A major impact of the Covid pandemic has been that individuals have become very cautious with their money. The first instinct for many people has been to cut down expenses, especially ‘unnecessary’ ones. And as a result increase savings. This kind of action is a positive as far as the money management is concerned. However, one needs to beyond savings so that the effort doesn’t go waste. Here are a few things to watch out for.
The first tendency of individuals is to put the money in the savings account. For many, this is where it resides because nothing much is done after this. This is a good first step which leaves the overall process only half completed. There are two reasons why amounts lying in the savings account is not beneficial. The first is that the money in savings accounts earns only 3-3.5%, lower than the inflation rate. The other thing is that if the money is not invested, then it might be spent on some other expense. This is the reason why it needs to move beyond the savings account.
There is also a tendency of the investor to try and look for something that is safe. The scars of the pandemic has made safety the number one goal for many individuals. This makes them go towards traditional products like a bank fixed deposit or in many cases even traditional insurance policies because this is what they have been doing all this while and this seems safe. Again this might not be the best way to tackle the situation because the rate of return on the money from these areas is now so low that there is a good chance that the earnings is again going to be end up being far less than what the inflation rate is in the economy. In some cases the route chosen might not be appropriate for the requirements too. Ultimately this leads to an erosion in the value of money because with a small growth it will not get you the same amount of benefit in the future.
The real manner in which the individual can ensure that their money is being guided into the right area is by ensuring that they have invested according to the requirement of their goals. This will also require that there be the use of different asset classes as well as different instruments for this purpose.
So someone might need a mixture of debt mutual funds plus equity funds while others might have a separate need which includes real estate too. This might seem to be a simple thing but it is probably the most important point for an individual investor to follow. So, ensuring that the money reaches the final intended destination is key to the success of all the efforts.
(The writer is founder, Moneyeduschool. Views expressed are personal)