It is not a secret that majority people keep delaying decisions related to their personal finances in lethargy. This behavior forms part of a very common attitude called Financial Inertia.
The thought process of a person in financial inertia usually says: “I am earning well, no need to look at my portfolio” or “I know that I need to do something for my financial planning, but I am too tired today”. Both these thought processes may not harm over a few days. However, the issue is that in majority cases this mentality lasts for months and years until it gets too late for them.
Let’s discuss why the cost of doing nothing today, is expensive, with a scenario.
NOTE: The calculations below are not the only calculations required in financial planning or wealth consultancy.
Scenario 1: Future Value of Money (erosion or discounting)
Let’s assume you have INR 1 Crore (1,00,00,000) savings in your bank account. You save this money for 2 years at the current inflation in the Indian economy, which is @7.6%.
After 2 years,
Future Value of today’s INR 1 Crore = 10000000/(1+0.076)^2 = INR 86,37,249.374 (INR 86.37 Lakhs)
So by doing nothing for 2 years, you have lost INR 13.63 Lakhs worth of purchasing power of your own hard earned money!
Scenario 2: Insurances outdated or not enough
Let’s assume you purchased life insurance of INR 1 Crore when you were 25 years old and today you are 35 years old. Thus, a time period of 10 years.
Now with 10 years of inflation eroding purchasing power,
Today’s Value of INR 1 Crore = 10000000/(1+0.076)^10 = INR 48,07,035 (INR 48.07 Lakhs)
Insurance Shortfall = 10000000 – 4807035 = INR 51,92,965 (INR 51.93 Lakhs)
This means that in 10 years time you have a created a shortfall of at least INR 51.93 Lakhs in your life insurance.
Is it worth sticking to just INR 1 Crore life insurance or do you need more? Is it worth risking your families’ well-being in case of your unexpected passing away?
Scenario 3: Financial Strategies not regularly customized by a Wealth Consultant
Let’s assume you are a happy investor holding a diversified portfolio across multiple asset classes like property, stocks, mutual funds etc.
You are invested in various investment vehicles, but did you consider:
- Is your diversified financial solution customized personally for you? OR did you just follow generic investing tips from your banker/broker?
- Does the strategy satisfy your short, medium and long term goals? OR does it just grow/depreciate without purpose?
- How much money will you need at retirement or your children’s education?
- Do you have adequate protection planning (life, health and vehicle insurances)?
- Does your strategy offer you adequate liquidity?
- What will you do if recessions like 2008 or COVID-19 (2020) occur next time?
Here, you will have to optimize your strategy from time to time as your personal situations change with help of professional Wealth Consultants.
In the above 3 scenarios, it is clearly observed that holding on to financial inertia can lead to erosion of wealth and shortfalls in protection planning. Also, holding on to outdated or unplanned financial strategies will not suffice.
Thus, paying quick and regular attention to your financial decisions and keep them as updated like you update the software in your mobile phone is not just good-to-do, but a MUST DO.
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