Tenets for financial freedom

May 17th 2020

Recent conversations on few WhatsApp groups that I am part of made me write this post – People were venting their frustration / anger in the group as the 20 lakh crore govt. support package was being announced over 4/5 day span last week. Some mentioned about govt. not doing anything for the middle class and how people are losing jobs and facing humiliation in the hands of credit card sharks….

The phrase “credit card sharks” struck a raw nerve in me – the immediate thought was “don’t we  know of the exorbitant interest rate credit card companies charge for delayed payments”. A card swipe provides instant gratification; the same swipe could inflict prolonged pain in case we are unable to repay the loan (swiped amount) in allocated time - The hounds / sharks as collection agents get termed come house calling and give the defaulter sleepless nights.

So who is in the wrong – is it the card company or the defaulter? Should the blame not lie squarely on the person defaulting? 

Let’s pause and reflect - Todays life is about individuality and instant gratification. There is therefore a lot of pressure to own / experience things first /ahead of others. And this urge to possess all & sundry, I believe, induces us to lead a life beyond our means and at times, brings with it the pain described above.

How does one keep such notorieties at bay – well, for people in the age group of 25/30 year-olds, speak to your elders; understand from them as to how they led their life 20/30 years ago when there was little materialistic fanfare/exuberance. Spend less time on WhatsApp / Amazon/ Netflixs of the world – better if you put a time cap on content view each day. Find 10 mins every night to ponder on the things done that day and how it affected your general wellbeing. The present young generation is far removed from the notion of “calmness”. Those 10 mins can help acquire a feeling of tranquility, sooth nerves and induce much needed deep sleep over 6/7 hours duration. This would bring down anxiety level in general  

As for financial positioning - buy only that you can afford. Further, understand that a purchase delayed by a few months does not take away anything but actually saves money & makes for a worthwhile buy; do your math – 2.5 to 3% interest per month over 3/6 months ( 15 to18% price increase over 6 months – add processing charges and it can go up to 20/22% ). Now slot it against  “discount” advantage (for a slightly delayed purchase) as price skimming effect wanes and prices drop / stabilize few months after launch; plus you also get to know the product’s market performance providing implicit protection from a wrong/uninformed buy. These 2/3 months could be effectively used to raise/manage budget for the envisioned buy….. Whenever there is an urge to buy a high value item / experience that is not tangibly value accretive (e.g. - iPhone) always ask what utility it would serve? If you are not able to find a perceptible benefit then the buy is a waste of money. Imagine the other necessary things same money could buy. 

General financial hygiene tips so one does not experience very turbulent times whenever hardship strikes –

1>    Start saving early to receive benefit of compounding over longer period. Also last 20 year data shows interest rates have moved in a downward trajectory and probably continue on that trajectory over time. Early initiation (saving) therefore helps lock investments at a higher rate.

2>    Maintain a judicious balance between long term and short term savings; also diversify among asset classes.

3>    Save compulsorily every month. And remember, your economic value would increase as you make steady progress in your career and savings, thus providing you enough financial muscle to lead a comfortable (ability to delve in your whims and fancies) yet peaceful life.

4>    Always plan for a rough day – maintain 3 months expenses in savings account (SB).

5>    Buy Mediclaim to protect against hospitalization inflation.

6>    Take loan (only when essential) to buy asset/s that has/have the propensity to “APPRECIATE” in value – House and not car (car value depreciates the moment you buy)

7>    Maintain FD equivalent of 6 months of Loan EMI (or expenses) to shield against predicament/s due to loss of job and/or other vagaries that life might throw at you. This is your emergency fund.

8>    Buy Insurance term plan (depending on your lifestyle, affordability and a forward view on potential loan liabilities) as protection against life fatality.

9>    Diversify savings – do not put all eggs in one basket.

10> If possible develop financial acumen so you can keep a strict vigil on your investments

The above 10 tenets should help ride most rough seas. While they are not panacea against any/all financial ills that one may face, but can be used as pointers to develop strategies suitable to you per life lessons learnt (experiences).

Pl. note this article has been written to open your mind to various possibilities in financial modelling that would help secure your future. It has that limited purpose only. 

SB