Last Minute Exam Fever? Maybe Your Kid Is Learning From Your Financial Habits!

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With exams around the corner, it is likely that you are worried about your child’s preparation. You disapprove of the last-minute studying and even admonish your child for starting to prepare in the last minute. But before you lecture your child for not having studied throughout the year, ask yourself whether you are responsible for such behavior? Is it possible that your child is learning to procrastinate from you? For instance, can you honestly say that your financial planning or planning for long-term goals such as retirement is on track? You may have dilly-dallied similarly, a habit that may have derailed or delayed your financial planning. So, why just berate your child and instead look to set an example.

The cost of delay in investing

As youngsters, most people think that we do not earn enough to save. According to anecdotal evidence stated by financial planners, most salaried individuals do not consider investing for retirement in the first five years of their career. The numbers don’t improve later either. In fact, a Reserve Bank of India (RBI) household survey found that less than a quarter of our population planned for retirement in 2016.

This can prove to be a big mistake in your later years. A lot of people realize that they should have started their retirement planning when they were young and had few responsibilities.

Let’s understand this with a hypothetical example. Ajay begins an SIP of Rs 5,000 in an equity fund at the age of 25. Assuming that the scheme delivers returns of 12% annually, Ajay would accumulate Rs 1.77 crore over a period of 30 years. However, if he delays his investment till he turns 28, his corpus by the end of 30 years would reduce to Rs 1.21 crore. Even if he enhances his savings by 10% each year, he will not be able to make up for the notional loss he incurs at the beginning of his career. This example is proof of the fact that what you invest in the first ten years of your career will account for nearly 25% of your retirement corpus.

Impact of delay in tax planning

Now let’s get to another aspect of financial planning: tax planning. Has your kid seen you breaking out into a sweat at the fag end of a financial year trying to collect investment proofs to deduct your taxable income? Does he or she often witness you making frantic phone calls to make last-minute investments? If so, you are indeed setting a poor example!

Last-minute investments can be risky

Delay in tax planning can cost you dearly as well. For instance, you can make a last-minute investment in an equity-linked savings scheme (ELSS) to get tax deductions up to Rs 1.5 lakh under Section 80C. In such a scenario, you will have to make an investment in a lump sum. But investing a lump sum amount can backfire. That’s because if you make a hurried investment in a month where the markets are volatile or on an uncertain trajectory, there are chances of you losing money.

On the other hand, if you choose to make periodic investments in an ELSS through the systematic investment plan (SIP) route, you stand to benefit on two counts.

Firstly, you average out your costs by buying lesser units when markets are high and a larger number of units when markets are low. This will help you weather the risks of volatility.

Secondly, an ELSS investment can help you meet long-term financial goals such as higher education of your children or building a retirement corpus. This is because ELSS helps in wealth creation and tax saving.

The same holds true if you buy an insurance plan towards the end of the financial year. While it is a good idea to augment one’s insurance cover, a last-minute investment just to save taxes may not work out. It’s always better to take time and research before you fortify your health cover. It’s also ideal to integrate tax planning with your financial plan at the beginning of a financial year to avoid exposure to unnecessary risks.

Lead by example

So, if you want your child to be proactive and not reactive, maybe it’s time to relook your financial behavior and set the right example by not procrastinating. By making timely financial planning decisions, you can not only gain control of your financial future but also impart a lesson or two to your child.

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