7 Saving Strategies that can backfire

1.     Buying Health Insurance with the lowest Premium

Everybody wants lower health insurance rates, but you could wind up with sorry if you buy by premium alone. Skimping on coverage can leave you financially exposed and wishing you had spent more for better protection and service. Low premium means high risk. These limited plans may not apt for everyone and they could end up costing more if you need expensive care. The problem is that insurance companies are advertising these unbelievably low premium health insurance plans. Health Insurance is a long-term complex contract coupled with complex services. Comparison of premiums could be largely misleading and could result in a disaster. Comparing Health Insurance requires deeper insights into the overall insurance contract called policy wordings over and above price comparison. That doesn’t mean that you ignore the price. But when comparing health insurance quotes and policies, make sure you compare apples to apples, but while comparing, always remember that sometimes these apples are rotten.

In other words, the premium may be cheap, but the co-pays and the portion of the costs for which you’re responsible are not. Obviously, your budget whatever it is, and that is better to have not-so-great health insurance than no health insurance.

2.     Not Buying Supplement Health Insurance Policy

Most of salaried people must be having their employers’ health insurance plan which must be covering self, spouse, children and parents or some of them.  Most employers’ group insurance schemes offer limited sum assured, say Rs1-3 lakh which may not be adequate to take care of the medical expenses of employees and their families. This will become crucial in future because medical costs are growing at 12-18 per cent every year, so are health risks due to stress and overwork. In the worst-case scenario, like downsizing, a person without supplement individual health insurance policy can be exposed to risks till the time he is covered again. Buying a separate cover for self and family will help you prevent a dent in your savings.

So even if your employer provides a good health cover right now, what about retirement? When you go to health insurance companies later to buy the plans, be sure that you will not get it or you will pay in gold!

3.     Not buying Term Insurance

Many investors have discarded the possibility of buying term insurance as they don’t get any money back at maturity. They see as investment product in the mirror of insurance so they buy only traditional plan or any policy which combines investments and insurance and offer its money back later.

It implies people don’t understand the meaning of ‘insurance’. The insurance cover  means a corpus which your dependents receive should be able to provide the current life style for them for regular day-to-day expenses of your family with an inflation adjusted return, pay your current liabilities,  emergency expenses and meet the goals you share and buy assets which you wanted them to own.

4.     Buying Insurance policies for Tax savings

Millions of people tend to buy unit-linked insurance plans (ULIPs) which they don’t need and don’t understand that product which has no power to meet their financial goals in the future, just to save tax! They have bought even endowment or money back policies which have neither given suffice life insurance cover nor provided any decent return, the only reason turns out to be “Tax Savings”. These policies are secured products that have your money safe, but the cost of lower returns. The return you get from these policies hardly cross inflation figures, so you cannot get excellent returns from these types of policies.

The situation may be worse while stopping the further premium or surrendering of these policies; your pain may be widened. But what is the effect, long-term as you still continue paying huge premiums and it delivers a lower return than you can get from other products in the long-term. It catches 22 situations.

5.     Falling in Free Financial Advice

It may sound obvious that if you are getting something for free than why should one pay for it. But when it comes to financial advice free can be very costly. Many individual investors resist paying fees and don’t bother about how much commission their financial advisor or agent earns as they feel that respective financial product company has been paying commission to their agents/advisors. But actually, it is the investor’s money from which they are being paid.

Let’s say tax people buy a ULIP with a premium of Rs 50,000 per annum, for saving of tax assuming they are in the 30% tax bracket, they will save Rs15,000 in tax. But if that was ULIP with a 40% premium allocation charges which is the most likely, Rs20,000 is lost the moment they sign the document. So you save Rs15,000 and lose Rs20,000 as charges. And yet, are the same people who say Rs15,000 for a financial planner- too costly.

6.     Focusing on Financial Fee, Not on Value

In the financial world, a lot of investors want transform to their financial life through financial planning exercise but they got a mental block because of the fees as they try to negotiate with planners or hire someone having at the lowest fee. Imagine someone offers to create for you a financial plan which will cover all the aspects of your financial life along with research, analysis, recommendations and personal support for 1 year. The cost of the whole package is Rs20,000. In all probability, it is likely to be your concern about the fees and decided not to hire him as fees become such a big thing for you that you deviated from your main agenda. The fees became bigger than your financial life itself.  An amount of Rs20,000 will not make difference to the financial planner’s life, but that same Rs20k will completely change your life. If today Rs20k  was  your reason for not hiring  the planner; it can cost you lakhs in the coming years through traditionally wrong selection of products by yourself and/or under agents and distributors’ control.

7.     Shopping through Store Credit Cards

Research shows that we feel less guilty when we pay with our credit cards than we do while paying in cash. People think they are simply making a smart move by saving 10% off of their initial purchase, but now you are on a mailing list for all sorts of promotions and discounts on that products which are not really you need. Looking through those incoming catalogs or e-shop can once again trigger demand where there wasn’t any originally; you will soon end up in a debt spiral, which affects your financial position gravely. Also, if you are late on a payment, interest and penalty rates can often be much higher on store cards than traditional bank cards.

Remember, a credit card is not always the best option to spend. Nevertheless, it can work wonders to ease your financial situation, if used smartly, with care and discipline.

We love a good money saving tip. When you’re living on a budget, saving a few rupees here and there can make a big difference. Some money saving tips is pretty sound (like research a product before buying and finding it for the lowest price). Other money saving tips can backfire and end up costing you more in the long run.

This article got published at Dalaltimes.com on 22-05-2014, To Read, please click here

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