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Last week, Mint completed a full year of the weekly personal finance show Smart Money on Bloomberg TV India, which I co-anchor with Vivek Law. Viewers of the show and readers of this column will be familiar by now with the concept of a money box—or the box that contains your financial life and tells the story of your financial health. We’ve worked to establish that each product in the box has a role and must justify its place in the money box. We’ve tried to create boxes that reduce risks and increase long-term wealth creation. It is time now to take a step back and look at the money box in the context of the life cycle of a person’s money life. Veteran readers of this column may remember me writing about the Dhan Chakra concept five years ago, but I think it’s worth revisiting it now and linking the circle of wealth to the life cycle of a money box.

While there are various windows through which we can examine our lives (relationships, achievements, milestones, accomplishments, and so on), the window I’ll choose here is that of money. What does our life look like when viewed through the prism of money? Till we get the first job, we’re dependant on our parents’ money box. Once in a job or as we begin our own enterprise, the work we do begins to produce an income. From the time we are in our mid-20s to the time we retire, say between 60 and 75 depending on what work we do, it is the income that our work earns that sustains us. After that, we hope to live off our retirement corpus or pension.

So we need to think about our money box across time. When we are children, our money box is tiny and is filled with pocket money or gifts. Once we begin earning, the size and complexity of the box begins to increase. The size is still small and the inflows are largely salary or some business income. Flowing out of the box are all the expenses that an average family incurs—living costs, rent, loan instalments are the usual outflows. Most people have a surplus left over or deliberately target a surplus of income over costs. This is the money that is to be put to use for two purposes. One, to de-risk the money box from an untimely death jeopardizing the rest of the family that is dependent on the money box, and from unforeseen medical events that need large outflows of money. Buying the right kind of insurance cover protects the money box from losing its savings to these unforeseen event-linked costs. Two, to build a corpus for future use. These are usually a downpayment for a house, children’s education and marriage, and the most important one, which gets left for the last—retirement—or that time when fresh flows of income from salary will dry up leaving the money box unfunded.

As the box grows over time, apart than salary, other kinds of income begin to fall into in—dividend, rent, interest and profits all make for larger and larger boxes. Robust boxes will have provisions for emergencies and risk management and will be able to deliver money for pre-decided broad purposes along the journey. Once the financial obligations to the children are over and we move towards our retirement—or the time when our labour can no longer get us a return—the money box should have enough capital to replace the income that our labour earned with rent, interest, dividend and profit. The money box will now fill with the return on various assets created rather than with a return on labour.

Once you have this big picture of the life cycle of your money box in place, it is much easier to target a surplus over current consumption and lifestyle spending, because each decision to spend today will impact the potential income flow later. Dhan Chakra, or the circle of wealth, is the life cycle of a money box. The tiny piggy bank we started with as grubby five-year-olds can end in two ways. Since the shroud has no pockets, we can leave it for the kids and grandkids. Or if we don’t have our retirement money box in place, become dependent on the money box of our children. Our lifestyle choices today will decide which of the two boxes we’ll end up with. So think about the money box as a dynamic entity and see its journey across time rather than a one-time decision that you take today.

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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