdom is more relevant today.
HOUSING
Once, a house meant financial security and a good long-term investment. Today, buying a house implies a huge EMI burden.
Paying off a home loan early in your career compromises your other goals. It also ties you down to one place, hurting your career. Then there are the high maintenance costs.
Out: Buy a house
In: Rent a house
The cost to buy far surpasses the cost to rent in all cities.
Cost to rent includes sum of rent and maintenance charges. Cost to buy includes EMI and maintenance charges. Source: ArthaYantra Buy vs Rent Report 2017
INVESTING
The previous generation put money in the PPF and FDs to protect capital and earn a decent interest.Today, post tax returns of most such schemes can’t beat inflation. For long-term goals like retirement, a large allocation to equity is necessary to build wealth that beats inflation in a tax-efficient manner.
Out: Look for guaranteed returns
In: Look for high returns
How a one-time investment of Rs 1 lakh would fare in different instruments.
Current value as on 20 March 2017. Fixed deposit rate: 6%
SAVINGS
Earlier, just saving, that too around 10% of your income, was considered sufficient for the future. Now, you not only need to save more but you also need to invest it to build enough wealth to protect you from poverty in old age. The best way to go about doing this is by investing first and spending later.
Out: Save 10% of what you earn
In: 10% is not enough
A small hike in savings every year makes a huge difference
Assumption: X saves fixed 10% of his salary every year while Y steadily hikes savings by 1% every year. Income for both rises by 10% every year and both fetch 14% annualised return.
TRANSPORT
Earlier, owning a car was seen as a status symbol. Fuel was cheaper too. Today, an efficient public transport system and app-based taxi services make owning a depreciating asset like a car unnecessary. You are also spared the trouble of high fuel bills, vehicle maintenance, driving in traffic or looking for parking space.
Out: Buy a car
In: Take a cab
Cost of using an app-based cab for a fixed commute like home to office.
Rates applicable in Bengaluru as on 15 March 2017
Cost of using a self-owned car for fixed commutes like home to office.
For fuel expenses, 10 km per litre mileage and Rs 75 per litre cost have been considered. EMI has been calculated for a loan amount of Rs 2.5 lakh at the rate of 9.7% p.a.
INSURANCE
Endowment policies are supposed to provide a mix of insurance and investment. They don’t actually provide the best of either.Term insurance is low-cost insurance that comes with higher cover for a lower premium. It does not provide returns and is treated as an expense.
Out: Buy an endowment plan
In: Buy a term plan
Term plans provide a high cover for a reasonable premium.
Source: IDBI Federal Life Insurance
GOLD
Lack of awareness and options made the earlier generation invest heavily in physical gold. Today, gold bonds score over physical gold and gold ETFs or mutual funds, on many fronts.
Out: Buy gold jewellery
In: Buy gold bonds
Bonds offer interest income and capital appreciation
Saurin Parikh 