Relationship With Money

I wrote this piece a while back for a website. Reposting it here with some edits. Hope this provides a framework for those that are looking for some help

I keep hearing various versions of what people are doing with their money. I am going to put each one of them under a broad category. Some are frugal, some are helpless, some blame their luck and some work diligently towards maintaining their financial health. It is my personal style to focus a lot on diligence and discipline over long periods of time.

I have also known get-rich-quick artists. They are as slippery as they come. I don’t understand them. I can’t put them under any of the categories I have come up with below.

Five broad categories:

1. No money: Living paycheck to paycheck. It’s a state of feeling poor all the time despite having a steady income. In some cases, the affected person is saddled with credit card debt constantly playing catch up. Some go through their whole lives with this philosophy as living on loan becomes the financial normal. This is not a good place to be in. Some in this space are living beyond their means and others have financial responsibility disproportionate to their income. The person in this situation is often forced to take new loans/credit cards to pay off the old ones. It’s a sure shot recipe for money related stress in the medium to long term.

Solution: Downsize your life temporarily and put in the hard yards to get to good financial health. Start saying ‘no’ to all the consumerist temptation life throws at you. Say no to some of the financial responsibilities. Call up the bank/credit card company and workout a payment plan. Pick up a temporary job on the weekend.

I fully recognize it is very easy for me with enough means to analyze the situation from distance and dispense free advice. My objective is to help as I have accumulated some knowledge over the years by living well below my means.

2. ‘Outsource’ money: Certain individuals known to me indulge in this and this is very lazy. Ironically, these are same individuals who have a solid independent streak. It’s a puzzle how the financial part of their lives got outsourced.

Either the spouse or other family members manage money of this person. My biggest problem with this approach is lack of ownership. Taking ownership for good decisions and bad, money related and otherwise is a sign of growing up.

Solution: At the very least, maintain a periodical oversight of what is going on with your money. Or, put down clear goals on where you want your money to be or at what rate you want your money to grow year over year. If the money is underperforming, please be bold to ask questions and make yourself aware of where the mistakes were made. Please don’t let trust, emotions or familial temperament get in the way of money management.

3. Simple money: Provident fund, fixed deposits, real estate and in some cases insurance policy are the areas where money is parked in this method. My thought is, this portfolio will underperform because of it's defensive nature. Further, inflation eats away at the value of fixed deposits. If you are living in India which has had high growth and high inflation till 2015 for last 20 odd years and you have put large amount of your money in fixed deposit, you have missed out on earning higher returns. If only the same amount of money in your fixed deposit was invested in a blue-chip stock, your money would be far higher in value today. You don’t need a solution here …you simply need to course correct and gear a certain percentage of your portfolio towards stocks. Do that only after you have learned the basics of mutual fund and stock market investing.

4. Balanced money: Exposure to term insurance, bonds, precious metals, real estate, land, stock markets and mutual funds/ELSS/ULIPs. While there are many asset classes here, but this approach is not far from value investing. 20% of income is invested steadily month after month, year after year. The key component of this investment style is spreading out the risk on a range of asset classes and accumulating wealth over a long period of time with thoughtful risk exposure.

During the time I lived in the USA, I had some Jewish friends. They thought of wealth creation over time spans of one hundred, two hundred years. Simply mind blowing because on that kind of time span risk has a very different behavior. Time and compound interest are key allies for this investment style. In this approach:

a) precious metals (gold, silver, platinum & palladium), bonds and term insurance form the defensive core of investments (risk mitigation, capital protection and forming a moat around inflation and/or recession) 

b) Real estate and land form the solid middle with moderate risk and growth prospects

c) Because the defense is strong, about 40% - 50% of the portfolio is geared towards mutual funds, stocks etc. for high returns

This is my approach and I am happy to get into details with anyone wanting to know more.  

5.  Aggressive (and maybe reckless) money: Very high percentage of exposure to stocks. There could also be investments in startups, day trading, timing the market, owning more than one house and flipping property. Visits to gambling dens and playing poker can’t be ruled out either. In short, this relationship is geared towards > high risk, high return or heavy losses. I may never participate in it and not recommend it but sure there are people who have “play” money allocated to it. Other than observing this money philosophy from sidelines and recognizing it is not right for me, I have nothing much to say.