Home / Opinion / Your money in 2015—the two-step way to financial health

I recently learnt a very important lesson in goal-setting and habit-forming from a medical doctor. A persistent bad back has me visiting the orthopedics more than I like. They all say the same thing—regular exercise is your panacea. Not marathon running but just a simple, regular workout. I find that I begin well enough, but two months later regress into inaction. Travel, the big destroyer of routines, is the usual excuse for not finding the 30-40 minutes to do what is needed. Then this one guy sits me down and tells me: just do these three exercises. Do them twice a day. Don’t skip. Don’t do more if you have no time. Don’t do three sets of 10 each if you don’t have time. Do each just once. But do them. I hear him. And start. That’s it. The goal became smaller. Much more manageable, and one that did not require a full 30-40 minute time slot in the morning. I find that when one set is done, there is always space to do one more. And when three exercises are done there is always the space to do 10 more.

The doctor did two things that worked. One, he set a small enough goal that he knew is manageable. And if I say I can’t do even that, I’m not serious about getting better and can look for another doctor. Two, he set a habit-forming default. So the day there is pressure on time, it takes less than 10 minutes to get through the routine. On days when there is time, I can take the full 30-40 minute module. I’ve always been fascinated by the synchronicity between finance and health. We mean to get both in order but keep putting off the actual doing. The benefits of getting a grip for both are in the distant future—and the human being is not very good at delaying gratification. If it is the everyday habit that is the tough part of health, it is the toughness of the problem that makes us put off translating the thought into action in finance. In fact, Daniel Kahneman in his book, Thinking, Fast and Slow, presents research on how the human brain, when faced with a tough decision, takes the easier way out of either not deciding at all or getting distracted with irrelevant details that are familiar. For example: when faced with a decision on long-term investing, rather than sift through the 5,000 products out there, we will use some crutch to make a quick decision. This could be reading about a particular product in the media. Or seeing an advertisement for another product. Or simply getting influenced by the nice manner of the sales person selling a third product.

For those as challenged in finance as I am in health, here is the two baby step approach to financial health. One, make goals that are doable. For instance, do not try and solve the problem of retirement planning at one go (unless you are working with a financial planner). Start by identifying how much you are able to save each month after you’ve met all your basic expenses. Write down two numbers. The first is the minimum you can save and the second is the maximum you can do. The first number will be the amount left over after all the discretionary spends on holidays, entertainment, eating out has been made. The second number is the potential of saving that you have if you cut out harshly everything other than the most basic spends. Our goal is a halfway house between these two extremes. Write that down. This is your savings target each month. Two, know what to do with this money every month. This is the key habit-forming step. You will not allow it to accumulate into one mass in your savings account to be invested at one shot at the end of the year, but will take a decision to find an instrument to soak up this money each month. If this decision is taking time and effort, do one of two things. Open a two-in-one account and sweep the money into a fixed deposit (FD) each month or keep moving the money into a short-term debt fund each month. If you can’t choose the fund, stay with the sweep-into-FD strategy, but do not leave it in the savings deposit. The two-step way inculcates the regular saving habit and allows you to see your own saving potential when you look at the FD balance or the debt fund corpus after six months.

On the bigger question of money advice for 2015. The advice remains consistent—there is no change in what I recommend as product choices. Gold is no more than 10% of your portfolio. The core of your money box is in zero-risk products such as provident fund, Public Provident Fund and FDs. The rest of your investments are in equity-linked products, ideally mutual funds. You have an emergency fund that covers six months of your living costs. You have a pure term life insurance policy. And, you have a medical insurance policy.

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, Yale World Fellow 2011 and on the board of FPSB India. She can be reached at expenseaccount@livemint.com

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