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Delaying investments can cost you dearly
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When it comes to making investment decisions the rule seems to be to postpone it to another day. This applies not only to decisions on how and where to make the investments, but also to going back and evaluating if the investments are working as they were expected to. Did you know that there is a real cost to this behaviour?
Consider your money lying in the savings bank account earning around 4% when it could be earning 10%, not to mention the impact of compounding that you would be losing out on. Or, your money losing value stuck in a loss-making investment because you delay the decision to exit from it.
You get away with this inaction because you don’t immediately see the consequence of putting your investment decisions on hold. You would feel the effects only when you need funds to meet your goals and you find that you are falling short because you did not give enough time for your investments to grow. The funds that you will then have to commit to meet the same goals would have increased significantly because you would not only have lost out on earning better returns but also the benefits of compounding with time.
Getting your investments back on track so that they can meet your goals and targets will mean that you now have to invest a much larger sum than was required earlier. The earlier you recognize the problem and deal with it, lesser will be the pain. Here’s how to start.
Am I all right?
There are two things that you need to do: recognize the problem and protect your investment plan. Once you accept that your long-term goals will suffer from the habit of not making your investment decisions on time, you will be ready to do what is necessary. But how do you know there is a problem at all? A large balance in the savings bank account built up over time, investments that mature but are not reinvested, believing that there is a right time to invest and waiting for that level, cheques received from investments lying unclaimed, holding on to sub-par investments and not making the decision to exit, are some of the signs that you have been afflicted with the malady of financial inertia too.
Your reasons for postponing the decisions may be many. You may think that you don’t have that magic figure saved up that you need to start investing. And in the meantime, what you do have saved remains idle. Reality check: There is no magic number. Start now with what you have.
Or, you may be wary of making a wrong investment decision, particularly in an unsure investment climate. You want to wait for a good time to start. Reality check: Now is always a good time.
If the product or process of investing is seen as complex and requires you to make too many choices from the many options available, you are likely to defer the decision, especially if you are a new investor or someone not familiar with the nuances of investments. Reality check: Start with simple products and get help to make the decisions.
Often, you like to maintain status quo because you are comfortable with what is familiar. So you stick with investments and service providers even though you know that your money could be earning better returns elsewhere. Reality check: You may be harming your finances when you don’t consider all the options available. Get outside help if you are not able to break the habit.
Tips and tricks
Having an investment plan and short-term value targets for your investments is a good way to make sure that you don’t neglect or postpone your investments. When you see that you are behind your target you are more likely to take action to stay with the plan, or if necessary switch your money from a poorly performing product.
Automate your investments as far as possible so that you are not required to take decisions each time an investment has to be made. Banks offer sweep facilities where the balance in the savings account over a limit that you specify is automatically transferred to a fixed deposit where your money will earn higher returns than the savings bank account. The electronic fund transfer facilities offered by banks require your intervention once to give instructions to the bank on the amount of transfer, frequency of transfer, period over which the transfer has to be made, and details of the investment account to which you want the transfer to be made. You can use this facility to make periodic contributions to investment accounts such as the National Pension Scheme (NPS) or the Public Provident Fund or the systematic investment plans offered by mutual funds, among others. You will have to make a one-time effort to identify the investments that you want to make and then sign up for the automatic payment facilities. Your money will get invested with minimum effort on your side.
Start with simple products that are easy to understand and minimize the choices that you have to make if you are a new to investing. Your excuse that you don’t understand a product cannot then be the reason for putting off investments. Choose investing periodically with small amounts over waiting to accumulate a large sum before you start investing. It will not only get you going without delay but you will also be able to benefit from opportunities that arise at different times.
And if everything else fails, and you don’t want to save pennies and lose pounds, find yourself a financial adviser you trust to manage your money for you. Their job is to make sure your investments are on track according to your plan, and they will ensure that your money does not sit idle.
When there are no deadlines except the ones that you set for yourself, it is difficult to stick to a schedule or plan. The consequence of postponing investment decisions is that your money will be not be utilized to its full potential. Your savings will be under-performing, and very likely not on track to meet your future needs. You will miss out on the benefits of compounding that being invested for the long-term brings to your investments. If you are not in the habit of investing your surplus money regularly and reviewing your investment portfolio, then you are likely to miss opportunities to make better returns. Your requirements from your investments are also likely to change with time. If you don’t do a periodic review of your investments and their fit to your current needs, then it is likely that your needs and goals will remain unfulfilled. Make simple changes in the way you make your investments to tackle the problem of inertia till you are ready to take charge. It is in your interest to do so.
THE TREASURE HUNT: 5 PLACES WHERE YOUR MONEY IS HIDING
As they say, a penny saved is a penny earned… and then invested if you are a wise investor. But saving is not only about cutting back on living expenses so that you can invest. If you look carefully there is likely to be a lot of ways in which you can save money in the way you manage your financial affairs. Often, the selections you make in your financial decisions may not be the most cost efficient. While you may be meticulous in comparing costs, evaluating options and comparing vendors before you buy, say, a refrigerator or a television, the same diligence is not applied to financial choices. Much of the problem lies with not knowing what you want from your financial products. So, you end up paying for things you don’t actually need. Here are a few ways to reduce the wastage.
Say no to fees
Credit cards, bank accounts, demat accounts, trading accounts, all charge an annual maintenance fee, apart from a transactions-linked charge. Annual fees charged in many of these products are for specialized services that you may not use. For example, certain credit cards with high annual fees provide lounge access at airports. If you don’t travel frequently, paying for this is a waste. Settle for a card with no or lower annual fee as long as it meets your requirement.
Trading accounts may charge a high fee for providing access to the derivatives segment of the market, which you may not even consider investing in. Banks may ask for higher minimum balance in an account to offer services such as unlimited free automated teller machine (ATM) use, at-home account opening, and others. You could instead choose a type of account in which you have to pay for some services but minimum balance required is lower. This will free up a chunk of money.
Compare the features and costs offered by different banks, brokers and depository participants and select those that give a reasonable service-cost mix.
Get organized
When you miss a payment due date, you are charged a fee and even a penalty. While this can be very high in the case of credit cards, it may be lower for others. Missing insurance premiums also brings on a fine apart from keeping you without insurance cover till you pay. Setting reminders and using services such as automatic payment options are a way to stem this unnecessary drain.
Close unused bank accounts, trading accounts and demat accounts so that you don’t keep incurring penalties and fees on them. Explore the possibility of consolidating your holdings under one demat account so that the cost of maintaining investments comes down. Update your investment records with the correct address and currently active bank account so that interest, dividend or redemption cheques reach you in time.
Use all the tax benefits
Make sure that you claim all the tax benefits you are eligible for. To the extent your tax liability comes down you have additional savings. Look beyond section 80C and discover additional tax benefits such as deductions on interest paid on home loans and on money spent on maintaining a property; interest paid on educational loans; premiums paid on senior parents’ health policies. Medical expenses and school fees, up to a limit, are also in this list. Make sure that any losses you may have booked on investments are set-off against gains. Take the time to find out all the tax deductions that you can use.
Small is beautiful
Don’t ignore the small cheques and credits that come your way. This is your money that you can use to invest. The interest and dividend cheques will typically be for small amounts, particularly if you have spread your investments in multiple products, but can add up to be significant.
A good way to make sure that you don’t lose out on the benefits of your investments is to choose the direct credit facility. It eliminates the complications of receiving and depositing cheques. Have a designated investment account into which these amounts are credited. Make all your investments through this account so that all these small credits get re-invested too. Other amounts that may come your way include tax refunds, cash back on credit cards, and others. Go through all the fees, interest and penalty debited to your investment or service accounts. And follow up and get them corrected if you have been wrongly charged, however small the amount.
Effective insurance
Insurance should be among the initial financial decisions you take. But the premiums are an expense. So make sure that you are paying only for what you need. There are many ways in which you can reduce your premium payments. An annual payment option is cheaper than the more frequent monthly, quarterly or half-yearly ones. Similarly, consider your existing cover before you take additional insurance. You don’t need mortgage insurance if your outstanding loan amount is included in the amount of life cover you have. Why pay twice?
If your employer provides you some health cover, then take additional health insurance only to the extent you think you need.
If you are a careful driver and don’t see yourself getting into too many accidents, then you can opt to pay a percentage of the claims out of your own pocket. This will bring down the auto insurance premiums.
If you make no claims on your general insurance policies in a year, use the no-claim bonus to reduce the premium. Also, keep in mind that buying policies online is usually cheaper than buying offline.
Select financial products and services that give you what you need at the lowest cost. It is never too late to correct a wrong decision, especially where it concerns money. If you really want to benefit from all the effort you put in to select the right product then ensure that the money that you save finds its way into your investment kitty and not frittered away.
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First Published:23 Nov 2014, 11:31 PM IST
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