Our food habits, dressing style, and social etiquette all such aspects of our lives are influenced by the process of socialization. We learn and implement all these ideas on the basis of our interactions with our friends and family. Similarly the financial decisions we take are essentially controlled by non – financial factors. Individual characteristics combined with the impact of the society, family and friends account for these major non – financial factors.
Our investment decisions are the ones that are affected most due to this behavioral bias of following the people around us. We see one of our friends picking a multi bagger and bragging about how he/she made money within no time. In the quest of finding that next multi bagger the probability of us buying a stock that our friend recommends is high compared to choosing one based on our research. The positive signal about the stock is being conveyed by the friend but not the market governing factors of the stock. This is similar to buying a house in a locality because someone advised us that the area is going to flourish in the coming days. So essentially the utility curve of such invest instruments is skewed because it is not the individual need or demand that is driving the utility curve but the wild goose chase of the individuals is driving it.
After investments, it’s the tax saving decisions that get effected due to social impact. Be it directly making tax saving investments without actually analyzing the tax liability or purchasing instruments based on the recommendation rather than their own merit we increase the burden on ourselves in the name of tax savings if not done in a systematic fashion. It is undeniable fact that 80C takes the front seat when it comes to discussions around tax savings. But it is important to assess the tax liability methodically and determine the amount you can invest. Since liquidity is a major stumbling block when it comes to tax saving investments, it is also important to assess our goals and their respective timelines and decide whether making investments for achieving the goals or making an investment for saving tax is important.
If you have enough surpluses to make investments which are incentivized from tax, make sure that you do not get lured by your neighborhood uncle or some relative to buy an insurance policy in order to meet their targets. Insurance for long has been the most loved tax saving instrument of Indians. Never buy insurance for the sake of tax savings. Get insurance to get protection from unforeseen eventualities.
Making financial decisions in isolation without assessing their impact on other financial decisions, following the advice of friends and family without assessing the merit of the investment instrument being recommended by them are the most costly personal finance mistakes. We highly recommend the individuals to stop following their peers when it comes to making financial decisions. The financial needs and solutions for every individual are different. It is in their interest that they have to opt for financial planning platforms which provide unbiased advice.