Greg Chappell,the great Australian cricketer on being appointed as coach of Indian national cricket team did what every right thinking coach or an advisor should do.
He asked the team members to go back to the basics.
For batsman that means; importance of running hard between the wickets,cutting down on risky shots for scoring runs and for bowlers; keeping control over line and the length.
For mavericks like Virendra Sehwag and aristocrats like Saurav Ganguly this was pretty harsh.
His tenor may be controversial but the message was clear. One can achieve success by being disciplined and consistent in approach. Australian cricket team dominated the cricket world for so long by not doing anything extravagant but with this simple philosophy of hard work and discipline.
It is the same in case of our financial life. Success depends on adhering to basic principles of prudent financial management.
Investment world may be complex but life can be simple.
Dont make it complicated. There are already enough bright minds from management schools adding to the difficulty levels every day.
As a sensible person,our objective should be to achieve complete financial independence and make life simpler.
The stage of financial independence can be reached where money is working for you instead of you working for money. Instead of you toiling hard 24×7 let there be passive income.
The problem,however,is the approach we follow.
Lets discuss it one by one. The first is Earn,Spend,Save. We earn and then spend it for EMIs of home,car,household expenditure,entertainment,eating out, travelling etc. What is left is the savings for the month. So out of Rs 100 we earn,we spend Rs 85 and rest Rs 15 is the savings. This approach according to me leads to what I call is the stage of Financial Disappointment & Disaster.
Here savings is dependent on expenses. Instead of cutting down on expenses,we are compromising on savings. Are we working for banks to which we pay EMIs or ITC,HUL, PVRs of the world for consumer durable,entertainment,etc?
Pay yourself first
First week of the month should be allocated for your SIPs,RD and forced savings. EMI can wait till month end. Logical. Isnt it? Next stage is Earn,Save,Spend. Slightly better than earlier stage,but still one is dependent on earnings alone to manage the entire finances. It however does bring some discipline in the process but eventually lead to the stage of Financial .
The savings and the expense will still be prone to risk. This leads us to third stage of Earn,Protect,Save, Spend.
Here we try to protect the source of our financial well being. Protect earnings by way of protecting earner (Life Insurance),protecting against the risk that can derail earnings (Health insurance,asset protection etc.) The biggest confusion is at this stage. We mix protection with savings. These two are entirely different from each other.
By mixing the two we are compromising on both. Protection on a standalone basis is very cheap but mix it with savings and we have a problem. Buy insurance for protection and not earning.
If we tick all the boxes here,we have achieved Financial Security. Think for a while something is still missing. We are away from that coveted status of Financial Independence. And this can be done only when the savings get converted to investments. That matured stage is Earn,Protect,Save,Invest,Spend. While a savings denotes no or low risk,investment will essentially have risk.
All we have to do is to manage it properly. How,when,where to invest is altogether different topic but this conversion from savings to investment is of utmost importance without which passive income and eventually financial independence cannot be achieved.
Get ready,work hard. There are plenty of Johnty Rhodes around,very excited to run you out.
The author is ACA,CFPCM Think Consultants,Nagpur Member,Foundation of Independent