Home / Opinion / Financial well-being is a system and not a get-rich-quick strategy

I’m reading two books on managing money. The first, All Your Worth: The Ultimate Lifetime Money Plan, written by mother-daughter duo Senator Elizabeth Warren and Amelia Warren Tyagi, is about finding balance in your money life as that leads to emotional peace and financial well-being. The second, The Index Card: Why Personal Finance Doesn’t Have To Be Complicated, is by Helaine Olen and Harold Pollack. Olen is also the author of the superb book, Pound Foolish, that showed the dark underbelly of the personal finance and financial literacy industry.

The authors of the two books say something very simple. Managing your money is not a get-rich-quick scheme. There is no one formula—buying junk bonds, junk buildings or other such assets—that will make you rich. These schemes and their hawkers get rich through their seminars and books but nothing much changes in your life. They also say that you will not do better by depriving yourself of the daily coffee takeaway from a coffee shop. Suggestions such as these deflect you from the larger problems in your financial life and make you feel guilty about the small pleasures of everyday life. Nobody gets rich by skimping on a coffee a day and then blowing up their money on some ponzi scheme.

Warren and Tyagi answer the question: how much should I save? They divide the monthly spend into three parts. One, the must-haves or the bills that absolutely has to be paid—rent, equated monthly instalments (EMIs), school fees, food, insurance premiums. Two, the wants or some ‘fun money’. These include your daily cappuccino, a movie a week or that vacation you must take once a year. Three, is savings. The money for being able to pay for must-haves and wants in the future.

They go one step further and give you a ratio of the three parts of spending. A maximum of half your income (net of taxes) goes towards must-haves, 30% towards wants, and 20% towards savings. Remember this formula is for the US where they have social security. In India, we will have to tweak this to up the savings part to at least 30%. When you see that 24% of your basic is already getting saved through the mandatory Employees’ Provident Fund (EPF), 30% does not look that big.

Olen and Pollack put down on an index card some simple rules about investing and managing your money. The advice is similar: save 20% of your income, pay off your credit card debt, buy inexpensive well diversified mutual funds, do not buy direct stocks, make sure you have good protection in your insurance plan. The core idea of the book is to break the myth that finance is tough and that you need to be a rocket scientist to manage your own money. Simple rules for an average household work much better than complicated strategies by smooth talking bonus-focused managers in a bank or a portfolio management service peddling adviser.

These are good books to read for an average person since they stay away from the high decibel sales push of a single strategy of getting rich quickly. They both seem to understand that all of us need a system in place rather than a single strategy. A system is a way to solve a problem at its core, rather than rethink a strategy every time the market changes direction. A financial system that works for you is similar to a long-term physical well-being strategy. Crash diets usually fail. Rushing into a financial product usually fails too. A physical fitness system that takes into account your unique life and issues and is built into your daily routine is much more successful than the latest diet fad. A financial system that mostly runs on its own after you have spent some time putting it in place is better than one that needs a weekly or monthly update.

My one note of caution is this: the books make it look easy to do. Some of it is easy, but remember that an average household needs between eight to 10 financial products. To evaluate and buy each will need a degree in finance and law. While you can take short cuts, the better plan is to find a good financial planner and work with her to set up your financial system. The books help in knowing what needs to be done.

End note: Why do we need books and guides to do what is so obviously sensible? Writer and illustrator, Tim Urban [you must watch this absolutely fantastic TED (technology, entertainment, design) talk: http://bit.ly/1U8JXNn], says that our actions are often taken over by, what he calls, the ‘instant gratification monkey’ who grabs the wheel of control from the ‘rational decision maker’ and keeps you busy with having a great time today rather than thinking about tomorrow. It is this monkey that pushes most of us to put away for another day’s work that we need to do today. The only thing the monkey is afraid of is the ‘panic monster’. The panic monster comes onto the stage screaming and yelling when the deadline or crisis is almost at hand. The monkey runs away, leaving control to the rational self, who then works hard and manages to meet deadlines. A lot of our money decisions follow this to a script, therefore, giving rise to the need for outside help to keep the monkey under control.

Monika Halan works in the area of consumer protection in finance. She is consulting editor, Mint, consultant NIPFP, member of Financial Redress Agency Task Force and on the board of FPSB India. She can be reached at monika.h@livemint.com

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