Not getting rich? 7 saving strategies that can backfire in the long run

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New Delhi | Updated: April 14, 2018 12:49:04 PM

Saving money the wrong way doesn't make you rich. In fact, there are some saving strategies that can even backfire in the long run. Here's a look at some of them.

saving money, investing money, money disciplineSaving money is essential for meeting our financial goals and leading a happy life in retirement.  (Image: PTI)

Saving money is something we all love and need to do — that’s beyond dispute. However, it’s the ‘HOW’ that really matters. For, in our bid to save more, we often resort to means which instead of helping us save more, lead us not only to spend more but even miss out on our end goals. So, why go through all that effort only to get the minimum return? Or to be off the mark in your ultimate goal?

Let’s go through some of such saving strategies that could potentially backfire in the long run, unless we are alert and prudent:

1. Saving without thinking of the overall big picture

Saving money is essential for meeting our financial goals and leading a happy life in retirement. However, just saving or investing is not enough. You need to be sure what you are saving for. For, “if you aren’t sure what you are saving for and what it means for you, saving becomes a pain. Therefore, take some time to think what you want (a vacation in Vietnam?) And where you ultimately want to be (retired by 50 in the Himalayas?). Create visuals and a target for these goals and an easy way to track progress. That way you will enjoy the savings journey for itself, and then the destination too,” says Satyen Kothari, CEO, and Founder of Cube.

2. Leakage from fees

This one really matters because all of the passion, clarity, and discipline in your savings plan mean nothing if you are losing a lot of it in fees. Compounding plays a big role here. Thankfully India has stopped allowing misselling in many ways (remember the old ULIPs?). However, there are still some terrible saving instruments such as complex life insurance policies, strange structured products etc. Read the fine print so that you avoid expensive fees, maintenance costs and get clear on things like hurdle rate profit shares. Some institutions may even want to charge a servicing fee if you want to make a change to your personal details. Just say no and opt for a cleaner savings option.

3. Being too conservative = being beaten by inflation

A bird in the hand is better than none. Except when you set out to build the Taj Mahal but end up in a shanty. This is what happens when you are too conservative all of the time and don’t diversify your risk strategy. “You know what you want, have passion, aren’t throwing it all away in fees and then go park in a conservative bond fund… So, 5 years later you are only 3% up based on inflation. I’m not saying you should gamble it all in Bitcoin, but just take some risks, diversify to hedge your bets and maximize your savings returns based on your realistic time horizon per goal,” says Kothari.

4. Saving most money in bank deposits from a young age

An average working professional has 30-35 years of career. If someone saves most of the money in bank accounts and deposits giving lower than inflation return, one is actually losing money. “While keeping money in banks is considered safe and returns are guaranteed, the cost of those two benefits is extremely large. In fact, lower-than-inflation returns mean you are actually handing money to banks! With our expenses and needs growing at a fast rate, investment returns have to exceed the expenses. Otherwise, you might accumulate some money 30 years down the line, but the corpus will be woefully inadequate to cover your bills,” says Anil Rego, Founder, and CEO, Right Horizons.

5. Buying life and health insurance with the lowest premium

Buying cheap does not always mean buying smart. All things remaining the same, if service provider A is giving something cheaper than service provider B that should mean two things. Either the cheaper option is due to lower costs, or it could be because the cheap option omits something crucial. When it comes to buying life and health insurance policies, buying cheap may save you some money in the short term, but can make you lose peace of mind and money in the long term. Insurance has to be bought before the actual event happens. When the negative event unfolds, it will be quite shocking to discover that you have been short-changed. Hence, study and compare plans to find out how one insurer is actually offering a policy that is cheaper than the rest.

6. Taking debt that offers lower interest for a while

Debt is inherently wrong because it compels you to lock your future income. Many financial service companies provide debt that has zero or no interest for a while before the rates kick in. To a layman, any debt where you pay very low or no interest for even a short time seems very lucrative.

“Does less interest mean money saved? Not always. This is because the low interest or zero interest is only a teaser. The debtor will always try to recover the accumulated interest at a higher rate. In this way, you will lose out on money even though you may think you have saved money! When a loan offer sounds too good to be true, especially with low or zero interest initially, it probably isn’t. If creditors don’t charge interest, their businesses will have to be shut. So, always take such offers with a pinch of salt,” advises Rego.

7. Using your retirement corpus as an emergency fund source

Many individuals do not have separate emergency funds. Practically, having two separate funds means having to save more. Hence, they use two-in-one solutions. Before you know it, they start using their retirement corpus for emergency-uses only. But once you know you can tap into a large amount of cash anytime, chances are high that you will tap it almost always. So, the fund will deplete gradually.

“You may promise and even recoup some part, but over the long term, a small gap will become bigger. Emergencies need a separate fund. The retirement fund is for that time when you will have no recurring income and you will be compelled to live off the life’s savings. Hence, do not dip into retirement savings fund on slight pretexts. If you are unsure of yourself, the best thing to do is to keep your retirement money in products where there are strict lock-in restrictions,” says Rego.

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