Know How to Resolve

So, one more year has ended and once again we are ready with our New Year resolutions. It’s raining articles on “what should be your resolution?”. Resolutions are made to concentrate on those areas which need improvement but even if they are made with a proper thought, they are most likely to be broken. The simplest reason for this is that resolutions mean behavioural changes and most people resist them, particularly when it involves altering a set habit. You understand how difficult it is for a spend-thrift to write down a budget and act on it. It is very difficult for some to miss the first-day show of new movie or the first day of “up to 60% off sale”. Retirement is a very far off target for many.

Financial planning resolutions are similar. People know that they are in financial trouble or could be in trouble if not acted upon, but even then they keep on delaying or looking for alternatives. Last year I also found this difficult to implement, not because i did not know the importance but actually my wife was not convinced. So to convince my wife to work on it, I had to make her experience some of the things to help her understand the importance of these areas. Through this article I would like to share some experiences which you can treat as advice and  can act on those to resolve for life ahead, not just the year ahead.

1. Stop paying yourself:

To make her understand the importance of emergency fund and retirement planning, I have decided not to bring the pay-cheque home and also did not let her. I kept on parking the total money somewhere in the liquid funds. Just to feel the crunch of not having enough money and understanding the situation when the actual flow of money stops. Now we were to manage with the existing savings, which lasted for around two and a half months. First month it didn’t bother us, the second month we took note on our expenses and started compromising on our lifestyle to make arrangements for coming months. This made her realize the exact situation of a job loss or retirement, when the regular income flow stops. So next day she resolved to create the emergency fund and actually created a good corpus in next 3 months. She actually understood the importance and used tools like budgeting and cutting down on discretionary expenses.

2. Expenses budget vs. savings budget:

After few months I realised that she has become overcautious on the expenses and also on the savings front. This has started bothering her lifestyle. This was the time to teach her the importance of investments. I explained to her the theory of compounding, taxes and the devil called inflation. This made her realise the repercussions of keeping money idle and that too in savings bank accounts. That was the moment when she actually resolved to invest at least 20% of the income every month into Investment products. For many it is very difficult to follow a budget on expenses but if we take out a portion of income and diverted it towards investment then automatically one is left with the portion which should take care of the expenses.

3. Be socially responsible:

Then was the time to give direction to that 20% savings and to increase that if required i.e. time to decide on goals. Like many, she was also confused on what should be her goals. Since we were and are a DINKs (Double Income No Kids) couple living on rented accommodation, the target was to purchase a house. And yes, like other women she wanted to purchase diamonds and wanted to go on a foreign vacation. Since I was aware of our financials, I showed her some calculations on our cash flow and net worth. Then I took her to some property dealers in some upcoming projects. Our cash flow did not support the expected EMIs but still she was very excited as she was expecting a raise next month. Two days later I took her to an old age home and an orphanage. We spent half of our day at each place. After coming back I asked her to write down her goals and prioritise it, so that we start working on it. I was amazed to see that now she did not write the diamonds and vacation in her goals, but added secure retirement and planning for our child’s future (though we didn’t have any, at this time). I added back the erased goals and allocated the funds towards all the five goals as per the priority. This made her so focussed that she resolved to cook at home even on weekends, so that we can donate the funds saved to that orphanage and old age home. We have also cut down our expenditure on birthday parties, weekend movies, etc. so that we can choose a more exotic place for our vacations.

4. Take care of your health

Some things might not be on your priority list but even then you have to work on it. Many a time even a fitness freak goes through such a bad health phase which leads to complete washout of his finances. Though we generally or theoretically take care of our health by eating balanced diet, no smoking, no drinking, regular exercise, etc. (hope I am not embarrassing anyone), but still health problems are not in our hands. So to manage it financially we must be adequately insured for health, accidents and critical illness. I knew that my wife will counter it with her employer provided insurance coverage of Rs 3 lakh. To answer the same I took her to one of my doctor clients who is a neuro-surgeon and has a private practice, as this time I didn’t want her to experience the plight. The doctor was in the habit of increasing his mediclaim’s sum assured every year which should be equal to the highest amount any of his patient’s had spent on the medical treatment. His current health Insurance coverage is Rs 15 lakh. After discussing with the doctor she not only resolved to buy a good coverage but also took out some money out of her income, every month, to help those patients who could not afford such expensive treatment.

The whole idea of telling you my story is to make you understand that you will stick to your resolutions only when you are actually passionate and serious about them. Once you experience it, you will surely start working on it. But as they say,“it’s always wise to learn from others’ experiences.”  For making resolutions you need not have to wait for 31^st Dec, you make them on any day of the year. It’s not difficult to resolve, but it’s actually difficult to stick to it.

Better to take it seriously this time.

This article has been written for Financial Planners’ guild India. Reach at www.fpgindia.org