How to manage personal finances
NEW DELHI: While we all assume that good personal financial habits are easy to acquire and live, what we see around us does not confirm that notion. The data shows that participation in the securities and mutual funds markets is, at best, marginal. People still prefer to keep their money in property, gold and bank deposits.
The road to efficient personal financial decisions is still fraught with many obstacles: complexities introduced by policy makers and regulators that investors do not easily understand; too many products described in too much jargon; The implementation problems that require paperwork and investor processes do not know how to complete them. It is easy to assume that financial education can solve all this. Not really. We can focus on what investors can do in this situation.
That premise takes me back to a constant cradle on this column. Investors complain that I do not provide specific instructions. The reason is simple. Efficient decision making always replaces actionable points for implementation. Without setting the context, without defining the problem and its boundary conditions, and without observing what works and what does not, decision making will continue to be impaired.
This column simply focuses on allowing investors to dominate that framework. One concept at a time. One principle at a time. One idea at a time. With the hope that, over time, investors will know how to take care of their personal finances.
Why take over? There are three reasons for this. First, the era of government that provides us is over. A generation that has no pensionable jobs will soon retire.
Second, the market is governed by sellers. The only defense investors have of their armies that will pursue their objectives with aggression is to be in charge of their personal financial decisions.
Third, we will all live longer. Living with regret for decisions that are not made on time is horrible. What are those concepts, principles and ideas that could help us? Let me put five things to think about.
First, Personal finance It's about the few strategic decisions you make for a lifetime. If your goal is to be financially independent, you cannot achieve it without stable income, controlled expenses and asset accumulation.
Second, if you have a sensible investment in mind, you must commit to strategic asset allocation and diversification.
Third, understand the idea of growth versus income and decide how well your money aligns with your needs given the phase of your life. What you need every day must be taken care of by your income and everything else must be invested to grow in value.
Fourth, every decision has a pure form: the right thing. Grab that, completely and without fear. Then deal with what the commitments are, and if you are willing to accept those commitments given your situation. Whether it's a loan, unpaid installments of a credit card, the policy you signed or the fund you bought, you should be sure that they are right for you.
Fifth, decisions have a high level of competence. They need a thorough conceptual understanding and experience to deal with the entire cycle of thought, action, observation and correction. Be sure which components of this cycle you will deal with and what you will outsource.
There are components of your financial life that you must take care of. Columnists like me hope to help, but the task remains theirs.
(The author is president of The Center for Investment Education and Learning)