Mastering Personal Finances Amidst Chaos: Lessons from Thirukkural

In today's world, inundated with super-energized, impulsive influencing content, which has the potent ability to trick our brains into mindlessly scrolling and clicking the 'pay now' button without pausing to analyse our purchases, managing our “personal finances” becomes truly challenging. This phenomenon isn't limited to online purchases; it also applies to the physical purchases we make when casually visiting shopping malls or other locations. I mention malls specifically due to their highly impulsive nature of advertisements and displays. The pandemic phase gave rise to many finfluencers (who generate content with an education mask and in most cases influence to invest in a certain financial instrument promising a great return), the financial regulators across the globe are scanning these brain spammers and creating more accountability.

The mentioned noises are not always under our control and even if we block or uninstall an app on our smart devices, it is truly difficult to arrest these noises. However, we need to be aware that getting influenced or not is under our control. It is only when we are conscious of this super-weapon that financial navigation becomes simpler in this ever-noisy world.

Personal finances are the foundational blocks for individuals across all walks of life, regardless of the diversity of income streams necessary for achieving financial success. So, is it truly difficult to manage one’s own finances and why do most of us struggle with this life’s fundamental necessity? The irony is that even finance professionals who have studied finance and are in the jobs of advising companies about how to manage finances are at failure to manage their own finances.

Most of you who are reading this article will be dependent on the salary as the primary income stream and will always be in awe in witnessing the constant flow of financial Gyan available on social media. Some of them would have matured and realized that always sticking to the basics will help us create disciplined financial habits. It is important to always reiterate and revisit the basics to stay protected against the constant impulsive buzz around us.

Before we look at the fundamental financial metrics, it is important to define the basic terms (pros can skip this part, if you feel it is very basic).

• Income – Money that we earn through a legitimate means
• Debt – Money that we owe to anyone from whom we have borrowed
• Investments – These are the assets that we own (can be anything which has the nature of both appreciation as well as depreciation)
• Expenses – These are the general spending which we incur to satisfy our needs, wants and luxuries.

So, what are the basic financial metrics that one should track from His/Her’s first-month salary onwards?

• Savings = Income – Expenses
• Savings Rate (%) = Savings/Income

This is the portion of our disposable income which we allot to save now rather than mindlessly spending on the wants/luxuries fuelled by our impulses. One of the widely adopted methodologies is the 50/30/20 rule for maintaining a health savings rate. 50% goes towards our needs, and 30% goes towards our wants which are our discretionary spending (if controlled will only increase our savings rate and the remaining 20% goes towards our savings and debt repayments. The key here is to not live a cheapskate life but to strike a balance between mindful spending and saving for the future.?

• Cash to Investment Ratio = Total Savings/Total Investments

This ratio provides insights into the liquidity position of an investment portfolio, offering a snapshot of the extent to which readily available funds are allocated compared to those committed to longer-term investment vehicles. A higher ratio suggests a more conservative stance with a greater emphasis on liquidity and risk aversion. In contrast, a lower ratio indicates a propensity for longer-term wealth accumulation and potentially higher risk tolerance. Balancing this ratio is essential in optimizing both liquidity needs and investment objectives within the context of an individual's or entity's financial strategy.

• Debt to Income Ratio = Debt/Income

This ratio is a key indicator and truly vital to check our ability to manage debt responsibly and sustainably. This is the ratio used widely by lenders (financial institutions) to determine creditworthiness while sanctioning and disbursing loans to an individual. A lower Debt-to-Income Ratio indicates a healthier financial position which means a smaller portion of the disposable income is enough to honour the debt obligations and a high Debt-to-income ratio indicates a financial strain and highlights the limitation in one’s financial flexibility which increases the risk of defaulting.

• Net worth = Total Savings + Total Investments – Total Debt

Net worth is a fundamental financial metric that is used to assess an individual’s or a household’s financial position. It represents the difference between the total value of assets against the total liabilities. If the result value is positive then it indicates financial solvency and wealth accumulation and if the result is negative then it indicates financial indebtedness and a potential financial strain.

What does our Master Thiruvalluvar say about this essential topic of managing and creating wealth? Well, he has dwelled into it more philosophically but if understood clearly will certainly make more magic in the way we manage and create wealth with our income.

In Kural 333 under the Chapter “Instability”, he has written a couplet which stresses the importance of understanding the characteristics of the income flow.

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It is vital to understand that the income/money we earn through a legitimate action is always perishable in nature. We need to create an income stream which is certain in nature using the income earned in the world ruled by VUCA (Volatility, Uncertainty, Complexity and Ambiguity), failure in this regard will only result in disastrous consequences.

In Kural 753 under the chapter “Way of Accumulating Wealth”, he explains the potent ability of wealth.

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With the required wealth in hand, one will be able to travel to any extent to illuminate the darkness in life, which brings more sorrow and pain.

In Kural 754, he explains to us the importance of generating wealth through legitimate means and what will be the result of such wealth generation.?

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It is super-vital to always reiterate that any cash flow in our life should always be generated through legitimate means and only this type of wealth generation will add more happiness and virtue to our life and the opposite of this will only bring more sorrow and pain.

I would like to conclude this article by reiterating that being conscious of what is under our control is foremost important in reducing the risk of getting influenced by the noises around us and as elicited by our master Thiruvalluvar it is vital to create more income sources which are certain in nature using the income we earn through legitimate means and most importantly we must always ensure to measure and track our financial health even though it might look monotonous.