Retirement planning can be considered a part of the broader term ‘financial planning’. In finance, the concept of opportunity cost is very important for decision-making. Opportunity cost refers to choosing one option and letting go of others, along with the benefits of the foregone items or services. For instance: buying things on sale or at the cheapest rate, but compromising on quality, and other such hacks and habits. This applies to retirement planning, too. Saving money helps for financial security but sometimes you question yourself whether these Money-Saving Habits Aren’t Worth It or not.
In India, where financial education has not been a part of the school curriculum, children typically inherit their financial habits from their parents. However, the useful saving habits for boomers may not be similarly useful for millennials or Gen Y.
Let us look at these money-saving habits that are not as useful for saving money as otherwise thought.
1] Delaying Insurance: For many individuals, health insurance is not considered a need, but rather a luxury. As many of the older generations have not spent on health insurance, many youngsters do not understand the need for it. The reality is that by spending a small amount, they can ensure coverage of their health-related expenses. However, they find saving this amount is more important than buying a health insurance plan.
Whether it is life or health insurance, the premiums are low if bought at a young age. But people often ignore it and save this money in financial instruments or, most of the time, use it for other expenditures. But, ignoring health insurance for self and family to save a few thousand rupees now can cost a few lakhs in the long run. Saving on insurance premiums can cost anyone dearly, eventually putting one’s finances under duress later.
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2] Saving On Necessary Items: Having a saving mindset is fine, but saving on items, such as food, basic comfort, etc., can have a high opportunity cost. For instance, doing all household work by oneself to save money, but losing out on health in the process is not worth the effort. Spending on oneself sometimes will not take the savings out of your kitty. Thus, think of saving money from items having less opportunity cost in the long run.
3] Saving At The Cost Of Getting An Education: At times, saving looks more attractive because it gives measurable rewards in terms of building upon the corpus, so the expenses for long-term benefits may get ignored, and education is one such important expense.
In many families, once a child is born, parents do not want to spend on their upskilling and education, even if it can improve their chances to explore better career options and earn more. The opportunity cost is high if it is for education, and hence, it should be evaluated carefully.
4] Ignoring Health And Avoiding Small Joys: If your life mantra is to work hard, it is not harmful. However, ignoring health, both physical and mental, may not be a good idea. If you want to save money by not joining a hobby club or not taking time off from work even if you are not feeling at your best, it may harm you more than it can save you money.
For unquantifiable things, knowing what you are losing by letting off the alternative option may be difficult, such as joining a gym or exercising at home. So, find out their opportunity cost and make the decision.
Saving money and investing is crucial, but certain money-saving habits that look useful in the short term may not be beneficial in the long term after retirement, especially when it comes to the quality of life. So, being mindful of the opportunity cost to balance savings and expenditure is critical, so that you don’t end up cutting down on your expenses to an extreme, and also get to enjoy a quality life, too.