Compulsory Investment can be best for your financial life and at times the best way to get your finances in order to get into a savings habit. Here’s why and how.
If you have been delaying that savings habit or still shrug and say “well I tried, it just does not happen….” or you feel “…yeah, this guy just has to write, but we know how hard saving is…” then let me tell you, that savings are actually pretty easy and if you feel, you cannot save, then there is something wrong in the way you see savings or maybe you are not taking savings habit that seriously. Savings are important and while it sounds, clichéd, over used and over preached, it is the essence of your financial life. Savings eventually lead to investments, and investments to asset building and eventually to stable financial life. So for those who still can’t save, try compulsory investing. Yes, compulsory investments are the best you can do for your finances, and in turn you will learn a thing or two about how easy saving actually is.
So what kind of compulsory investments you can look at and how do they help your financial life; let us see:
It may sound repetitive, but SIP is the best option for mutual fund investments, and mutual funds are a great option for equity investments. Start an SIP in a good fund. What this will do is it will forcibly get you to set aside that much amount for your investment every month, since the SIP amount will be deducted each month on a fixed date. Once you start investing, there is this human tendency to want returns, and hence you will not want to close it until you get some positive return on your SIP installment, and thus it will result in long term savings and investment routine, since Mutual Fund or any equity investment will need long term horizon to see good returns. This is one forced investment your financial life will benefit from.
Similar to SIP you can also look at Recurring Deposits to start a forced investment habit. Recurring deposits too, deduct a fixed amount from your account every month and deposit into the RD account. On this you earn interest that is equal to the interest earned on FDs. The returns are guaranteed and stable and RD is a fantastic product for anyone to meet your short term goals which are 1-3 years ahead. This will again make you save that much amount every month and ultimately build that habit.
If you have kids, start a child plan. The good thing is that although they are argued as expensive products, child plans have the benefit of the company paying any remaining premium if anything were to happen to you during the tenure. This assures your child’s future even in your absence, and all this in addition to the sum assured that you get in case of untimely death. For child plans you need to pay premium regularly throughout the tenure and there are penalties if you don’t. Also since there is this emotional thing attached to it that you are saving for your child’s future, it will result in savings for the premium to be paid on time. Thus it will result in compulsory savings and organize your finances, for you and your kid’s financial future too.
Yeah, I know your question, “How can a Loan be an Investment?” Well it can if it helps you build an asset. A Car Loan is not an investment, since the car will depreciate in value and the returns are negative. But a Home Loan helps you build asset that is your own property. By and large, property prices rise in the long run and also, unlike car the life of a property or a house is much longer, thus it is also a long-term asset and definitely an investment. Plus if you do not stay in that house, you can still generate income through rent. In a similar case, if you are using you car as an income generator, by renting it to people or using it as a transport service, then yes in this case even a car loan is generating income for you. So if you have EMIs to pay, come hell or high water, you will make sure you manage those amount anyhow and automatically save for it. It will teach you a lot about money management too, and in the end, the satisfaction of owning your own asset, through religious savings is motivation in itself. Hence such type of loans can result in forced investments so to speak.
Anything that makes you put your head down and save, save, save… should be started to put your finances in order. The two most important pillars of building finances are income and savings. You earn, but if you don’t save there is no way to build on your income and generate assets. If you cannot save on your own, start any of these compulsory investments to benefit your financial life and get into a forced savings habit.
Leave your thoughts in the comment below, if you think otherwise or feel there are more ways to save compulsorily.