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 behavioral or psychological pattern towards Personal Finance. Generally financial planner’s work gets over once he/she handed over a final draft of client’s financial plan but a good Financial planner’s real work start from here. He/she is more concerned about individual’s finance knowledge, attitude towards handling their finance, their expenditure pattern etc. than just making their financial plan.
I also get many queries through mail, WhatsApp and messenger on different topics of finance. One such query I recently got was on financial habit. That guy asked me about “What is my single advice that will change someones financial habit?” Today lets go deeper on this topic..
Let’s first understand what is Habit?
According to Wikipedia, A habit is a routine of behavior that is repeated regularly and tends to occur subconsciously. The American Journal of Psychology defines a “habit, from the standpoint of psychology, [as] a more or less fixed way of thinking, willing, or feeling acquired through previous repetition of a mental experience. Habit makes any work easier and interesting for us. When we develop interest in something and do it regularly it becomes our habit. When we are forced to do something, and we don’t have knowledge about it we try to skip it. That thing becomes irritating for us. But when we pursue our habits we experience happiness and stress free life.
Same thing applies in Financial world too. When we are forced to do saving and investing without realizing its importance we will fail to do it for long. There won’t be any regularity, and we may search for a stupid reason not to follow that. So how to change this situation? Let’s answer these questions
- How can we develop interest in finance? The answer is through Knowledge. When investor is knowledgeable about the benefits of investing, different financial products, investment process, its pros and cons etc. he/she takes investments more seriously.
- How can we make investments our habit? Once the investor is knowledgeable and when he/she disciplined towards Investment it will automatically become habit.
So in my opinion Knowledge and discipline in investing will lead to financial peace…
This one liner can change individual’s attitude and approach towards financial habit
So 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
Investor should focus on following 2 aspects while applying The Golden Circle in Investing process:
- Knowledge : Knowledge about personal fiance, financial products, risk and return theory will keep investor on the right track of wealth creation.
- WHY, is the question investor should ask oneself before investing.
- Why I want to invest? Is there any goal behind this investment? These questions are related to 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 your goal? How you are going to invest? How is your asset mix for achieving the particular goal? These questions are related to selection of 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 the particular financial product?
- WHY, is the question investor should ask oneself before investing.
Knowledge about WHY, HOW and What will make the investor confident and prudent to keep his/her fiances on track.
2. Discipline
Wealth creation is a long term phenomenon. It can be achieved only when investor keeps on investing continuously and keep invested for long. Discipline keeps it happening for longer term.. The investor’s disciplined approach make him/her invest regularly till the life goal is achieved. Missed SIP, missed renewals of FD/RD, missed opportunity to change the asset mix can cost huge in long term. This will not happen if the investor has 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 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
- Amount required per month- Rs 21500
- assumed portfolio return as 9%
- Fixed Deposit can be done in 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 as 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 be able to accumulate the down payment amount of his dream house !!!
We start investing in something just because our friend or next door neighbor has got double digit returns in a month (WHAT). Rarely do we have a systematic way of structuring our investments (HOW), and even rarer is our definition of an end goal (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 approached. 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 !!!
This is single most valuable advice!