The idea that you can earn more than you can spend and create an investible surplus every month is riveting. Not many people can achieve that. People generally live beyond their means, spending more than investing. But it is not just about spending alone. You realise that you are struggling to meet commitments made to your future. In most situations, you make commitments to some investments that may be overdone. These are situations when you are overinvested or overinsured.
Over invested
There is a strong affinity towards physical assets in India. Two-thirds of the Indian household wealth is invested in property and gold. Many of you think of these as investments. There is a sense of comfort that physical assets give to you. Many invest in multiple properties to generate a rental income. Considering an average rental yield of less than 1-2%, it is not an investment but just a saving.
Do not forget that your investments must generate a return that beats inflation and leaves some money on the table over the years. You will miss out on a stock market rally if your money is largely locked in properties that you do not use. The same applies to the thought about over investment in gold that happens primarily through jewellery.
While gold as an asset class has done well, it cannot be a dominant part of your assets. You must allocate your money in such a way that you have covered adequate bases in the market. The other problem is with individuals not keeping track of their monthly systematic investment plans. Over diversification is unnecessary if the average returns on the Nifty 50 are 13% over 30 years.
Assuming the inflation rate stays at 6% over the long-term, a return of 13% can take care of your future needs. You must engage a financial advisor in 2025 if you have not done it yet. Your asset allocation is likely to help you manage your finances better.
Over insured
There is a lot of zeal in the way insurance companies sell life and general insurance to you. Since a lot of your data is floating across credit bureaus and banks, you would be inundated with calls from tele-marketers to secure your family’s future or income. You cannot blame companies for reaching out to you. They are merely looking to grow their business. The onus is on you to make the right choices.
A lot of you take up multiple life insurance policies, unit-linked insurance plans or health insurance policies to protect against eventualities. You must evaluate your options carefully. Insurance is a protection against life situations. However, it is not an investment. The primary objective of an insurance company is to keep money to pay you when you or your family need it the most.
You pay a premium for that promise and not really to meet your financial goals or beat inflation. Choose a good life insurance plan and a health insurance plan that takes care of most illnesses or emergency care for you and your family. For investments, plans offered by insurance companies are not the only solution. You can invest in index funds or exchange-traded funds, diversified equity funds or own quality company shares. Your financial advisor can help you make sense of all options.
The New Year calls on you to make a resolution. You must invest in knowledge for your own financial security. It is not easy to understand all the investment and insurance products if you are not familiar with finance. You need to try to focus on things that are relevant to you. ‘Over investment’ and ‘over insurance’ are not exactly classical personal finance terms. They are behavioural issues.