Resilience, immunity, flexibility, adaptability, and protection.
If we had to sum up the last two financial years – we would use these words. Not because they were in ample supply or were all around us. But because these were the words that almost the entire humanity collectively understood for the first time and realized how important they are.
The world is still grappling with one crisis after another – from the waves of the deadly COVID-19 to the geopolitical supply chain bottlenecks, and from rising inflation to the Russia-Ukraine tensions.
As a matter of fact, if anything, these crises have hammered the importance of being prepared, healthy, and resilient on all fronts – physical, mental, professional, emotional, and especially financial.
If it were up to us, we would write off the financial years 2020-21 and 2021-22 from the collective memories of the world. But, as it is not in our hands, we shall do the next best thing. Something that we have been doing for millennia – stand up, dust, and pick up the lessons for the future.
As we enter the new financial year starting on April 1, 2022, the question is how to develop resilience and protect ourselves from financial pandemics which are far more frequent than medical ones?
The answer lies in the following 10 commandments – something to do and not do, something to learn, and more importantly unlearn.
The Ten Commandments for the New Financial Year
1. Find, Where Do You Stand
Before taking any leap – on the playground or of faith – you must place your feet firmly on the ground. If the ground underneath is slippery or, in the worst case, is fragile, you will need dollops of luck to make that jump.
Similarly, when you start or take the next step in your financial journey, you must know where you are, what you already have, what is your goal, and what course of action is needed to reach there.
By creating a statement of assets & liabilities or a net worth statement, you can figure out where do you stand. Whether the road ahead is a slippery slope or a long runway to compounding. (Read my conversation with my friend Rohit about the importance of knowing your Net Worth)
2. Identify the Mistakes, And Do Not Repeat Them
One of the major mistakes we make is ignoring the mistakes we made.
While making decisions under uncertainty we are bound to make some wrong ones. When it comes to money, emotions also play their part in clouding our judgment.
It could be impulsive purchases, taking a personal loan, or confusing insurance for investments. It could also be forgetting to cancel the subscription of all the OTT platforms which we no longer watch. Such petty expenses are like small leaks with a slow but steady flow, to empty your coffers. (Read: 21 Money Mistakes to Avoid)
Another mistake could be that despite having to struggle to pay the EMIs and bills, we do not take out time to study and discuss personal finance. We are always looking for that lottery ticket that would take away all our troubles – in the form of a momentum stock, cryptocurrency, or commodity.
Charlie Munger, Warren Buffett’s senior partner, friend, and guide has this to say of mistakes, “All I want to know is where I’m going to die so I’ll never go there.”
3. Unlearning is as Important as Learning
We usually focus so much on learning and forget we have some major bad habits. Unlearning is like weeding – removing all that is unwanted, toxic, and dangerous to our financial health.
One of the first things we need to unlearn is waiting for having enough money to start investing. Let me tell you, it will never be enough, and you will never start investing. One day it would be a regular bill, the other some emergency. Then there will be inflation and taxes eating into whatever you are earning. It will never stop. So, start small and make it happen today. (Also Read: When is the right time to start financial planning?)
Another thing we need to unlearn is to believe in tips from brokers, friends, uncles, and even on social media groups. If you are going to throw your money around simply based on hearsay, then we suggest better keep it in your savings account or open an FD. It will at least take some time to disappear. (Read: 21 signs of Bad Money Management)
The third habit that we need to unlearn is that we spend first and then if something is left, we save. As Warren Buffett said, “Do not save what is left after spending, but spend what is left after saving.”
A final habit to unlearn is to let go of our ancient beliefs around money.
We treat incomes, especially the surprise ones as if we hunted after days and blow it over like there is no tomorrow. Similarly, we treat volatility like an attack on our person and get into the flight-or-fight mode. It is difficult to change the hardwiring of the human brain, that only until the last century was always in constant fear of their lives.
4. Designing a Budget and a Portfolio
With a fair knowledge of the status, mistakes, and a resolution to fix them, now you are ready to draw a plan.
A plan should include a monthly and annual budget to manage your expenses and income. This will help you with the cash flow situation while allowing you enough room to save by helping you to curb impulse buying. (Also Read: How to stick to a Budget in this mobile apps world?)
You can follow the 50-30-20 rule by Elizabeth Warren – spend 50% on needs, 30% on wants, and save 20% of income every month. This rule is helpful if you do not have a clear goal in mind.
Another important part of the plan is to define your financial goals – immediate, short-term, and long-term. Based on these goals, you must find the best asset allocation and portfolio to reach the target amount in the needed time. (Also Read: Perfect Investment Portfolio- How does it look like?)
Depending on the amount and time horizon of the goals, you may have to tweak the savings rate or may have to go for a more aggressive asset class. You have two choices – make your expectations, and hence, goals realistic; or take on more risks to achieve them. (Also Read: How to prioritize your financial goals?)
5. Take Note of Rule Changes
The new financial year brings a host of changes. Most of the financial updates are related to tax policies, TDS rules, and investment-related rules.
Therefore, it is also time to redesign goals and investment policies accounting for the impact of such changes on the portfolio. If you can pay attention in the beginning, you are less likely to panic as the financial year nears its end.
6. Prepare for any Emergencies
The time has delivered its most important of lessons – hope for the best, prepare for the worst.
After so much turmoil – physically, economically, emotionally, and financially – if you still need convincing to make an emergency fund, then good luck with that.
Having an emergency fund could help you think more clearly with an altogether different perspective. You will not function out of fear.
A golden rule is to have at least six months’ income in your emergency fund in a separate savings account, FDs, or liquid funds. Always remember, only cash and cash equivalents should be part of your emergency funds. Assets like gold and stocks are too volatile, and real estate is illiquid. (Also Read: Emergency Fund- the first step in financial planning)
7. Start now – It’s Never Too Late
As Robert G. Allen said, “How many millionaires do you know who have become wealthy by investing in saving accounts? I rest my case.”
The money sitting idle in your bank could never beat the rising inflation. And in today’s scenario of raging inflation and falling interest rates, even FDs do not offer any respite. (Also Read: What is inflation and how does it impact your financial plan?)
In the long run, allocating money in a basket of defensive as well as growth-oriented asset classes will give you a safety net as well as beat inflation to generate long-term positive real returns. (Also Read: Asset Location is as important as Asset Allocation)
The emergency fund is not counted as part of your investment corpus. Nor do the house where you live and the one for which you are paying off a loan.
For defensive investments, PPF, EPF, NPS, and other small savings schemes from the government are your best bets. For steady cash flow, you may look at some interest paying instruments or have to create a structure through Mutual funds. Dividend-paying stocks, or commercial real estate to let out, can also be the source of regular Income. (Also Read: Safe Investment Options in India)
Finally, for the much-needed growth in your portfolio, you cannot ignore equity Investing at all. You can start a SIP in good mutual funds aligned with your goals. (Read: What is SIP in Mutual Funds?)
8. Always have a Second Income Source
I know its easy to say. But as far as possible strive for this.
The rising standard of living and inflation put worrisome demands on the already strained resources. The continuous stress to make the ends meet results in irreparable physical and emotional burdens too.
The freedom which the second source of income could offer is priceless. It could be a side gig, an extra job, or another set of hands contributing. If not try and save the maximum possible money and create second and passive source through Dividends or Interest Income.
This would not only help you reach goals faster but would also offer a better cushion against shocks. (Read: How to create a second source of income?)
9. Start Learning about Finances
It is because of financial illiteracy that most people get trapped in the vicious debt cycles of revolving credit. Basic knowledge of how credit cards work, markets function, inflation eating at your income, and multiple investment options can help everyone in the long run.
Most people do not learn about the basics of finances either because they do not have time or find it confusing. But it is the lack of such understanding that puts them in a tight spot. They find finance riddled with jargon and too many calculations.
Well, in the times of YouTube videos and online calculators, it is no longer complicated to get a basic understanding of finance, taxes, inflation, interest rates, and related factors. Tracking your finances and analyzing your spending patterns is also super easy with great apps.
In any case, you will have to put in some effort and time. We believe giving only 1-2 hours a week is enough to build a foundation.
10. Sharing is Caring
There were many stories of the financial ruin of families in the aftermath of the COVID-19 crisis because the sole earner of the family passed away.
The loss and pain were exacerbated also because in many cases the families did not know about assets/debtors, liabilities/creditors, investments, and even their insurance policies.
When you make a personal financial statement, you are leaving a record of your thoughts, philosophy, and most importantly your current financial status.
At least one or two of your family members must know about your financial position. They must be updated every few months to bring them up to speed. If that’s not possible, then you can give instructions to your financial advisor to appraise your family about such matters when you are no longer around. (Also Read: 21 Good Money Habits for your Financial Wellness)
Do not Ignore writing a WILL. Having a Private Trust can be further beneficial when you want to ensure the distribution of assets as per your wish.
There are far too many stressors in life. By simply following the above commandments, you can make your financial lives simpler and even untangle your personal lives in this and all the coming new financial years.
Learning and unlearning are both parts of the journey. A Financial Planner and a Reliable Advisor can be your navigator in this territory.