You will work shorter and live longer than you think. Are you prepared?

A New Year brings optimism and we try to channelise that rejuvenation into action through resolutions.

Whether it is stopping smoking or liquor or starting a new diet or fitness regime, the start of a New Year is the time to kick it off. Even when it comes to money, people make resolutions at the start of the year such as controlling their spending habits, following up and clearing some old pending investment-related paperwork, or even something as simple as being more serious about their money.

This is also a good time to go back to the starting line, to take another shot at those things that got missed or we got wrong, and to renew our commitment to actions that we have taken in the past, and that need to be continued.

In line with this, here are eight truisms that I find useful in terms of defining my attitude and my actions towards managing money.

You will work shorter than you would like and live longer than you think

The days when people worked till 60 and then retired are gone. The gig economy has added even more uncertainty. At the same time, nearly everyone you know has parents in their 80s and even 90s. In these last 15 years, the dominant life stage for people has changed from their working-life to their post-work-life. This is compounded by the fact that with every newer generation, the chances of being financially supported by one’s children reduce. What this means is that one needs to plan for this much earlier and much more actively.

Every time you spend beyond your means, you are borrowing from your future earnings

One of the casualties of the social media-intensive world is our behaviour has become increasingly impulsive and our lifestyles have crept up. The lines between needs and wants and their respective priorities have got blurred.

The biggest threat to one’s retirement is not, as one would intuitively think, the inability to generate returns adequately to sustain your corpus. It is the inability to keep expenses under control and continuously expand your lifestyle beyond what is planned. The more you expand your lifestyle today, the more difficult you make it for yourself to be able to sustain it later.

Living too busy a life in the present because you are building a better future is not a life well-lived

At the other end of the spectrum, the process of building wealth has to be enjoyable too –it cannot be just about the destination, but the journey too. Many times, in the preoccupation to catch the next milestone in life – a bigger house, luxury car, next promotion – you end up missing those things that make your life worth it today – the weekend getaway with friends/family, spending adequate time with parents/kids or even having quality “me-time”.

These are moments which cannot be experienced again, and missing them can cause deep regret later, hence making time for them in the present is prudent.

Being wealthy is not about money, it is about having the option to do what you want to

It will be foolish to assume that money and happiness are not correlated but at the same time, focusing on building wealth beyond a certain point is not guaranteed to make you happy. What having adequate wealth does is provide you with a certain freedom, to find more fulfilling pursuits. And this freedom, or the “optionality” available in your life to do what you wish, is what finds happiness.

Hence while earning money and building wealth should be a priority, take some periodic pit stops to find out where you are, and by when you will have the option to “cash in”.

If it looks too good to be true, it probably is too good to be true

In today’s technologically advanced and super-connected times, fads abound. But there are no shortcuts to building wealth, no “free lunches”. One of the most common mistakes that people make in this journey is seeking a “better” or “quicker” return, without adequately understanding the “risk” they may be taking. They do not realise that return and risk are two sides of the same coin.

Always beware of the next tip on Twitter and the next forward on Whatsapp that promise supernormal gains.

We overestimate the short term and underestimate the long term

Our minds are not wired to understand compounding as a concept, especially over longer terms. We think in a linear way, but time has an exponential impact on our lives. A simple example is the impact of inflation. A 7 percent inflation means costs will double in approximately 10 years and quadruple in 20 years. Similarly, an investment return of 12 percent over 20 years means that your initial investment has multiplied nearly 10 times.
Understanding the power of compounding and the role it plays in our lives is as good a superpower as you can have.

The situation is never as bad as one fears but also never as good as one hopes

In a random world like ours, luck plays a significant role in most outcomes, and one of the most powerful forces is mean reversion. Over time, things will revert. Hence be wary of both extremes – excessively positive and disproportionately negative news streams. A fund manager recently gave me a good line – India is an optimist’s disappointment but a pessimist’s delight. This is useful to remember when one reads headlines such as “India’s Golden Decade”. At the same time, one only needs to remember the despair and “The End of the world as we knew it" news in March 2020, to remind ourselves that we are far more resilient than we think.

The greatest wealth is the things money can’t buy for you when you want it

As a nation and as a world we have become more health conscious and that is good. Ralph Waldo Emerson is reported to have said “Health is the first Wealth”, and one couldn’t agree more. As we see people among us and around us ageing, and grappling with the physical and mental changes that come with it, we notice that the non-financial challenges of managing health and keeping oneself gainfully occupied is as big, if not bigger than the financial challenge of sustaining a longer retired life.

Starting early with maintaining a healthy life is as powerful a superpower as compounding – the benefits of this over the long term are immeasurable.
So this New Year, identify the truisms that resonate with you. And you may be pleasantly surprised to see that this time next year you have possibly incorporated sustainable positive change into your life.