The Top 4 Causes Of Financial Stress - And How To Beat Them

"Money is a headache, and Money is the cure", said Terri Guillemets. Undoubtedly, she was referring to the problem of Financial Stress which, in today's day and age, is assuming nothing short of epidemic proportions.

Research indicates that financial stress affects people across age groups and income brackets, although the relative degrees may vary. U.S based workplace wellness firm Financial Finesse publishes an annual report on financial stress as it related to the workplace and how it affects employee wellness. The results indicate that the highest levels of Financial Stress can be observed in individuals who fall within the age bracket of 30-44. Although it pertains to a different country, it's safe to say that the same statistic more or less applies to India as well.

Financial Stress can have a multitude of negative effects on the sufferer's life - including but not restricted to sleep deprivation, overeating, substance abuse, anxiety and/or depression, relationship issues and even accidents. The need to curb it, is therefore crucial.

An increased awareness of the underlying issues that lead to Financial Stress is of paramount importance. Awareness leads to action, and action leads to a sense of control that can greatly alleviate your anxiety when it comes to money matters. Here are the top four causes of Financial Stress, along with a few simple steps you could take to begin eliminating them; starting today.

Lack of Control
By far, the leading cause of overwhelming Financial Stress is a sense of one's financial situation being 'out of control'. The textbook definition of 'control' holds the key here; control can be defined as 'the power to influence the course of events'.

It's not surprising then, that with so many variables (your job, your pay, the markets, the economy and so many more), one would often tend towards feeling, in a sense, a complete and utter lack of power to be able to influence one's future. This can and will lead to Financial Stress.

The solution to this problem would be to control the controllable events, while putting in a best effort to influence the uncontrollable events. For instance, you can control how much you spend each month. Not allowing the 'lifestyle creep' to damage your savings, and not spending at least 30% of your monthly post tax income can help. Yes, you won't be keeping up with the Joneses quite as much, but you'll be a lot happier!

Additionally, having adequate Health Insurance and Term Life Insurance can go a long way in helping you feel in control of the future. Are you adequately covered on both fronts?

Lastly, do not fall into the trap of consumerism-led debt taking. This is quite possibly the number one reason for 'lack of control' related financial stress. Use your credit card as a convenience tool only, and not as a borrowing tool. Pay off your dues well in time each month.

Not being on track to meet future goals
Another leading cause of Financial Stress is the feeling of not being on track to meet one's future financial goals.

There are three steps you can take in this regard: First, identify, define and prioritize your goals by having a financial plan prepared. Second, make sure you're saving in the best, highest return asset classes for each of these goals, depending upon their respective time horizons. Third, get started, even if it's with a small percentage of the actual goal fulfilment requirement. You really don't need to go in hook, line and sinker right away, as that could actually exacerbate the problem!

These three steps may not put you on track to meet your goals immediately, but the sense of control you'll get will help alleviate your financial stress by several notches.

Your child's education and your retirement are likely to be two key financial goals for you, along with the purchase of a home. There's no need to rush into the third one with a large, high interest loan. If you're a new saver, take baby steps towards the first two goals with mutual fund SIP's (and other high return savings tools) instead.

Avoid diverting your long term savings towards life insurance or concentrating them purely into fixed return investments such as PF accounts. A judicious mix, with a skew towards low cost, high risk/ high return investments is the key to crossing the finish line well in time.

The Inability to identify a trustworthy Investment Adviser
The question of whom to take investment advice from has always vexed investors. Admittedly, this is a toughie. The conflicts of interest when it comes to recommending high brokerage products and / or proprietary products is literally inextricable from the Advisory profession even today; the regulators steady efforts to promote transparency and curb mis-selling notwithstanding.

It's hard to identify a truly conflict-free advisor, since the Advisory business in India is still heavily commission centric and not fiduciary in nature. What this means is that your Advisor will likely earn the lion's share of his income from commissions that emanate from the products that you invest into.

In an effort to move clients to a fee based model, SEBI has launched a large scale effort to promote the IA (Investment Adviser) regulations that will take a few years to realize its full effects. In the meantime, you could follow a few thumb rules to identify a trustworthy advisor.

First, look for the "gold standard"; an adviser who makes zero income from the products recommended, and 100% income from fees. You shouldn't be wary of paying up to 2% of your overall assets in fees to such an Adviser - you'll actually end up saving a lot more in unpaid commissions in the long run. Second, the CFP certification or an RIA license can help you identify a fee based Adviser whom you can trust. Third, look for an Adviser with no product biases (for instance, purely insurance, purely mutual funds, purely NPS or so on).

If a friend or relative of yours is already dealing with a trustworthy Advisor, you could seek him or her out.

Economy and/ or stock market related worries
Aristotle once said: "Either there's a solution to the problem, and there's no point worrying about it. Or there's no solution to the problem, and there's no point worrying about it".

Since this is the one that's impossible to control, it should therefore be the least of your worries! Worrying about the markets or the economy is like worrying about the weather - it's nothing but a colossal waste of time and energy. You cannot influence where interest rates or the NIFTY are headed, however much you'd like to.

There are two keys to beating market/economy related worries. First, be a realist (not an optimist or a pessimist). Second, self-educate - even if at a very basic level. Pick up a copy of a financial daily and scan through the first page daily. Third, manage your asset allocation using common sense. Markets usually give very clear indicators of being fairly valued, overvalued or undervalued. Balance your asset allocation once every six months or once a year, based on which asset class is overvalued and which one is undervalued. Do not trade, speculate or move in and out of investments too quickly.

Better yet - you could put your money in a 'shut and forget' mutual fund (such as a dynamic asset allocation fund) that automatically balances your equity and debt allocation based on certain key indicators. ICICI Prudential Balanced Advantage Fund, Franklin India Dynamic PE Ratio Fund of Funds and DSP BlackRock Dynamic Asset Allocation Fund are some options you could consider.