A 12 STEP GUIDE TO MANAGING YOUR FINANCIAL LIFE IN 2014.
– Vishal Dhawan, Chief Financial Planner, Plan Ahead Wealth Advisors.

 

We are now at the end of 2013, and a lot of us may be evaluating how quickly the year 2013 passed by ( as it always seems). It is also a time to evaluate our ‘hits and misses’ – resolutions that we made at the beginning of the year that we kept, as well as those that we did not keep. Whilst there are multiple methods to use to be better prepared to keep our New Year resolutions, we hope to share our thoughts on how one can do so for your financial resolutions for 2014. What we believe is essentially required is a clearly marked action plan, which is broken down into parts. This is like having various mini meals during the day instead of one king size meal. As mini meals prevent you from feeling lazy, this clearly divided action plan will help you stay focused and stay connected to the end result you want. As we are approaching the end of 2013, we are simply attempting to create a monthly calendar to simplify the process of managing your money and make this one of your agendas for the year 2014. One of the biggest myths about managing money is that it is all about returns
on your investment. Whilst returns are no doubt a critical component of managing money, we believe it is critical to take a more holistic view on finances.

January – Put it all together – There is no point in having made a large number of investments because of the potential for above average returns or tax savings or putting away excess savings and not knowing where the documents for these are or how they are doing. Create an inventory of all your savings and investments – bank accounts, insurance policies, mutual funds, shares, demat statements, real estate agreements, credit card statements, loan documents, amongst others.

Whilst this may sound simple, it can be much more challenging than it seems. Whether you wish to maintain a set of files with all these or use software for tracking, it is critical that all the records are well documented and stored so that you or your dependents have easy access to it.

There is no point in having made a large number of investments because of the potential for above average returns or tax savings or putting away excess savings and not knowing where the documents for these are or how they are doing.

Treat it like an ISO certification for yourself whereby you or your dependents can retrieve any document within a maximum of 15 minutes after you realize you need it.

have never seen the need for emergency funds come up in a manner where there is a knock on your front door, followed by a polite request to make the money available after 2 months because there will be a need for the funds. Emergencies are exactly what they are ie emergencies and come up when least expected.

February – Question what you really want your money to do for you – This could vary from person to person, for some it is retiring at 45, for another sending a child to study overseas, or for someone else, visiting 100 places before he or she dies. As you think deeply about these life goals, you will find monies would have an important role to play in a large number of these. Try to put numbers to each of these goals and estimate how your finances are currently designed to get you to these goals. In case you find this process difficult, you may need to seek the help of a certified financial planner or ideally a certified financial life planner.

March – Keep what matters, let the rest go – This is one of the most challenging parts of managing money,since you may have to admit to mistakes that you made in the past. Past performance should not be the only factor driving this decision. For example, if you have a large number of small value insurance policies that do not give you substantial life cover, it may be better to surrender these policies and buy a term insurance cover that will allow you to cover the risk to your life meaningfully for your dependents. Or equity investments made in the past that have not delivered for more than 7 years, may need to be substituted with better equity investments. Remember to separate underperformance of equity markets from underperformance of specific stocks or equity mutual funds in your portfolio.

April – Plan for emergencies and contingencies – From all of my experience, I have never seen the need for emergency funds come up in a manner where there is a knock on your front door, followed by a polite request to make the money available after 2 months because there will be a need for the funds. Emergencies are exactly what they are ie emergencies and come up when least expected. It could be a medical emergency for yourself or your family, a sudden job loss or the urgent need for money to help a dear friend. It is imperative that these funds are kept away separately for use in an emergency – the amount could vary depending on individual circumstances but typically 3-6 months of contingency expenses are a good idea. These should ideally be kept in a combination of cash at home, a credit card that has a decent credit limit and which has been recently used, savings account linked to fixed deposits which can give you the dual benefit of higher returns and liquidity, and liquid funds that tend to outperform bank fixed deposits especially due to their higher tax efficiency. You could consider using liquid funds with recent innovations in liquid funds that allow you to withdraw cash through ATM cards or redemptions through SMS due to their superior ability to provide access in case of an emergency.

May – Put your risk control mechanisms in place – Ever wondered why cricket teams travel with two wicketkeepers or why they have a captain and a vice captain? Its fairly obvious , isn’t it? So why is it that a large number of us do not have adequate life cover for ourselves, or that our houses are not insured, or that our medical insurance covers are for Rs 2 lakhs when we know that the last acquaintance that got admitted to hospital spent 7 lakhs on his illness. It is therefore critical to evaluate the right amount of life insurance coverage required for oneself and medical cover for your family. Ensure that your house is neither overinsured nor underinsured, and if you are a professional, business owner or key decision maker in your organization, you have insurance covers to protect risks that you are exposed to as a result of your vocation. Since risk mitigation tools are constantly evolving, you may need to seek professional help for this. Also remember that this is not a cost but your Plan B, so treat it like one instead of looking at it as an expense.

June – File your taxes correctly and diligently – Depending on your country of residence and occupation, the dates for filing your tax returns may vary. However, it is critical that you collect all of your data and report, be it income, investments, interest statements, capital gains, or any others and compile it carefully so that you do not miss out on anything critical. One of the common things that we hear from investors is that we don’t remember whom we issued this cheque to, or I only have a small amount of interest earned on my savings account so why bother filing my returns as my employer is already deducting tax at source. Whilst you are probably correct that a large portion of your taxes are already taken care of, 100% accuracy is critical in this exercise. Just like you dedicate time to other important aspects of your life, you need to make time for this as well, so that it does not come back to haunt you later.

July – Use technology to improve the management of your finances – There have been significant enhancements on monitoring and managing finances in the last few years. Technology benefits can be gained through your mobile phone, computer or tablet. From online information on taxes deducted on your account or tax refunds processed, to investing surpluses in your bank accounts to earn superiors returns, to alerts on specific transactions that have taken place on your accounts, to maintaining digital records of all your important documents, technology allows tracking and transaction on your finances far more easily than ever before. You should actively consider the use of a software that allows you to track all your finances and assets in a single place, so that your updated finances are available as and when required. You could check on solutions from your financial planner about the same.

August – Build a team of trusted advisors – Most individuals today need the services of a financial planner to oversee their overall finances, a tax advisor to file and manage their taxes on an ongoing basis and a legal advisor to guide them through matters related to succession and real estate. Whilst it is possible to work with each of the above professionals on a transaction by transaction basis, increased complexity and integration on all aspects of your finances requires you to build longer term relationships so that decisions on your overall finances are taken in a more holistic manner. Whilst it is always possible to find an advisor for a specific transaction, building a team that understands your world view is critical for success on an ongoing basis.

September – Build your succession plan – There may be multiple dependents on you – your spouse, your children, parents, a sibling or his family. If you need to support each of
them differently, ensure that your finances are arranged in a manner that this can happen smoothly. Whilst a nomination is a good starting point, it is unfortunately not the solution to all your succession issues. First of all, remember you are never too young to die. Once you accept that reality, you can begin work to make a checklist of all your physical and financial assets, your thoughts on how you would like them divided (remember that it is not easy to divide a physical asset like a house into half easily), and then putting it down on paper so that there is no possibility of an incorrect interpretation. Remember, the draft of someone else’s will is very unlikely to work for you, so get it customized to your requirements. There are good online solutions available today that allow will creation for simpler succession planning needs. Speak to your financial planner on whether he can offer you any of these solutions

October – Invest in yourself – There is a tendency to go into a comfort zone with respect to our professions and careers, especially as we become masters at doing the same thing over and over again. Macolm Gladwell in “The Outliers” has shared a 10000 hour rule which I’m sure a lot of you already know about. For those who don’t, the 10000 hour rule indicates that mastery in a field is driven by spending 10000 hours in it. So what happens after you have spent 20 hours a week doing the same thing for 10 years? Maybe its time to move your cheese before someone else does that for you. Just like companies spend a significant portion of their revenue on research, how many of us have a financial plan that includes spending a portion of our income( or our wealth) on improving ourselves. As Warren Buffett says “Investing in yourself is the best thing you can do.”

November – Accept that you are an investor – Whilst most of us start off as investors, there is a high risk of becoming a speculator along the way. The difference between an investor and a speculator is two fold in our opinion – firstly, an investor thinks more with his brain and less with his eyes, and secondly, an investor knows what he owns, why he owns it and can explain that clearly. Avoid buying an investment just because it has done well in the recent past or because it excites you. As George Soros says” If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.” In case you cannot avoid speculating, restrict it to a very small portion of your portfolio and understand that you are speculating, not investing with that portion of your wealth.

December – Review your plan and rebalance your portfolio – Whilst its great to have a plan and even better to implement it, its important to ensure that it is on track to deliver what was expected from it. Whilst different types of investments deliver results over different time frames, it is critical to evaluate that the overall plan is moving in the direction that you wanted it to. Whilst it is good to spend some time on the specific products that you have invested in, the overall allocation across different asset classes is ideally where the focus should be, so that assets that have become cheaper can be added to in the portfolio, and more expensive assets can be reduced. This simple strategy of rebalancing , at least once a year, can make a significant difference to your overall portfolio returns.

Have a great 2014 and we hope you are able to keep most, if not all, of these financial resolutions.