Thursday, February 21, 2013

How you choose to mess your financial life

It is said that you reap as you sow.

The future depends on the decision you take (or made to take) today. While making a choice, have you considered the different combination of outcomes possible? When you take or even do not take an action (since not taking a certain action also amounts to action), you are actually making a choice in your financial life.

A lot of people have not taken many important decisions in their financial life, which they should have taken long back. The choice of taking or not taking certain action is yours. However, it’s only in hindsight that today’s decision turns out to be right or wrong at a certain point in future.

Let’s see how a decision taken by you today can ease or mess up or ease your financial future:-

Buying Endowment and Money back plans:-

It is a well-known fact that people very often buy endowment and/or money back plans. The choice of buying or not buying such plan is theirs. It has been estimated that the average sum assured in India after 60+ years of buying and selling insurance is roughly RS. 90,000/-. According to the annual report of IRDA, the total Sum assured for 26 crore odd insurance policies by all Indians amount to Rs. 23,96,646 crores. This translates to an average Sum Assured of roughly Rs. 90,000/-(data as of 31/03/2008. The Economic Times 17/08/2009). What is the choice that they have made by subscribing to such plans:-
  • Considering insurance as an investment product
  • Choosing to receive returns which are even below the inflation rate
  • Exposing themselves to their life’s goals being missed owing to low capital formation in such plans.
  • Wealth being destroyed rather than be made.
  • They are buying into something which is not liquid at short notice. Hence, in times of emergency they may not have the necessary funds at their disposal.
  • They have opted to expose their family to financial uncertainty in the event of their unfortunate and untimely demise.

Not buying Term Plan

The first statement usually you hear from the investor is that they do not need term plan because the premium they pay is a waste of money (since it is not received back at the end of the term). What are the choices that they make by taking this decision:-
  • Exposing their family to financial distress in the event of their untimely death.
  • They choose to pass their liabilities (if any) to their surviving spouse and children.
  • They force their family to change their lifestyle upon his death.

 Not buying sufficient Health Insurance

The most common excuse people give for not buying sufficient health insurance is
  • I am still young & healthy. So why waste money on health insurance.
  • Will buy one when I cross 40—the ideal age to buy health insurance.
Without being judgmental about the decision, let’s see the choice they make for themselves &and their family:-

  • It is likely that their entire wealth or a major part of it might be wiped out in times of a medical emergency in future. (Read:- health insurance is wealth insurance)  
  • Cost of treatment continuing to rise, while upper limit of cost of all major surgeries and medical conditions being fixed by health insurers; they are exposing themselves and their families to severe cash crunch in case of a medical emergency in future.

 Undertaking Long term liabilities

The youngsters joining the work force go about undertaking long term liability as if there is no tomorrow. Home loan, car loan, white goods loan etc. are all easily available. Rather than working towards securing their future by judicious investments, they are busy spending away their future incomes. Without being judgmental about their decision, the choice that they are making for themselves will ensure that
  • Should the future turn out to be any different from what they had anticipated, they are sure to have a struggling life.
  • They might as well forget about peaceful and financially secure retirement, since they will not have accumulated significant wealth so as to retire with regular cash flows.
  • Today’s gain, tomorrow’s pain.

 At the end of the day, you always choose something in your life out of the decision you make. This is true for all the aspects of life, including your financial life. So understand that you are fully responsible for what you get and not your accountant, your financial advisor etc.