Being money-wise: know when to say no

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The mantra for personal financial success seems to be in saying yes. You have to say yes to a financial plan, yes to saving and investing, and yes to making all those decisions that will further your financial interests. However, sometimes your interests may be better served by saying no some times. Here are five such situations in which being able to say no may add to your financial security and strengthen your situation.

No to what you don’t need

When the only reason to consider an insurance policy or bank account or deposit is as a favour to a friend or relative then it is a clear no. They tie you to an expense that is not necessary and block funds that can be otherwise invested in a way that benefits you.

The money blocked in maintaining a minimum balance in a bank account that you don’t really use, or the annual charges on a credit card that you don’t need or the additional charges for using the derivatives segment of the stock market when you know that you will never invest in derivatives, are all examples of services and products that you may sign up for but that you don’t actually need.

“Many people buy a financial product on a transactional basis; they do not consider their goals. Such products do not yield them anything. People are over indulgent when it comes to insurance products (unit-linked insurance plans and endowment plans) and fixed deposits. Many mistakenly buy these insurance products for investment purposes,” said Nisreen Mamaji, a certified financial planner, and founder, Moneyworks Financial Advisors.

Ask yourself what role the product or service will play in your financial plan. Is there an unmet need that it will fulfil? The answer will tell you whether you need it or not.

Giving in to the attractive packaging and irresistible offers will mean costs and expenses that divert your funds from what is needed to what is not.

No to products that don’t fit

There will always be an investment product that is expected to give better returns than other available options. But whether or not it is an investment that you should consider will depend upon your particular needs from your portfolio.

Say no to investing in a product that does not fit your preferences for risk, return, liquidity and other features. For instance, just because equity markets are expected to outperform at a particular point in time, a retiree should not consider moving a large part of the retirement corpus to equity investments. Or, a product that is being promoted for its safety and guarantee features may have lower returns than what you need from your investments to meet your goals. Or, the lock-in feature in a product may not fit the liquidity you need in your investments.

Including such unsuitable investments will hinder the ability of your portfolio to help meet your goals.

“When choosing a product to invest in, see if its returns are beating inflation consistently. Also, take a second, and maybe even a third opinion, before making an investment decision. Sometimes those who are selling or saying that you should opt for a particular product will be giving the advice based on their knowledge, and may not be taking into consideration your individual need,” said Kartik Jhaveri, founder and director, Transcend Consulting (India) Pvt. Ltd, a wealth planning firm.

No to dipping into long-term funds

It should be easy to say no to pulling out savings earmarked for long-term goals to meet short-term expenses or needs. Most often than not, there is no plan to replenish the savings as quickly as possible to make up for money that was withdrawn so that the long-term goal is not affected.

Even if the funds are paid back, there is loss of compounding benefits. Unless it is an emergency and there is no other source of funds such as a short-term loan, diverting funds from a long-term goal should be a no. It puts the long-term goals at risk of being underfunded.

No to debt

It is easy to access debt. But debt should be taken only to meet essential expenses or acquiring assets that cannot be met out of savings alone, such as a home loan to purchase a property, or an education loan to meet costs of skilling that will improve the ability to earn income, or for necessary expenses such as an automobile loan, or a loan taken to meet an emergency. In all other cases, the answer to an offer for a loan, however attractive the terms, should be no.

“Debt can be a means to help you achieve something. But that does not mean you have to avail of loans unnecessarily. Take on debt only if you have the income to pay it back and make sure that it does not affect your cash flows too much. Your income and the amount of debt that you are taking are two factors to consider,” said Jhaveri. Moreover, taking on debt when you don’t need it diverts income from saving for your goals to meeting the repayment obligations on the loan.

Other than your cash flows, there are various other factors that you need to consider. For instance, have a look at the prepayment options (charges), the taxation aspect and the interest rate of the loan. (Read more about taking a loan onhttp://mintne.ws/1RnFqqy )

No to self and others

The most important skill to develop is the one to say no to yourself when it comes to spending on wants (and not needs; a big difference).

Spending money is easy, but if it is not on your budget then it is a no. For this to work you need to have a budget in place that is realistic and does not make you feel deprived of things you enjoy.

“Budgeting is important. Get into the habit of writing down your inflows and outflows. There are several apps that will help you do this, or you can use Excel, or simply keep a notebook where you write down your expenses. This will let you take control of your money. You will realize where your money is going, which will make you money conscious. Within, say, three-six months you will see what your outflows and cash flows are like,” said Mamaji.

There are various steps that you can do to keep spending in check. These include keeping your goals in focus to remind yourself of what is important, never buy things that you did not set out to buy, find ways to spend time other than at a place where you may end up spending money, use cash to pay for things because the physical act of giving up cash can act as a brake, make all important payments and investments first so that you have little to spend on excesses. Device a strategy that works for you and stick to it.

Similarly, learn to say no to others who seek financial help from you. If you can offer assistance without affecting your own goals then definitely help. But otherwise don’t let yourself be coerced into helping others at the cost of your own financial security. Make it a habit to argue the pros and cons of each money decision and evaluate the financial consequence on your goals. It will make it easier to say no when required.