Cooking any
dish involves a basic procedure. Apply the same process to investing too and
you will realize how easy it is to manage your money.
Step 1
Check if all systems are Ok
PUT AN INSURANCE PLAN IN PLACE
Before you
start cooking, it is advisable to check the gas pipes, regulator and electrical
connections. Gas leaks from damaged pipes or faulty regulators; loose
electrical connections cause sparks; old wirings trigger short circuits. These can
cause major fires. Therefore, your kitchen should be well protected thru’ fire
extinguishers.
Likewise, your
finances too should be adequately protected. One stroke of bad luck and your
years of savings may disappear. This is where insurance comes in. Insurance
covers are available for various kinds of perils. Choose a suitable mix —
before you begin investing — and safeguard your finances.
Step 2
Plan your menu
MAKE YOUR PERSONAL FINANCIAL ROADMAP
If you have
time, you may prepare a 5-course meal. But if you need something fast, you may
go for a sandwich. If you are a vegetarian, you will surely not have meat. In
short, individual tastes, specific situations and the budgets differ.
Therefore, your choice of dishes will be different from your colleagues,
friends or even your family members.
Similarly, each
person’s investment objectives, risk appetites, time-frames and taxation also differ.
If you can take higher risk, equity may form 70% of your portfolio, with
balance 30% in debt. In a medium-risk scenario, this ratio could be 50:50. Hence,
don’t blindly copy other peoples’ investments. They may be right for them, but
not necessarily for you too.
Preparing your
own specific and personal financial menu is, therefore, a must.
Step 3
Learn how to cook
EQUIP YOURSELF WITH RIGHT KNOWLEDGE
Ok, you have
decided your menu. But do you know how to cook? You would agree that it would be
a ‘mess’, if you make your dish without knowing the recipe or having the right
ingredients.
Same thing
applies to money too. There are very few millionaires despite good incomes.
Mis-selling is rampant. Frauds are common. These clearly indicate limited awareness
about financial matters. Obviously, therefore, you must learn how to manage
money. Surely, you don’t want to end up in a ‘financial mess’!
Step 4
Buy good ingredients
BUY HIGH QUALITY ASSETS
Surely you
cannot make a good dish from rotten inputs. Howsoever good a cook you may be,
you need fresh ingredients. Spoilt items will only give you a ‘spoilt’ dish.
Similarly, bad
quality assets won’t make you rich. Bad shares will lose money. Bad insurance will
not provide adequate cover. Bad property may not appreciate. In short, you are
going to lose money with inferior financial products.
Surely you
cannot remain healthy eating only junk food. Nutritious food is essential for
your (and your family’s) health. An occasional junk meal may be ok. But in the
long run eating high nutritional value food is a must.
Likewise, you
cannot become rich by investing in junk products. Good products are essential
for your (and your family’s) financial health. An occasional bad product may
not hurt. But only a high-yield portfolio will create long-term wealth.
Step 5
Don’t overpay for your ingredients
KEEP A TIGHT REIN ON COSTS
Ideally you
must buy the best possible ingredients at least possible prices. Sure, you must
maintain a balance between quality and price. Unless the quality is significantly
better, it may not be worth paying extra. Why shell out more just for
attractive packaging? Conversely, buying only the cheapest items may not always
be good. These could be of sub-standard quality, which could spoil your dishes
(and upset your stomach too).
Same applies to
your financial ingredients too — don’t overpay. For example, buying a
combination of term plan + PPF would be more economical than an endowment
policy. Again, the cost vs. quality balance is crucial. A particular broker may
charge more but give better advice than someone inexpensive but failing to
provide quality recommendations.
Step 6
Throw away rotten
ingredients
WEED OUT THE UNDERPERFORMERS
Food gets
spoilt from time to time. Your vegetables may rot; bread may become mouldy; or pests
may infect your cereals / grains. If you do not remove these stale items
promptly, you will spoil the remaining good portion also.
Likewise, your
assets may also turn bad. Some companies may perform badly and your investment
may depreciate. Changes in taxation may make some investments unviable. Some
thematic funds may no longer remain market favourites. As a result, you may
suffer outright losses or at best earn poor returns.
Therefore, you
must regularly throw out your failed/underperforming assets.
Step 7
Use the right proportion of ingredients
JUDICIOUS ASSET ALLOCATION
Right proportion
of the ingredients is essential; else you may get a distasteful dish. Even a
simple thing like salt makes a big difference. You need just a pinch of salt in
your dish. But put just a little more (or a little less) and you can feel the
difference.
Further, your
diet should have variety. Your body needs carbohydrates (for energy), proteins
(for building the body) and vitamins (for body systems to function optimally).
Since different food items give different inputs, your diet must include rice/wheat
(for carbohydrates); meat/eggs (for proteins); and vegetables/fruits (for vitamins).
If any item is missing, your body will suffer some deficiency.
Thus, right
proportion and right variety is necessary for your healthy well-being.
Same with your
investment portfolio — you need a combination of liquidity (from bank balance);
safe & regular returns (from fixed deposits); and growth (from equity/property).
Thus, both
diversity and appropriate asset allocation is necessary for your financial
well-being.
Step 8
Give adequate cooking time
LET THE INVESTMENTS MATURE
What will
happen if you boil meat for a few minutes only? It will remain half-cooked. To
make it palatable you have to boil it for 30-45 minutes. On the contrary your
potatoes will be done much sooner.
You must cook
food for the required time, else it will remain raw.
Same holds true for your investments
too. In fixed deposits your interest will start from day one. But if you desire
to make money in equity in a few days/months, your expectations are misplaced.
You must remain invested for
sufficient time, else it will not grow.
Step 9
Eat and relish
CELEBRATE YOUR MONEY
Finally,
cooking is over and all your delicious dishes are ready. Now you can relish
them. All your efforts have paid off. All the hunger you had endured until now
is about to be satiated. Great!
Similarly, once
your millions are made, you can start savouring your money. All your discipline
has paid off. Having achieved financial independence, you are free to fulfil
all your desires. Again, great!
Step 10
Change with time
REBALANCE YOUR PORTFOLIO REGULARLY
When you are
young and your body is growing, you need more proteins to help that growth. But
when fully grown-up, the requirement for proteins goes down.
When you are
young and your wealth needs growth, equity and property will help. But as you
achieve your wealth targets your need for growth reduces and you can switch to
debt products.
When you are
young, your body resistance is high. Your body systems are robust. Thus, you
can take risk with your food habits. But as you grow older, you need to be
careful about what you eat, when you eat and where you eat.
When you are
young, your risk appetite is high. Your financial system is robust enough to
withstand shocks. Thus, you can take higher risks with your wealth creation.
But as you near retirement, your risk appetite reduces. Thus, you have to rebalance
your portfolio.