Are Money Mistakes Hereditary?

Between 2004 and 2011, economics professors at the University of Copenhagen analysed loan histories of five million Danes, and came up with a profound conclusion: children pick up the bad financial habits of their parents.

While analyzing 30 million personal loan records held by individuals in the ages between 18 and 45, the professors detected a pattern in repayment habits. As per their study, if a parent had defaulted on a loan, the chances that their child would also default on a loan were four times that of a child whose parent had not defaulted.

We are shaped in many ways by the choices, actions, and decisions of our parents. Our money management habits too many have been inspired by our parents. While good habits will provide us the groundwork for financial stability, bad habits will bring problems.

Here’s a look at some not-so-great money habits we may have consciously or unconsciously picked from our parents, and what we can do to nip them in the bud.

Repayment of Loans

As the Danish study above reveals, we may be picking our parents’ tendencies towards debt. It’s our moral and legal obligation to repay our loans and credit card debts. Try and look into your parents’ credit history to understand how they have repaid (or not repaid) their debts. Repaying your loan will not just unburden you, you will also be rewarded with an improved credit score, which would allow you to take further loans at the best interest rates. 

Traditional Insurance

Many Indians still prefer the ‘traditional’ way of insuring their lives. Often, such life insurance products are bought without evaluating the actual insurance needs of the family. For example, if you’re a primary bread winner with dependents, your insurance policy must cover the long-term expenses of your survivors, such as rent, EMI, children’s education costs, healthcare etc. Also, very often life insurance is bought in a hurry at the end of the financial year to simply save tax. This needs to stop. Insurance should be bought, first and foremost, to cover the life risks of the family’s primary provider, and to replace his income in case of his untimely death. While traditional insurance plans may have their attractions, a person with dependents must consider term insurance, which provide higher protection levels at lower costs. 

The Rush For Gold

Not all that shines is gold, and not all that’s gold always shines. Gold has provided a traditional investment route to Indians for centuries. The yellow metal certainly has its benefits: it is rare in quantity and so precious’; it doesn’t corrode and so it can be stored for long periods of time; it is malleable, so it can be reshaped into wearables and artefacts. However, you must resist the urge to park all your money in gold. Its market returns have seen a lot of volatility in the last few years. You should consider a mix of mutual funds, bank deposits, PPF, etc. while planning your investment portfolio, and also allocate some of your funds towards gold—but in a small, controlled amount. Secondly, gold investors don’t actually need to buy physical gold. To overcome concerns about purity and safe storage, you may simply buy gold mutual funds, gold ETFs and Sovereign Gold Bonds. 

Not Buying Health Cover

How many cases do you already know of parents dithering on the matter of buying health insurance? Some families avoid buying health covers, thinking them to be an avoidable expenditure. Then, it becomes difficult to buy even a basic cover for them at an advanced age. Any hospitalisation at such a point would put the family’s savings and wealth at risk. Health insurance is a mandatory purchase. It should ideally be bought when you’re young. Start off with a basic cover of Rs. 5-10 lakh, and then keep upgrading with top-ups as you age. In the event of a health emergency, your family’s wealth would remain protected.

Fixed Deposits Are Great, Within Limits

Consider the average fixed deposit returns today: around 6 % to 7% per annum. If you’re in the 30 percent tax bracket, your post-tax returns from a 6% deposit would be a paltry Rs. 4.2%. This is highly unappetizing and does not even beat the average inflation rate over the last 20-odd years, which has hovered in the 6.5% range. Fixed deposits should be used to store money for short-term needs, such as for an emergency fund. Beyond a limit, it wouldn’t be wise to invest through them. This is because they aren’t tax-efficient, and because there are several other options (such as PPF and mutual funds) that can offer much better returns.

This article originally appeared in The Finapolis.

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