Regular and disciplined personal budgeting, if followed, can help one both financially and mentally
For most people, the last few months have been unprecedented. Whether it is about finding out how secure your financial position is in this crisis, or about understanding what is really important for you, or about looking for new opportunities in an otherwise grim time, it has been a period of discovery.
For me, this period has reiterated a few money lessons that I have learnt and personally tried to follow over the last few years. If anything, this crisis has confirmed to me that the path towards financial, in fact, overall well-being, lies in successfully practicing these lessons.
Separate the must-haves from the nice-to-haves
We yearn to earn more because we want to fulfil our desires. That is the main motivational factor for further success. Over the years, we use this motivation to increase our incomes so that we can enjoy these material pleasures.
But the last few months have deprived most of us access to many products and services. It has also taught us what we can live with and what we can live without. In a way, it has helped us draw clear lines between our needs (must haves) and wants (nice to haves).
Regular and disciplined personal budgeting, if followed, can help one both financially segregate and mentally be prepared for any such eventualities.
Income Protection is more crucial than Wealth Enhancement
Good times encourage us to take more risks. While that is not bad in itself, it can be harmful in case adequate protection measures are not in place to take care of a sudden turn in tide.
It is all well to have the risk appetite and invest aggressively in well-selected equities for your long-term goals, but in a downturn such as the recent one, are you forced to dip into them? Not being prepared for emergencies such as a job loss or god-forbid a medical emergency or a loss of an income earner can rudely bring to bear the futility of having a good long-term investment portfolio without adequate risk protection.
The troika of adequate contingency funds, life insurance and health cover is an absolute must before you embark upon your investment journey. Having a proper safety net allows even the most confident of risk-takers to take their risks with a sense of security.
Debt can be a killer in bad times
The last few years have seen considerable increase in profligacy in consumer behaviour, driven by easier access to cheaper credit, as well as a significant explosion in availability of goods and services that pander to our desires. This crisis has taught people how dangerous debt can be, especially when one’s source of income is no longer certain.
At times it is necessary, even helpful to use debt. That said, it is important for every income earner to remember that his or her desire to take on debt should be contained by the quantum and certainty of future earnings, as well as adequately under-written by existing alternative assets.
Plan more important than Portfolio
Crises lead to volatility in markets and even the worst of crashes. During such times, for someone to not have a clear understanding of what to do can be very unnerving. What to do stems from what these investments are for, in the first place.
Having goals mapped to your investments has the effect of mentally stabilizing you by making you focus on the longer term. Investing to a goal-based plan helps give you the necessary confidence and courage to take short-term reverses in your stride.
The goals must be periodically reviewed and course-corrected to know that you are on course to your destination.
Investments fluctuate. So, recalibrate and relax
The implementation of the plan is equally important, in well-chosen underlying assets and products as well as adequate diversification across asset-classes to benefit from both ups and downs.
Your investment portfolio needs to be well-calibrated in terms of quality, adapted to your goals, their horizons and your risk appetite. Over the long-term, the regular recalibration will ensure any aberrations disappear, and what you get is a picture of your wealth steadily-growing to meet your goals.
Your personal growth funds your future income streams
An important aspect is also about being professionally prepared for an event like this. I have seen many people impacted with sharp pay cuts, even work-without-pay, as well as job losses. This is going to be a way of life going forward, and you owe it to yourself and your family to make sure you are protecting your future income flows through adequate investments in the right skill-sets.
Health is wealth
This crisis sharply brings into focus something that we otherwise de-prioritize for various reasons – work, family, laziness. Our health. Till I was around 40, I was the typical executive, working hard, but otherwise sedentary. A chronic back condition forced me to take better care of my health. I took to running around 8 years back and, it is now a part of who I am, healthier than I was 10 years back!
I am not advocating running here for everyone, but just as we spoke about investing in one-self professionally, doing so for physical and mental health proactively is as important and a key cog in your personal wealth-building machine.
Enjoy the journey while it lasts
At the end of the day, wealth-building is a journey. You may have got all of the above right, but you could still get something wrong – the roll of the dice. Nearly three-quarters of a million people in the world and about fifty thousand in India have already perished to a completely new disease, something that none of these people ever imagined as they rang in 2020.
It could happen to any of us. Hence, while you keep crossing the ‘T’s and dotting the ‘I’s in your personal and professional life, stop to take a deep breath and look around, and enjoy the sights and sounds. Just focusing on the destination can be hugely anti-climactic.
This quote by the humourist and author Douglas Adams says all that needs to be said: “I may not have gone where I intended to go, but I think I have ended up where I needed to be.”
In the end, what such a crisis teaches you about is about having the right priorities. In case your priorities are not right yet, use this crisis to learn and correct.(The writer is a financial planner and NISM-certified investment advisor, and co-founder of Finwise Personal Finance Solutions)