Advice from earlier generation

Parents have very important role to play in raising next generation, they influence major decisions of next generation from taking courses for better future to choosing company to work for better prospects. Their experience of life certainly is a big help for next generation.

But, with all due respect, one area where their suggestions create severe damage is financial investment. It’s not their fault as well because their strategy has worked in their time so they certainly want to emphasize same strategy for next generation, but one thing they forgot is a lot has changed in finance world meanwhile. Next generation is going to face some unique challenges which earlier generation may not have imagined. So having perspective of future challenges is essential and it should reflect on choices we make for financial aspects of our future.

Here are few suggestions I have observed being given by parents to next generation. We will see how it might have worked and why it may not work.

Buy Endowment Insurance to save tax

Why it worked : Having insurance which gives money back on maturity was well marketed idea, and considering equity markets were not very matured most of gain was pocketed by big players. Insurance companies usually have big pool of recurring incoming funds which they used to invest in market with some sense of safety from debt market. Gains from market is be distributed to customers after deducting expenses and securing their own profits. Hence it was an attractive investment because you get money back in addition to exposes to market indirectly.
Why it may not work : Future value post maturity is peanuts if you consider inflation adjusted future expenses. Wide variety of plain term insurance available in market, though low promoted. Considering people slowly and steadily moving to term insurance, insurance companies pool of funds will go down unless they increase market share. They will still remain big pool of recurring funds to invest in market, but not as big as they were. Their market investment will return predictable results which will be enough to cover their expense.

Buy House as soon as you start earning

Why it worked : Earlier generation had most likely one job throughout their career. So settling down sooner did make sense. You save on rental charges, save on tax and start paying EMI sooner, so that by the time you in 40s you start living loan free.
Why it may not work : New generation change job location frequently for better job prospects. Buying home sooner may restrict their mobility. Selling house is very uncertain process, chances of getting right buyer in short timeframe is next to none. High chance of selling on steep discount to cash out the investments. New generation need immediate access to their investment hence they prefer it to be liquid, wherein investment in property is all or none game, you can’t cash out 5 lakhs from realty investment for emergency.

Bank Balance is measure of success.

Why it worked : Earlier generation is also known as baby boomer. Banking concepts a were new to them, and by far, only available option. Banking were providing security for cash, and getting interest on top of it was considered as additional advantage by them. Inflation was low so people didn’t care much about low interest given by banks.
Why it may not work : This age of generation is having information available on their hand. There are many alternatives available to choose from for investing, which can give better return and beats inflation on consistent basis. They understand that Net Worth is much more important, where bank balance is just one part of it.

There could be many such cases. But certainly I do not want to throw away their suggestions, in fact, I suggest to verify if those ideas are still best and if not then lookout for best one.

Enjoy!


Also published on Medium.

 

Harsh