FINANCE SPECIAL..... Is your money strategy in place?

Is your money strategy in place?

Think about your financial life and decide how you will make your money work

What does the unknown and unexpected do to us? Are we thrown off balance, unable to decide? Are we so unsettled that we do not know what past experience to draw upon to deal with a new situation? Or, do we love the surprise? Do we enjoy the adrenaline rush and the freshness of the new? Personal finance is personal, because each of us responds differently to the unexpected.

What is the right thing to do, is the oftasked question. There is no single satisfactory answer. Don’t spend your income, some will say; put aside some for a rainy day, others will add. Some will fail to visualise what a rainy day might look like and so fearing it would seem foolhardy to them.

From among all the advice about goals, retirement, early saving, investing right, risk preference and disciplined investing, how do we choose our path? How do we stick to it? Where should we begin?

Strategic personal finance requires investors to think deeply about their financial lives, and set themselves preferences about how they would like to play the game. It is strategic because it considers both actions and consequences. It is not a whimsical orientation that seeks to live the good life without the effort to earn the money to support it.

First, have we identified what we want our money to do? What purpose would it have to fulfil to satisfy us? There is a hierarchy in play here. We seek safety and security for ourselves and our family as a primary survival goal. After having enough to meet the basic needs, do we know what we should do with the surplus?

Our spending habits are dictated by our strategic orientation about what is important to us. To some, keeping up with social circles is so important that spending on partying, clothes, gadgets and travel is something they have to do. To some, the lure of interests is so high that they have to spend on it regularly. To some, giving is the primary purpose of the surplus and they have to pursue charitable activities. Make sure you have enough for what matters most to you.

Second, how do we behave when there isn’t enough to go around? How willing are we to make sacrifices? Do we choose denial instead? Do we borrow to make up? How do we make choices when we fall short?

Our saving habits are driven by our strategic choices around money as a limited resource. If we dislike falling short, borrowing, or asking around, we willingly set money aside for the future. For an unknown eventuality that might need us to draw upon our savings, we create a buffer.

Third, how accessible do we want our savings to be? Is being able to draw on it at short notice a comfort we need? Or do we want it to be locked away out of sight so we are not tempted to access it? Do we like checking what is going on? Or are we willing to let it lie and be confident that everything will eventually work out fine?

Our choice of investment instruments depends on how we treat the assets we accumulate. To someone who fears falling short too often, assets that can be accessed quickly is important. To someone worried about stability of income, looking up the value of investments often is an emotional need.

Fourth, how well do we stick to plans? Are we able to implement and execute ideas? Are we able to respond to events as they unfold and make tactical changes as needed?

Our ability to stay the course and remain in charge of our finances depend on how confidently we are able to make tactical choices as life unfolds before us. We are not disciplined, systematic investors if we allow tactical unexpected events to keep modifying our strategic long-term plans.

A young earner who pays multiple EMIs, worries about credit card dues, is unable to make a career choice that takes him to a new city, needs help with strategic personal finance. The choice of assets fails to take into account the spending needs, and the income is at risk as decisions are being driven by sunk costs of property.

A retired senior who lives frugally out of fear of outliving the assets, and is unwilling to incur expenses that can enhance the quality of her life, needs help with strategic personal finance. The assets she will leave behind can be put to use in her lifetime, even if partially, to offer her more comfort.

Many of us may not have spent time to think about strategic objectives that should drive our money decisions. We let money lie in the bank, or invested in assets we don’t bother about much, or left locked in investments we hope would do well. Simpler decisions to fly out to see a friend, or buy a new guitar to begin music lessons get pushed out when we are unable to decide. Risky decisions to spend retirement proceeds on large ticket expenses, or invest in poor quality investments get taken, as we fail to appreciate the consequences.

Being in charge of our wealth is to stay focused on what we want our money to do for us, and driving decisions in that direction with discipline. It is easy to be in denial and tell ourselves that money doesn’t matter so much to demand such careful attention.

In all the years that I have heard people’s opinions and ideas about money, I have not met a single wealthy person who says money is not important. The wealthy enjoy the choices money offers. Some exercise those choices for the benefit of many; some focus on their comfort alone. I have also met many who declare that they are not enamoured by money, but simply cannot stop spending.

Make your choices about wealth, and be sure you own it, whatever be your philosophical orientation towards money.

UMA SHASHIKANT
IS CHAIRPERSON, CENTRE FOR INVESTMENT EDUCATION AND LEARNING

ETW 19NOV18