Break These Money Habits In 2020

2019 went by in a blink of an eye, and amidst the tumult and indecision of the equity markets and the rude credit shocks that defined the debt markets, investors more or less repeated the same follies. No doubt, 2019 began with good intentions and plenty of “money resolutions” – to save more, borrow less, get organized, or perhaps get a Financial Plan in place; but for most of us, those resolutions would have faded into inaction pretty quickly! This year, why not put an end to resolutions and start the year by taking some concrete actions instead? But first, spend a moment assessing what kind of investor you are. After all, self-awareness is the first step towards effective and well-directed action. Do any of these stereotypes define your own approach to money?

The Procrastinator

You know your goals, you understand the importance of Financial Planning, but you’re forever postponing it for “a better time”. Chances are that you’ve consulted with a Financial Advisor or two in the past as well, but got cold feet at the last moment and failed to start your investments. You may also hold the belief that it’s wiser to start off with a large savings amount in one go when you can afford to, and when the time is opportune. Alternatively, you may be a fence sitter who is forever waiting for “better market conditions”. If this sounds like you – you’re “the procrastinator”.

The procrastinator will suffer tremendously because of the impact of delay costs. With every passing year, procrastinators sacrifice the money multiplying effects of compounding and miss bullish market cycles. Gradually, inflation catches up with them. 

The Remedy: a change of mindset is in order. Remember that when it comes to Financial Planning, well begun is half done. Start small, but with the big picture in mind. Get a financial plan prepared and build a robust, time-bound plan of action to achieve your goals. Remember, you’re doing it for your family! As a wise man once said: “When the WHY becomes clear, the WHAT and HOW to fall in place by themselves”.

The Lifestyle Spender

Last but not least, “The Lifestyle Spender” is a victim of a terrible affliction called the lifestyle creep. Forever obsessed with keeping up with the Joneses, the hapless lifestyle spender wanders about in an endless cycle of loans and repayments, incurring enough interest costs in a lifetime to feed a small army! Lifestyle spenders tend to be very optimistic about their future; hence the propensity to spend their future incomes, incurring expensive loans in the process. They also tend to be more emotional and a lot less logical in their approach to decision making.

Every time the lifestyle spender receives an increment, their lifestyle goes up by a couple of notches. A new car, a renovated house, designer clothes – these are on the top of the lifestyle spenders’ to-do list. Investments? SIP’s? Those are the things boring people do! As a result, lifestyle spenders usually end up overstretched, leveraged and anxious about their family’s future.

The Remedy: This one’s tough to break out of, as it requires a dramatic change in mindset. Gradually cut back on lifestyle spends and aim to scale back bit by bit, until you’re spending 70-75% of your monthly incomes and not more. Put your monthly savings on auto-pilot by starting SIP’s in Mutual Funds. And above all, break out of the destructive habit of comparing the size of your wallet with others. Quit seeking happiness outside of yourself and stop buying things you don’t “need”. Sleep on your expensive purchase decisions; if you’re fortunate, a lightning bolt of clarity may hit you when you wake up. Remember Warren Buffet’s famous words, “if you buy things you don’t need, you’ll soon have to sell things that you need”. Wise words indeed. 

The Disorganized One

Are your investments scattered all over the place? Do you tend to invest small amounts in a plethora of different schemes? Do you have no clue about the annualized rate at which your money is growing at, or how much your cumulative sum assured is, across your life insurance policies? Do you have stacks of investment documents and statements flying all over the place? If you answered yes to any of these, chances are that you’re “the disorganized one”.

Disorganized investors are at a great disadvantage to their more well-ordered peers. They often unwittingly hold on to poor investments for extended periods of time, and usually end up over-diversified to the extent that their portfolios underperform even benchmark indices. Very often, they end up inadequately covered from an insurance standpoint too, despite shelling out hefty annual premiums.

The Remedy: it’s a daunting task to clean up your affairs, but it’ll be worth your while. Take a day off from work, collect all your investment and insurance papers in one place, and plug the data into a simple spreadsheet. Thereafter, consult a professional & trustworthy Financial Advisor on what to retain and what to junk. Take a risk assessment questionnaire, a Human Life Value quiz and map your future goals to your recurring investments.

The Gambler

“The Gambler” believes in living life king-size; winning big or losing big. Unfortunately, this doesn’t stand them in good stead with respect to their investments. Gamblers are forever on the lookout for the next tip, the next punt, the next big thing; without realizing that larger, more boring, more value-creating opportunities are passing them by, uncapitalized. Entrepreneurs ae particularly susceptible to this style of investing, as their natural bravado often ends up spilling into their investment patterns; much to their detriment.

The Gambler’s erratic investing style also means that they often hold polarised and intransigent viewpoints with respect to investing, as they’ve either made big bucks or lost their shirt in the past. Many swear off financial assets altogether after booking losses, only to enter them again at the peak of the asset class cycle, lured by shining past performances. The cycle repeats itself.

The Remedy: clearly separate your speculative investments from your long-term, goal-linked growth investments. Speculate with only what you can afford to lose in entirety without falling into a funk. Follow a strict asset allocation strategy with your long-term portfolio. Better yet, map your non-speculative investment portfolio to your important future goals (such as your child’s education or marriage, or your own retirement).