There is enough literature available to take one down the complex roads of financial management. In this piece, the focus is on 'financial discipline', which is not just an elementary aspect, but a scarcely addressed one, too.
If you have ever heard a person say to you, “Please keep this money with you. I will take it when I need it for a specific purpose. It will just get spent if it is with me”, that is financial discipline. It is an ability to recognise one’s own capacity, potential, planning for the future and recognising the challenges. Financial discipline nurtures and guards your resources responsibly. It helps you ensure that you have money for the major certainties of life.
Purchases made on a whim have the unique ability to drain our income and savings—the primary reason people are unable to stick to a discipline. Therefore, what also constitutes indiscipline is, not having a financial plan in place, as it is more challenging to regulate expenses in the absence of personal money management guidelines. Those successful in managing personal finances have stuck to discipline either by acquiring the skills or taking the assistance of products structured to reward discipline.
DO NOT LET THE SEEMINGLY URGENT TAKE OVER THE IMPORTANT
Alarmingly, a study finds that among Indians, almost 30 per cent never invest money and over 40 per cent will draw from their savings to fulfil needs that they feel momentarily pressing. Ironically, the same study points that the fear of not having adequate savings to support the loved ones is the greatest fear among Indians. Such a dichotomy is the result of the crossroads life puts one at, where an impulsive or emotional decision forces indiscipline. A vacation might seem necessary right now, but so is ensuring comfortable living through the course of your lifetime. It is not like you are not financially savvy, but you may be missing a staunch resolve to ensure your savings remain untouched, no matter what.
To stay on guard, one will need to ensure they are not cross-subsidising funds meant for fulfilling future goals, to indulge the seemingly “urgent”. This applies not only during the savings period, but also at the maturity of the investments, where the money has to be channelised for the need. It could mean making practical decisions and denying oneself of instant gratification—physical or emotional.
PRUDENT SAVINGS NOW, UNRESTRAINED RETIREMENT TOMORROW
Among the working Indian population, 47 per cent have either not started saving for their retirement or have discontinued due to difficulties in saving for their future.
During the pre-privatisation times, an alternate job was assured for the employee’s spouse, child or next of kin, in the event of the demise of the employee serving the Indian corporations and government-based organisations.
Thanks to defined benefits of monthly pensions that came with being employed in those days, the need to plan for retirement did not arise. These individuals, now retired, lead a comfortable life today. But, what about today’s working generations, who have no pensions to fall back on at the time of retirement? From those days, a lot has changed today. With companies moving from pensions to defined contributions, after 2004, let us understand that our future is not going to be so looked-after. In this background, financial discipline is not a choice, but a necessity to lead a comfortable life.
In addition, life expectancy in India has risen to 68 plus, as per a report by the World Bank, which implies there is at least a decade more of existence, but without income. In this context, a matter deserving of serious deliberation for professionals in their early 50s is, how to save or invest the lump sum received upon retirement. The discretion of investing in gratuity and pension now falls on individuals themselves.
SAVINGS WITH LOCK-INS, YOUR BEST BET
When exploring investment tools, customers often look for those offering liquidity. It is strange that one should want liquidity of funds when building assets for say, one’s child’s education.
The compulsive need for anytime-access to your funds is but a by-product of a consumerism culture rampant in the developed nations, where the basic standard of living is much higher. Unlike in developed countries, India lacks a social security system and is among the lowest ranking in health expenditure per capita and non-insured health expenditure. Regular savings with lock-ins become all the more essential, given such a scenario.
Financial discipline is not about understanding intricacies of how the market works, but having a general, broad understanding of simple features such as lock-ins, guarantees and market-linked risks. And, most importantly, matching of long-term needs to long-term assets. Quite like the self-aware individual, who creates self-enforced checks to manage his money, everyone needs to internalise their attitude towards monitoring savings and choosing products combining features relevant to their need, attitude and capability. Besides, it is in the best interest of the individual to let foreseeable life certainties decide the financial vehicle.
R.M. Vishakha is managing director and CEO of IndiaFirst Life Insurance