Financial Planners are similar to your family doctor. Your family doctor treats all your health conditions — acute and chronic, including your emotional and relationship concerns. Financial Planners do the same. They just do not plan your finances, but they work more on your behavioural or psychological pattern towards Personal Finance. Generally, the financial planner’s work gets over once he/she handed over a final draft of the client’s financial plan but a good Financial planner’s real work starts from here. He/she is more concerned about an individual’s finance knowledge, attitude towards handling their finance, their expenditure pattern and ultimately their financial peace. than just making a financial plan.
I also get many queries through the mail, WhatsApp and Messenger on different topics of finance. One such query is on financial peace. You want to know how we can achieve Financial Peace and what are the pillars of that.. Today lets go deeper on this topic.
Let’s first understand what is Peace?
According to Wikipedia, “Peace is a concept of societal friendship and harmony in the absence of hostility and violence. In a social sense, peace is commonly used to mean a lack of conflict and freedom from fear of violence between individuals or groups.” It means peace gives us calmness and stability among individuals or society. The same concept we can apply to Financial peace also. We can say we have achieved financial peace when our mind is calm and secured. It is worry-free and has freedom from fear of scarcity. When the back of our mind no constant thinking of money matters going on. When we can focus on our work, on our hobbies, on our passion and enjoy our life full-heartedly without bothering about our finances.
Fundamental pillars or building blocks for getting financial peace.
What are those things which will help us to get financial peace in life?
In my opinion Knowledge and discipline in investing will lead to financial peace…
Knowledge and discipline are two important Fundamental pillars on which your financial peace depends.
How can knowledge help us?
When the investor is knowledgeable about the benefits of investing, different financial products, investment process, its pros, and cons, etc. he/she takes investments more seriously and make an investment as his/her habit, knowledge helps to develop an interest in finance which leads the habit turn in to the discipline.
How can discipline help us?
Investing is a virtue we need to convert it in a habit and once we are habitual about investing we become disciplined about this. Once the investor is knowledgeable and when he/she disciplined towards Investment it will automatically lead to financial peace.
A few years back, I came across a very interesting Ted Talk by motivational speaker Simon Sinek. He described something known as ‘The Golden Circle’
The concept stated that you should first identify your WHY (why are you doing a particular thing), then the HOW (steps that you will take to get you there) and then finally the WHAT (what you are actually doing).
We can apply this to our investment too… Let’s see how
An investor should focus on the following 2 aspects while applying The Golden Circle in Investing process:
Knowledge: Knowledge about personal finance, financial products, risk, and return theory will keep the investor on the right track of wealth creation.
- WHY is the question investor should ask oneself before investing.
- Why do I want to invest? Is there any goal behind this investment? These questions are related to the Goal-based Investment strategy.
- How, is the question related to the process for achieving the targeted amount for the particular goal of life
- How you are going to achieve the targeted amount for my goal? How you are going to invest? How is your asset mix for achieving a particular goal? These questions are related to the selection of the right asset mix for the said goal.
- What, is the question related to the returns investor will get at the end of the term.
- What returns I will achieve if I invest in the said product? What will be the result of the said investment strategy? What are the pros and cons of selecting a particular financial product?
Knowledge about WHY, HOW and What will make the investor confident and prudent to keep his/her fiances on track.
Wealth creation is a long term phenomenon. It can be achieved only when an investor keeps on investing continuously and keep invested for long. Discipline keeps it happening for longer term.. The investor’s disciplined approach makes him/her invest regularly until the life goal is achieved. Missed SIP, missed renewals of FD/RD, missed an opportunity to change the asset mix can cost huge in the long term. This will not happen if the investor has a Disciplined approach.
Let’s apply the Knowledge and discipline concepts to the investment world now:
Jay is planning to buy his own house:
Jay’s WHY: Jay wants to generate a corpus of 25 lakhs next 7 years to accumulate a down payment
Jay’s HOW: Jay charts up a plan which includes how he will apportion part his investible surplus towards this goal, increasing the saving portion of income every year, hunting for a dream house, etc
Jay’ WHAT: Jay decides that he will invest in a combination of mutual funds and fixed deposits to achieve his targets.
Now here is a tentative sheet of Jay’s plan and target:
- Goal — Accumulating down payment
- Time to goal — 7 years
- Amount required after adjusting inflation at 7% %
- Investment required –
- Mutual funds: Mixed of liquid funds, ultra-short debt funds, and balanced funds.
- Fixed Deposits
- The amount required per month- Rs 21500
- assumed portfolio return as 9%
- Fixed Deposit can be done in a lump sum or one year RD matured turned into FD each year and so on for 3 consecutive years.
If you observe, Jay defines WHY he wants something like the first step, then charts a plan HOW he is going to achieve it, and then finally he decides on WHAT are the products that can get him there when he obtains Knowledge about Investments for his goal. And if Jay remains Disciplined in this investment pattern he surely is able to accumulate the down payment amount of his dream house !!!
How do we plan our Investments?
Most generic way is :
1. We start investing in something just because our friend or next-door neighbour has got double-digit returns in a month (WHAT).
2. Rarely do we have a systematic way or detailed plan of structuring our investments (HOW),
3. And even rarer is our definition of an end goal (WHY).
This way of investing is getting us NOWHERE as it lacks vision and direction.
Think over it and try to find out answers of WHAT, HOW and WHY.
I have since linked all my investment decisions to quantifiable targets which keep me motivated because of in-depth knowledge of personal finance and disciplined approach. I have also helped numerous people identify their WHY and consequently the purpose for even the smallest of investments.
Keep gathering knowledge about Investing and be disciplined in investing to live worry free financial life !!!