I keep hearing various versions of what people are doing with their money. I am going to put each one of them under a broad philosophy.
Some are frugal, some are helpless, some blame their luck and some work diligently towards maintaining their financial health. It is my personal style to focus a lot on diligence and discipline.
I have also known get-rich-quick artists. They are as slippery as they come. I don’t understand them. I can’t put them under any of the categories I have come up with below because they are a category of their own.
Five different money philosophies.
- No money philosophy: Living paycheck to paycheck. They feel poor all the time despite having a steady income. In some cases, the person is saddled with credit card debt where the person is constantly playing catch up. Some go through their whole lives with this philosophy. This is not a good place to be in. Some in this space are living beyond their means and others have financial responsibility disproportionate to their income. The person in this situation is often forced to take new loans/credit cards to pay off the old ones. It’s a sure shot recipe for money related stress in the medium to long term.
Solution: Downsize your life temporarily and put in the hard yards to get to good financial health. Start saying ‘no’ to all the consumerist temptation life throws at you. Say no to some of the financial responsibilities. Call up the bank/credit card company and workout a payment plan. Pick up a temporary job on the weekend.
I fully recognize it is very easy for me with enough means to analyze the situation and dispense free advice. I have some wisdom I have accumulated over the years by living well below my means. I really want to help.
- ‘Outsourcing’ the money philosophy: Many Indian women indulge in this and this is very lazy. Either the husband, brother or father manages money of this person. My biggest problem with this approach is lack of ownership. If a woman is working hard in her job/or any source of income she should have skin in the game for making the money work hard for her as well.
Solution: At the very least, the lady should maintain a periodical oversight of what is going on with her money. Or, put down clear goals on where she wants her money to be or at what rate she wants her money to grow year over year. If the money is underperforming, please be bold to ask questions and make yourself aware of where the mistakes were made. Please don’t let trust, emotions or familial temperament get in the way of money management.
- Simple money (read investment) philosophy: Provident fund, fixed deposits, real estate and in some cases insurance policy are the areas where money is parked at in this philosophy. They usually underperform because the portfolio is too defensive. Further, inflation eats away at the value of fixed deposits. If you are living in India which has had high growth and high inflation till 2015 for last 20 odd years and you have put large amount of your money in fixed deposit, you have missed out on earning higher returns. If only the same amount of money in your fixed deposit was invested in a blue-chip stock, your money would be far higher in value today. You don’t need a solution here …you simply need to course correct and gear a certain percentage of your portfolio towards stocks. Do that only after you have learned the basics of mutual fund and stock market investing.
- Balanced money philosophy: Exposure to term insurance, bonds, precious metals, real estate, land, stock markets and mutual funds/ELSS/ULIPs. While there are many asset classes here, but this approach is not far from value investing. 20% of income is invested steadily month after month, year after year. The key component of this investment style is spreading out the risk on a range of asset classes and accumulating wealth over a long period of time with calculated risk exposure. During the time I lived in the USA I hung out with some Jewish people. They thought of wealth creation over time spans of one hundred, two hundred years. Simply mind blowing because on that kind of time span risk has a very different behavior. Time and compound interest are key allies for this investment style. In this approach
- Aggressive (and maybe reckless) money philosophy: Very high percentage of exposure to stocks. There could also be investments in startups, day trading, timing the market, owning more than one house and flipping property. Visits to gambling dens and playing poker can’t be ruled out either. In short, this is geared towards > high risk, high return or heavy losses. I may never participate in it and not recommend it but sure there are people who have “play” money allocated to it. Other than observing this money philosophy from sidelines and recognizing it is not right for me, I have nothing much to say.
a) precious metals, bonds and term insurance form the defensive core of investments (risk mitigation, capital protection and forming a moat around inflation and/or recession)
b) Real estate and land form the solid middle with moderate risk and growth prospects
c) Because the defense in is strong, about 40% – 50% of the portfolio is geared towards mutual funds, stocks etc. for high returns
This is my approach and I am happy to get into details with anyone wanting to know more.