Ignore these personal finance fallacies

Ignore these personal finance fallacies

Mutual Funds
by 5paisa Research Team Last Updated: 2022-07-18T12:45:39+05:30

There are several personal finance fallacies floating around the market. However, there are a few things you should avoid. What exactly are they? Let us investigate.

Personal financial experts frequently counsel people not to have EMIs that exceed 30% to 40% of their income, to save at least 20% of their income, and so on. However, certain misconceptions should be conveniently overlooked.

Myth 1: Debt repayment and investing cannot be done concurrently

One of the most popular misconceptions is that you cannot begin saving until you have paid off high-interest loans such as credit card debt. However, you should disregard this fallacy since saving is just as crucial as paying off high-interest debt.

The time value of money comes into play here. The later you invest, the more you must invest to obtain the same corpus at the same rate. As a result, it would be prudent to save and invest in addition to paying off debt. This will not only help you pay off your debt, but it will also allow you to take advantage of the time value of money.

Myth 2: Renting a property is always preferable than purchasing one

This may appear to be silly, but it is a myth. There will be much debate on this among financial advisors, but renting is not always a choice, at least not in India. Renting has its own set of drawbacks, just as owning a home has its own set of limitations.

Although, on paper and monetarily, renting may be preferable to buying a home in the long run. However, renting a property may involve some uncooperative landlords, frequent relocation, and so on.

Owning a house does not have to be so difficult. As a result, owning a house is preferable to renting. However, you must first assess your personal situation before making a decision.

Myth 3: Place all of your emergency fund assets in liquid funds

It is usually suggested that you store your emergency assets in liquid funds to earn more than a savings bank account. However, that is not the best option.

Rather than storing the entire money in a liquid fund, keep 15 days of spending in cash, one month in a savings bank account, and the remaining expenses split 50:50 between liquid funds and ultra-short duration funds.

Even when choosing liquid and ultra-short duration funds, never invest in funds that provide higher returns. The greater the reward, the greater the risk. The goal of investing in these funds is to safeguard money rather than to earn higher returns.

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