Financial Myths That You Should Stay Away from

Financial Myths That You Should Stay Away from

Last Updated : Oct. 9, 2020, 11:26 a.m.

Achieving financial independence is critical to withstand the challenges posed by inflation and uncertainties we face these days. Having such independence means high income, less to ZERO debt, and adequate insurance cover. But carrying financial myths makes it hard for us to achieve the same. Doesn’t matter whether it’s a loan, investment or insurance, myths are found everywhere. But the important thing is to know the myth itself. A lot of us don’t know that they are carrying financial myths, which could go on to increase their cost or prevent them from maximizing gains. So, in this post, we will bust some financial myths that most have. Let’s read and get your financial concepts clear.

Financial Myths Regarding Loans, Investments & Insurance

Financial myths would differ based on the products you choose to fulfill your wishes. In a loan, myths are regarding the functioning of interest rates, eligibility, etc. Similarly, many are not clear about investment dynamics and basic insurance norms. Being unclear about financial products can be as problematic as developing a perception about them based on the words of people who don’t know much about finance. We will first bust loan myths followed by those surrounding investment and insurance.

Personal Loan Interest Rates are Too High for Comfort

Considering that a personal loan is approved without any collateral, interest rates can be higher than that of secured loans like a home loan. But carrying a perception that personal loan interest rates are too high could be a lost opportunity for you. Yes, personal loans can be accessed at as low as 10-11% per annum, reducing the Equated Monthly Installment (EMI) and overall interest payments. All that takes is a good credit score, high income and job stability. Personal loan rates are much lower than 30-45% levied on revolving credit card dues. So, there’s no need to carry this financial myth.

A Fixed Rate Home Loan is Good

If you have taken a fixed rate home loan based on suggestions from others, you must have realized the mistake you have committed. A fixed rate loan implies that the rate of interest will remain the same throughout the loan tenure, unlike a floating rate loan where the rate changes based on changes in market rates. This makes many develop a financial myth that a fixed rate loan is good. But if you introspect, you will find the interest rate of a fixed rate loan to be at least 2-3% more than a floating rate loan. It keeps the EMI higher and increases interest obligations considerably. For a better summation, let’s consider an example below.

Example – You and your friend opt for a home loan of INR 50 lakh each for 20 years. While you go for a floating rate of 7.85%, your friend chooses a fixed rate of 10%. How much will both of you pay over the loan tenure? You will pay the EMI of INR 41,356 and have interest obligations of around INR 49,25,547. In contrast, your friend’s EMI will be INR 48,251, which will raise his interest obligations to INR 65,80,260 (approx.), around INR 16,54,713 more than you. The interest repayment of a floating rate loan may vary from what’s shown. But you could still have massive savings over your friend servicing the loan at a fixed rate.

Plus, the change in floating rate loan rates will not change the EMI unless you do a balance transfer or a part payment. So, if you were thinking that a floating loan will increase the EMI when the interest rate goes upward, you have now got a reason to discard this financial myth.

Revolving Credit Card Debt is a Good Idea

A lot of us believe in impulsive spending with a credit card because doing so brings a flurry of rewards, cashback and discounts. But this happiness is only one side of the coin, the other side is full of worries for you with tall interest dues. If you fail to pay the total due on or before the due date, the interest will apply on the unpaid balance at a higher rate of 30-45% per annum. Many pay the credit card due partially to avoid a late payment. But maintaining this bad habit will lead to perils very hard to deal with. If you want financial freedom, you have to kick out this financial myth quickly.

Stay Away from Putting Your Hands in Equities

This won’t be a myth for someone averse to taking investment risks. But those who can take risks and have long term goals are best suited for equity investments. The money invested here will most likely grow exponentially over time because of the high-return proposition of equities. Further, equities can give inflation-adjusted returns. So, carrying this financial myth will only hamper you from accumulating sufficient corpus for long-term goals such as child education, home and car purchase, and even retirement.

The thing you need to look here is whether you should invest directly in equities or do so via equity mutual funds. If you know the dynamism of stock markets, you could go directly. Else rely on the wisdom and expertise of mutual fund managers who will take the call on your behalf and manoeuvre your investments through thick and thin of the market. Just think about choosing the best mutual funds based on their performance over the years.

Some Think of Investing the Same Amount Every Month in Mutual Funds

Mutual fund investments can be made in two ways – SIP and lump sum. Of the two, most prefer investing via a Systematic Investment Plan (SIP) and rightly so given that investments made here can give you the benefit of cost averaging and compounding returns. Plus, it’s affordable as you can invest as low as INR 500 monthly. But having the financial myth of investing the same amount year after year won’t help you make the most of compounding benefits. Whereas, if you increase the investment amount annually, you will give yourself the best chance to raise a much bigger corpus, helping you meet your goals better.

There’s a step-up SIP that you can activate to achieve such benefits. It will raise your monthly SIP amount every year. All you need to do is give a request to the mutual fund company. You can use the annual increment to ensure the same.

Health Insurance Cover is Not Available for Treatment Less Than 24 Hours

Yes, health insurance companies provide covers for treatment taken at hospitals for a minimum of 24 hours. But they also add various clauses and sub-clauses in the policy document where exceptions are granted for some daycare procedures that take less than 24 hours to complete. Some of these can be dialysis, treatment of bone, ear and nose, etc. So, don’t have a preconceived notion that you can’t get cover for treatment taking less than 24 hours. You will end up paying for such treatment where the health insurance cover would be there. Read the policy document carefully so that you can make the most of the insurance covers available.

Health Insurance Cover is Available for Every Disease/Ailment

Many carry this financial myth and end up getting their health insurance claims rejected by the insurance company. We would like to reiterate – Read the terms and conditions carefully before buying a health insurance policy. You could see a list of diseases/ailments for which the insurer won’t provide any cover. Besides, it will also have a list of pre-existing diseases for which the cover can’t be given immediately. The policy will need to continue for a certain period before the insurer will cover these diseases. Most likely, the cover would be available for pre-existing diseases, which means the diseases that the insured has before the commencement of the policy, after paying the premium continuously for 2-4 years.

Life Insurance Doesn’t Give Maturity Benefits

If you are having this financial myth, you are partly true. Life insurance has many variants of which a term plan is there. In a term plan, there are no maturity benefits. But it’s important to have a term plan as it gives financial protection to the family members of the insured in the eventuality of his/her death. It will make them feel good at least financially. But there are various traditional life insurance plans where maturity benefits will be there. You can even get a loan against some traditional plans.

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