The Sartorial Elegance of Custom-Fits.
“Pay attention to where you are going because without meaning, you might get nowhere.” - Winnie The Pooh
For a bear who survived on rather inadequate nutrition of just eating honey for all meals and slept too much, Winnie the Pooh was uncharacteristically wise. Criticise his lifestyle choices as you may, Pooh was clear about what he needed and wanted in life, which made it easy for him to focus on precisely those things, not more, not less.
As they say, for every philosophy that one lives by, there is an equally attractive but diametrically opposite philosophy that works for another. I was heartbroken when I realised that this was true for two of my favourite comical, fictional characters who embody opposing views on how to live life.
“We’re so busy watching out for what’s just ahead of us that we don’t take time to enjoy where we are” - Calvin & Hobbes (Bill Waterson)
Which of these do you relate to more? Are you paying attention to where you are headed or simply enjoying the present, unconcerned about what lies ahead?
Other things aside, when it comes to your money, the breezy philosophy that Calvin lives by, can become debilitating. And not just for you but also your family members, who may possibly rely on you for their future wealth and health.
Why do I say this?
Let’s take an example, a trip down memory lane (for some of us at least, who border on the wrong side of the time period which hosts Millennials!). AK Hangal was a popular and well-recognized actor in Bollywood movies and played his part remarkably well for over four decades in a career that boasted of at least 225 movies. He even received a Padma Bhushan for his contribution to Hindi cinema.
Despite success in his career, and many decades of making a living through this career, towards the twilight of his life, Hangal suffered not just from medical issues but also bankruptcy. He was no longer earning an active income due to his age, and his grown-up son was out of work too. Hangal lived to be 98 years old. While he and his family received some help from the film fraternity, ultimately, the award-winning actor, sadly died in poverty1.
Why just Hangal, Big B lost most of his fortune at the turn of the 20th century and had to revive his acting career to pay off his debts. In round two, Bachchan seems to have planned better and diversified his financial interests rather than suffering by putting all his might behind a single project2.
Here is where Pooh’s guidance towards finding meaning in life comes in handy. Applied to your money life – it translates to a well laid-out financial plan that speaks as much to your present as it does to your years in retirement.
Now that we have established the need for financial planning in all our lives, no matter what age or phase of our career we are in, let’s leave the animated characters and Bollywood stars behind, and dwell on finding that perfect plan that works.
Can you just "borrow" the perfect-fitting financial plan?
A perfect fit is mostly something we notice on others. When it comes to our own selves, we tend to simply emulate that which we saw looked perfect and not necessarily what fits us best. You cannot resist buying a stunning wine-colored business suit for the office, even if it’s a size too big because the mannequin wears it perfectly. Buy it and get it tailored to your fit. Your cousin sees you wearing the perfect tailored version and wants to borrow it. Do you think the fit would work given that God has been unequal in distributing height, she’s 5ft 4in and you are just 5ft 1in?
The image of her walking wearing pants that are riding up higher than regular cigarette pants would undoubtedly be the talk of the circles for her colleagues. The misplaced entertainment, plus, the risk of landing up at work with a ripped and ill-fitting suit, make this forced fit completely unviable. Clearly, what fits you well isn’t the best choice for another.
Just like borrowed clothes sometimes don’t fit well, borrowed life goals and financial plans don’t always work either.
Tailored fit for a standard style?
Your financial plan is more like a tailored fit, but for a standard style.
This means, the basic design or the outline of your financial plan can match others’, and usually, the same cuts might be seen, but the finished product will be customized to your unique financial situation.
Here is my quick take on how anyone can consider some common financial planning choices-
1. Insurance: Let’s begin with a term-life plan. This is like a contingency cover. In the event of your untimely death, the future financial costs for your dependents, including daily expenses, long-term expenses and your spouse’s retirement could be taken care of. But remember that you don’t need life insurance of any kind if you don’t have dependents. A couple of thumb rules to note:
Rule #1: A term life insurance cover with a sum assured of 5-10 times your annual salary is a good start, and affordable. The exact cover should reflect your and your family’s specific financial realities, plus cover repayments on long-term loans.
Rule #2: Keep bumping up the sum assured as your income increases, review it every 3-5 years.
Other than term life insurance, focus your energies on medical insurance for yourself and the family. Family floater plans are great for a family of four as you can get a large sum assured which can be used for any member. Many will have a Mediclaim from their work, but often the sum assured can be low and coverage may or may not be as per your requirement. If you have a large family, children and elderly to take care of, having separate medical insurance taken in your personal capacity is always advisable as medical costs can skyrocket without warning.
2. Emergency Fund: This is another contingency plan, but more to deal with sudden, emergency expenses arising from situations like job loss, a temporary requirement (your landlord suddenly wants the next 3 months rent upfront but all your money is going to your SIPs!) or even disability, which are beyond our control.
Such situations impact our immediate ability to continue earning or spending at the same level and one should have some kind of a financial cushion to cater to that. As a simple thumb rule, ask yourself if your emergency fund corpus can take care of 6-12 months of your expenses. Again the exact figure will depend on your age, the size of your family and the kind of recurring expenses you have. If you already have a large pot of accumulated investments, you may be able to get away with a lower emergency fund.
3. Home Purchase or Rent: The economic viability of a ‘rent versus buy’ decision more often than not, fails. Since buying a house tends to become a hugely emotional and personal decision, let me not go into whether renting or buying would make more sense.
But, if you are buying a house (to live in) on a loan, ensure that your loan amount is not more than 50%-60% of the home value and the subsequent monthly repayment or EMI is within 40% of your monthly income. If you are renting, then try to ensure that your monthly rent is not more than 30%-40% of your monthly household income.
These numbers will allow you to put away a good proportion of your income towards savings & investments. The urge to live large early in life can give you a high, but don’t forget the trade-off you might be making against future wealth-creation!
Both decisions come with some tax benefits, find out about those too from a tax advisor/ financial planner.
4. Investments: A regular investing habit, started early in life, is an advantage gained for everyone no matter what your life’s circumstances. Thanks to technology, making regular, small-sized investments is a matter of one click.
Include long-term wealth-creation assets like equity, and also allocate to debt assets for an element of safety for your invested capital. If you don’t have any loans and have a regular monthly income, allocating 60% or more to equity through mutual funds or direct stocks is doable and if you do manage it, this would be a fantastic move- especially if you’re committed to remaining invested for 7-10 years or more. Debt investing is for the money you are certain to need in the next 2-3 years, hence, the safety of capital is a must- so keep ‘quality of investments in mind’ for this one.
Alternate assets like gold, commodities, and cryptocurrencies, seem glitzy and exciting, but glitter can wear out easy too! Best to keep this out of the core portfolio with not more than 5-10% across all such assets taken together (if you understand them sufficiently well) and that too, only after you have an established cushion of accumulated long-term investments.
5. Loans: A word of advice - Don’t rush into taking any kind of loan. It looks like easy money but this can be your downfall too. Unfortunately, for most, the desire to own a house is such a burn that the perils of a high-value loan are easily overlooked. Then comes the car, credit card, personal loans and so on. Credit card overdues are loans, financing schemes are loans and borrowing from a friend is a loan. Loans taken just to add polish to your life may get costlier than you expect. And they are known to get overwhelming before you can even realize. So be careful.
As a thumb rule, ensure that the aggregate monthly loan repayment is not more than 50% of your monthly income each month. If you’re paying anything higher than this, be ready for murky waters.
6. Give a little: Giving cannot really be prescribed, but this is one step I’ve realized that can bring unequivocal joy while also benefiting you tremendously.
Once your financial needs are taken care of, your giving journey can begin. And yes, true giving needs to be a silent, one-sided affair, don’t do it expecting a reward or recognition in return.
Everyone is not going to drive to the carnival on weekends, or to the racecourse. Take your own journey to the destination you will truly enjoy. The route to achieving your goals will never look the same as your neighbour’s. But you all might be driving in the same radius, often with similar-looking choices on the surface. Therefore, your paths may cross from time to time and it may not be the worst idea to exchange notes and learn from those around you, but don’t forget to finally adjust the streets you take, to your liking and for your own destination.
The temptation to follow the fashion!
Are you more inclined to wear a well-fitting business suit despite it being two seasons too old or to chase the latest fashion?
Often, the latest fashion looks good only in magazines. That aside, the danger is, you’ll be throwing out last season’s clothes, wasting your money and you’ll never know what you really like to wear. Outcome: you’ll find yourself in uncomfortably short pants way too often.
This is exactly the consequence of following someone else’s financial plan. Your cousin may have suddenly inherited a lump sum (a happy surplus in the larger scheme of things)- let’s say that money got invested partly in a venture capital fund, in a friend’s start-up and some in cryptocurrencies.
From the outside in, it appears that all these embellishments are part of a highly fashionable main attire. In reality, this is likely to be her attire just for select, short, work events - no one notices, no long-period discomfort and nothing to lose.
On the other hand, for you to add on these embellishments, might mean giving up the budget for your regular workwear. You might end up ripping that suit every day, but you can’t do much about it because you’re out of budget now!
When it comes to financial planning, stray away from the temptation to copy another’s formula and from all the glitzy embellishments in the form of alternate (exotic) investments. Chase this excitement only after your main financial plan is structured and your retirement plan is funded to the brim, and then some.
A few final words before I leave on a jet plane.
Life would be simple if we could all survive on a daily diet of unadulterated honey, just like Pooh. But that’s not the case and it’s never going to be. In reality, we all need a good, balanced mix when it comes to food, friends, clothes or even our financial plan. I know to stick to the basics and not wear wool in summer. At the same time, I keep a variety of styles and fabrics in my wardrobe and when I do step out for work, I know to wear what fits me best.
Make sure your financial plan too covers the basics with universally accepted strategies, but create room to get that customised, tailored portfolio that makes for a perfect fit within your present life while nurturing your future goals.
Here’s your checklist for a customised financial planning fit:
1. Financial Planning must-haves: These were discussed above. Insurance (term-life and medical), emergency funds and investments with relevant asset allocation.
What you need to get to this stage, are well-articulated goals, a meaningful talk with yourself so you have the will to do all this, and thought-through budgets which can help you build that customised plan.
2. Financial Planning Maybes: Investing is a big part of the plan, and within that, investing in equity for long-term goals and debt for short-to-medium-term goals is suitable, even critical. It’s only once these priorities and goals are covered that you should venture into investments in alternate assets.
Investing in property is also really a maybe (not the same as the house you live in). Real estate is an illiquid, high cost and low flexibility asset and sometimes it can backfire if you think of it as a good long-term investment. Think about this- if there is a sudden need for money, you can cash out on some of your investments if you have exhausted your emergency funds. But did you ever hear of someone who sold off their kitchen or one of their bathrooms or that small bedroom to get some extra cash? No? We didn’t either.
Jewellery too is a big maybe. Count it as part of your net worth, but working it into a financial plan can cause issues. Yes, some people think of gold loans as a way to earn some income but often at very low interest rates. And we don’t even tend to remember small but additional costs like making-charges and whatnot, at the time of purchase. So, in my view, think of jewellery as something that fits the emotional goals checkbox. But financial goals- no, I would suggest don’t consider jewellery here.
3. Financial Planning Never-Evers: This is easy. Never consider your life insurance plan (or for that matter any other kind of insurance) as a financial investment. Life Insurance is specifically for the contingency of your untimely death and ensuring that your dependents have an adequate financial cushion in your absence.
It sounds even silly to mention this, but I know people who need to read this one. Never spend everything you earn- save first and keep reminding yourself that there will be many more years when you won’t be earning than the ones you do earn in- so invest as well.
I also tell people to not indulge in unregulated assets. When things go wrong, you won’t know who to go to or what to do.
Also, never invest where the security is not held in your name and never take a loan to invest in any asset. Even on behalf of a family or friend. This is where relationships go sour. In life, and in investing.
Read till here? Give yourself a pat on your back.
You are now ready to start stitching that perfectly tailored financial plan, which hopefully, will fit only you. And if you are not confident enough to sew, knit or finish yourself, don’t hesitate to contact an expert financial consultant like a Mutual Fund Distributor or DM us on Instagram.
About the authorLisa Pallavi Barbora - Lisa is a personal finance expert with 18+ years of experience spanning wealth management, asset management and as a writer & educator. She shares her thoughts on her personal finance portal www.moneypuzzle.in, directed towards young earners who want to understand the ‘why’ of their daily financial decisions. Lisa also writes extensively for digital media & personal finance outfits, has moderated finance-related panels & been invited as a speaker not just for financial subjects but also as a writer.
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