Financial freedom - Your tryst with destiny!

Long years ago we made a tryst with destiny, and now the time comes when we shall redeem our pledge, not wholly or in full measure, but very substantially.

Those were the words of our first Prime Minister on the eve of our independence. Cut back to an individual’s life, it will be no mean achievement if a person can say the same in the context of financial freedom at any time in his life, on or before his retirement date.

In the age of goal based financial planning, it is important to make a list of what we set out to achieve, financially speaking, when we start our careers. Every year lakhs of people join the work force. Many leave, having completed their tenure. It is important for every new worker to know and understand the future that lies ahead of a retiree.

Most people retire around the age of sixty. For those who continue to work beyond that age, inadequate savings is a common reason. In my conversations with many retired people who are facing a challenging situation, the common refrain is ‘....our jobs did not have an in-built pension or I had to draw a significant part of my forced-savings for my child’s marriage or for building a home or funding their higher education’.

These are the common goals Financial Planners talk about while helping you to plan. These are also the dreams or goals highlighted by insurance and savings companies while selling their products.

However, prioritisation of goals is completely in your hands. Retirement needs the largest corpus of funds. The bigger the target, the longer the period one needs to allow, for, the savings to accumulate. Hence it will not be extreme to state - A new worker needs to start saving for his retirement from the first day at work.

For young impressionable minds beginning a career, unfortunately, this line of thinking is rare. The need for financial literacy is the need of the hour so that you may keep your tryst. 

Here’s raising a toast to your Independence & Freedom, for all times!

Is it time to bury the 'Maai Baap'?

The Govt. or better Sarkar, is the Maai Baap – or loosely translated, the all-important decider, the Parent of our fate or destinies.

Extend the logic to the financial markets – you have the concept of The Sovereign with its mandate to issue and print currency and hence The God of zero default risk!

Expectedly, the popularity of Govt. administered savings schemes such as EPF, PPF, LIC, PO savings etc. is very high. However, the recent experience (last seven years) in terms of high overall inflation, riding on a particularly high component of food prices inflation – a rare occurrence in recent memory makes it imperative to ask some pointed questions -

Population statistics indicate the increase in average life expectancy. What does the common saver do to protect himself from exhausting his retirement corpus?

Since the Govt. happens to be one of the most inefficient users of capital, if the common saver continues to park a significant portion of his life-savings with the Govt., should he not take some of the blame for the prevailing high inflation?

When you park your savings in Banks and Insurance companies, a significant part of your money finds its way to the Govt. by way of investments in Govt. securities. The quantum is mostly way above the stipulated norm. The return on these Govt. securities, in the recent past has more often been lesser than the rate of inflation. Does this bother you?

At home, will a parent give more pocket money to an errant child known to squander his money on idle pursuits? If your answer is a firm no, why will you be indulging an errant Govt.? Is it time, instead of letting the Sarkar be the Maai Baap, the citizens or the common saver assumes the role of the strict parent and put its savings in instruments based on merit?

Now, let us see what could be some of the possible consequences if the common person’s savings allocation is merit-based –

Govt. is forced to cut down on non-essential expenditure

Govt. is forced to sell off assets it is not able to operate profitably – may include PSUs and land and real estate

Govt. is forced to pay market linked returns on borrowings

Capital availability to businesses and industry increases

Lending by Bankers and Investments by Insurers is forced to seek the best risk-reward equation

Now let us take stock of what happened recently after a change in the Finance Ministry. A Minister known to be ‘market-friendly’ was back in his old office in the North block. True to market expectations, he kicked off in spectacular style, making a slew of announcements.

Quiz time again –

Did the FM make any announcements signalling measures to arrest the decline in GDP growth?

Did the FM say anything about tackling the possibility of drought and hence the threat to further spiralling of food prices?

Did he say anything about introducing inflation-indexed Govt. bonds for the savers to improve the real returns on investments?

If you know the answers, you will also know that the FM is playing to the galleries by making announcements to improve investor-sentiment. This is to attract more FII investment and hence may lead to a strong rally in markets.

Is this the primary role of the Finance Minister?

Don’t we know the risks that lie behind such moves from the past? The FM might be doing this to help his party win the next general elections. However, what will be the consequences of these moves on the economy and our personal finances beyond the short-term?

We believe that the time has now come for the common saver to become more aware of the long term risks to his financial safety and security and make well-advised moves vis-a-vis his savings, because the road to ‘zero risk’ may be fraught with danger!

In our next post, we will talk about what could be some of the options that an investor may consider to improve his portfolio’s overall risk-reward equation.

Faffing is injurious!

The Macmillan dictionary describes “faffing” as – to waste time doing things that are not important or necessary, an act, which is a complete waste of time.

The repetitive bombardment of news & views – a lot of which is gas (reminds you of a recent TVC of a deodorant brand); through multiple media, takes a heavy toll on our sensory mechanisms. This may lead to confusion in the mind and subsequently, wrong decision-making or no decision-making.

The consequence of the latter, sometimes, is better than that of the former, but, continued for too long, can lead to long-term damages.

If I am sounding too technical, you will have to forgive me. Without a basic understanding of the relationship of cause and effect, we will never come to grips about why we make common mistakes.

As part of my vocation, I work on how to use debt to create assets while avoiding common mistakes that may lead to a failed stress test or an eventual debt trap.

The test of a ‘good debt’ should include whether the repayment period is less, equal to or greater than the period of benefit accruals from the ‘purchase’ or ‘investment’. Simply, is it a case of deferred gratification versus incidence of costs ‘upfront’, relatively speaking?

E.g. taking a 20-year loan for a home, which will be, used for a lifetime. An exact opposite could be, going on an overseas holiday now (immediate gratification), financed by a loan, with a loan repayment over the next 3-years (deferred cost).

Likewise, there can be other tests – is the recurring ‘debt service obligation’ plus recurring expenses, within a reasonable percentage of the monthly income or cash inflow, of the person/family? What is the ‘margin of safety’? So on.

I came across an article on the subject in a popular website, by a respected professional. The article makes some observations, which are highly questionable, if not confusing, for a lay reader. Capitalism ensures spending is easier than earning, it says – Are not spending and earning two sides of the same coin. Is the aggregate spending, not equal, to the aggregate earning. Somebody’s spends results in somebody’s earnings, simple, is it not? Probably, what he meant was – it drives consumerism at the cost of saving and consequently asset building? I am not sure, I am guessing.

The author signs off, saying, it will be a good idea to consult a Financial Planner before taking any loan. It is not my intention to question the competence, capability and the intention(s) of the Planner community. However, let me ask you, Dear Reader – Do you know how to choose your Financial Planner? Do you know how to assess the qualities of the Planner? Do you want guidance or do you want to create ‘dependencies’ for decision-making?

The gap in your ability to make these judgement calls is precisely what should be the focus area of the media – How to choose a Financial Planner? What are the tests of good debt versus bad? Etc.

The long-term consequences of a wayward media are damaging both for the individual and for a society, with no formal social security structures. Of course, I am not making a case for state allocations funding individual financial imprudence!

The ultimate test of a media byte will be in whether it is worth ‘saving’, for future reference like an asset, or whether, it is immediately (or, within 24 hrs.) marked to the trash folder like an ‘instant’ consumable!