Before marking the FM for her budget, mark your household for its money decisions: Inculcate these 8 habits

Even as we follow the government’s borrowings and the plans for the fiscal deficit, we cannot afford to ignore our household finances. That is what we manage, directly control and spend our lives worrying about. So this week’s column deliberately skips the macro and looks at the micro. What are the top signals that all is well?

First, you have a plan for your debt and you don’t accumulate more and more debt. The government can run a deficit and collect taxes. But a household cannot make borrowing a habit. Interest rates for personal borrowings is steep; repayment is a big charge on the future income and debt holds you back from making bold career and location decisions. Going debt free is a good personal financial goal to pursue. Make sure you don’t run credit card dues; you aren’t running to your banker every now and then for personal loans; and you aren’t replacing one EMI with another.

Second, you don’t accumulate stuff whose value is deteriorating. You know that the car you just bought is worth so much less the moment you drive it out of the dealer’s showroom. So you plan to use it for as long as you can. You don’t make it a financial goal to renew the car you drive every three years. This is true of things you buy for the house, the electronics and the gadgets. You use these for a reasonably long period of time and are aware that they lose value. Be aware that allocating money to depreciating assets is a large ticket spending that reduces what you can save and invest.

Third, you don’t model your spending habits on what your friends and neighbours do. Yes, when you are young and are competing for attention, you would try to outspend your friend to impress. But you outgrow that phase. You must. If you still are that person who is spending to impress, you will end up with no control on your finances. If your household models itself as one that tries to keep up with the Joneses, you may end up quite unhappy. At some point, take charge of your expenses and ensure you are doing what matters to your household. Your spending habits must address your household’s needs, goals and priorities.

Fourth, you have a saving goal. After the initial years of running out of money, you have to settle down to accepting the income you can earn and therefore, the money you can spend. The longer you live in denial, the lower the chance you will save. You must save at least 20% of what you earn. That is what is yours —your wealth and your asset. All else is income and wealth for all those whose products and services you consume. If you are not saving, you are living in dangerous denial about curved balls life can throw at you. Your saving ratio must grow with time. Fifth, you have bought insurance.

To provide cover for life, for health, for accidents, and for your precious assets. Insurance is your first step to providing security for your household even as you are trying to build wealth through your savings and investments. It is the shield you have even as you are sharpening the sword. We don’t begin wealthy. We build over time. As we build little by little, insurance is our primary protection against anything untoward that may happen and throw the household off balance.

Sixth, you invest your savings—on time, to a plan, and in a systematic and disciplined manner. You cannot live life making ad hoc decisions about investing based on interesting opportunities that come your way. Nor can you trade and speculate to build wealth. You need a plan, you need a strategy, and you need disciplined implementation. Your money will grow and flourish into a pile of wealth you will be proud of, if you begin early and accumulate small sums systematically. Your wealth will generate an additional source of income that supports and supplants your income and secures your life. If you haven’t bought into this simple idea, you may be short changing your wealth seriously.

Seventh, you don’t mindlessly acquire property. It would seem like a sensible thing to do when you are the middle aged wealthy investor who earns fat bonuses and encases huge stock options. Systematic investment in a diversified portfolio seems like a boring thing to do. So you stash up the millions in properties. And indulge ostentatiously in doing it all up. The problem with this approach is that you create white elephants. Assets must earn money and be easy to maintain, pass on, split and liquidate. Your classy farmhouse may not check the boxes for a sensible investment. Take a hard look at it and don’t burn the bank trying to make it better than your friend’s. Invest to create wealth that pays you and your family; don’t invest in assets that demand more and more for mere upkeep.

Eighth, you must make giving a part of your financial life. If you are saving and investing substantially you are generating income that is more than you can use. If you have assets that also generate income, you have a lot more than you can use. Make it matter to those less privileged. To give is to make sure that you understand how much of a difference small amounts of money can make to so many other households. The joys of giving must be experienced and cherished as a part of the responsibility of being wealthy. Even as you obsess about and indulge your children, spare a thought to less privileged children whose life will change if you give them the gift of good education. Give to make a difference.

Depending on the phase of your life, your income, expenses, savings and borrowings will change. Some of us are lucky inheritors; some of us have to struggle to make it happen; some of us have just begun to enjoy the fruits of our work; and some of us have retired from active work. In every stage of our lives, being in charge of our finances matters. Having a mental checklist helps.

Before marking the FM for her budget, mark your household for its financial decisions and see how healthy your financial habits are.

(The author is chairperson, Centre for Investment Education and Learning)