Five outdated financial planning advice parents should avoid giving their children

While parents must continue to stand by their kids as a friend, philosopher and guide; here are five pieces of financial advice that parents should ideally avoid giving their kids.

Sep 14, 2019 06:09 IST India Infoline News Service

Most parents consider it their right and obligation to advise their children on money matters; and why not? They would always be sincere about giving the right advice. What has changed is the investment scenario and the financial planning environment. New products have come up that are more efficient in terms of returns and risk. Above all, a lot of erstwhile assumptions are being challenged. While parents must continue to stand by their kids as a friend, philosopher and guide; here are five pieces of financial advice that parents should ideally avoid giving their kids.

Invest in a house as soon as possible
Having a house of your own is the ultimate middle class dream. It is believed that an investment in property can never go wrong. That was a valid assumption at a time when people got into a job and stayed put till retirement and when investment options were limited. Today, it makes more sense to buy a house when you are clear where you actually want to settle. Your kids may have entrepreneurial dreams and the last thing they would want is the burden of fixed EMI each month. “Now you don’t need to pay rent” sounds enticing but more often than not, renting an apartment works out cheaper, more convenient and more flexible. Take your time before you jump into buying a property.

Put all your savings in gold and bank FDs
This is again an advice that was perfect when options were limited. There was a time when bank FDs paid 12-13% rates of interest and banks were still profitable. Today, banks pay less than 7% on FDs and still struggle to make profits. The FD rates can only go lower. Parents must also tell their children that investments must be tax efficient and from that perspective, debt funds are more efficient than bank FDs as they also benefit from falling rates. Gold is still essential but as a portfolio hedge to the extent of 10-15% of their portfolio. It is time to put asset classes in perspective for your children.

You get nothing back in pure risk policies
That is the typical argument in favour of endowment policies, money-backs and ULIPs. Unfortunately, it is also the worst argument. You take insurance for protecting against the uncertainty of life. Essentially, it must pay your family a decent sum of money and that must be sufficient enough to run the house without hassles. If pure risk covers is a sunk cost; that is what they are supposed to be. You can get a much higher pure risk cover for a much lower premium and the premium saved can be invested in mutual funds. That is a better method because it does not mix your investment efforts and your insurance needs. Ask your children not to confuse insurance and investments with hybrid products.

Raghav uncle is a CA; consult him on your finances
That is the most common advice children continue to get from their parents. The avuncular chartered accountant in the family is expected to help out with financial planning. That is not the job of a chartered accounted so you are going to be disappointed. Financial planning must be done by a certified financial planner (CFP). That person may be a CFA, CA or an MBA; that is immaterial. As long as the person is trained in giving personal finance advice it serves your purpose. It is a mistake to rely on your chartered accountant who also audits your business and doubles up as your LIC agent for personal financial planning needs. Teach your kids that accounting, auditing and financial planning are distinct disciplines and they must approach respective professionals for each task.

Share markets are just too risky
It is very likely that some overenthusiastic member of your family may have tried to play the stock markets and burnt their fingers. That may have made you extremely cagey about equities as an asset class. Advising your children to stay away from equities is wrong advice in the first place. In the long run, if they are looking at goals like retirement, planning for their children’s education, etc., only equities will help. That is because equities turn to give the best performance over the long run and beat most asset classes. Teach them to be systematic and long-term about equity investing, especially when they are looking at long term financial goals. Equities make money work hard and that is what you must drill into them. They always have the passive option of equity funds or index investments; but there is no long-term wealth creation without equities is what you must tell them.

As your children enter the professional world in the midst of a challenging environment, your guidance is vital. Ensure that you do not allow past conditioning to colour your advice to them. The rest will follow!

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