Why Do Some People Treat Investment Plans as Piggy Banks (and Fail)?

What is Piggy Bank Mindset?

For many of us, a piggy bank was our first lesson in money management. As children, we’d drop coins in and watch our savings grow. But as we step into adulthood, the piggy bank needs to evolve into smarter saving and investment strategies.

Piggy bank mindset is basically a financial habit where a person invests, but then tends to withdraw from it frequently. The goal of investment is to support long-term goals and create a financial safety net. However, if you keep withdrawing, the growth potential of the investment may be undermined.

Ideally, a smarter approach would be you have an emergency fund backup so that you don't have to disturb your long-term financial goals.

Why Do People Fall into the Trap of Piggy Bank Mindset?

Even after setting up investments, why do some people tend to pull out of them? Common triggers that may lead to breaking funds in investments are:

Easy Access to Funds

Certain types of investments give you the flexibility to take funds out of them when needed. For instance, certain investments like SIP in mutual funds may allow you to skip or simply terminate the plan with minimal effort. So, it gives you an open window to use your funds as you see fit.

Unclear Financial Goals

When you don't have a clear financial goal for the future and start investing without a clear plan, it may lack a solid foundation. When you know the purpose of the investment, it becomes easier to stick to your commitment.

Impulsive Expenses

The habit of unplanned and impulsive expenses can affect not just your investment funds but also your regular essential expenses. So, try taking one step at a time and focus more on essential and planned expenses.

Consequences of Frequent Withdrawals from Investment

What exactly happens if you keep picking out of your investment? The following may be the consequences:

Poor Compound Interest

Compound interest is best accumulated when you are consistent with the investment. It is calculated not just on the principal amount but on the accrued interest as well. With disturbed investments, compound interest may also be low.

No Substantial Returns

Continuous and stable investments may lead to expected returns over time. However, with frequent withdrawals, it may become tough to set up sizable returns over time.

Unnecessary Penalties

In some cases, the investment platform may also charge penalties if you withdraw more than the free limits. So, to avoid unnecessary penalties, it is best to refrain from frequent withdrawals.

How to Avoid Piggy Bank Mindset?

Understanding the effects of poor investment habits is not enough. To fix this concern and build a strong investment plan, you need to take a few steps. Some of these tips are:

Create an Emergency Fund

The first step is to divide your income into different parts, like investments, regular expenses, miscellaneous, and emergency funds. Yes, having an emergency fund can be quite practical and important. In times of need, you can have a fallback. It gives you peace of mind, and you also won't have to disturb your investments.

Pro Tip: Investing in suitable insurance products can help you avoid digging into your investments. The right health insurance, home insurance, and motor insurance can be very helpful during emergencies.

Build an Investment Portfolio

Even after all the planning and having an emergency fund, there are possibilities of uncertainties. In such a situation, you may have to touch your investment funds before maturity. In such a situation, if you have an investment portfolio, you won't lose all your investments. The idea is not to keep all the eggs in one basket.

Control Impulse Expenses

Managing expenses can be a little tough for someone who gets swayed away by impulsive purchases. However, with a strict financial plan and commitment, it is possible to align your expenses so that you don't have to take out investment funds. If you feel like buying something, wait for a while and ask if this expense is really worth it.

Invest in Plans with Minimum Investment Period

If you lack financial discipline, it may be better to opt for policies that come with a lock-in period. For instance, insurance-linked ULIP (Unit-linked Insurance Plans) investments usually have a minimum 5-year investment period. Equity-linked savings scheme or ELSS mutual funds come with a lock-in of 3 years. So, investing in such a plan means your funds will remain invested for at least a few years.

Consult an Advisor

Booking a consultation with a financial advisor can be quite helpful. A professional financial manager can better explain how to manage your expenses. With personalised guidance, it may become easier to understand how you can manage your income and what the right investment plans are for you.

Over To You

Investments are usually a long-term deal, whether it is market-linked or insurance-linked. Only when the funds are invested for the long term can they give maximum returns. With well-defined financial goals, planned investments, calculated expenses, and an emergency fund as a backup, you can master the art of long-term investments. Jio Insurance Broking can be your partner if you need help planning your investments. Connect with us today!