Cricketing tips for your personal finance

Winning a cricket match depends on a number of varied factors – it’s not just about scoring runs but the pace at which you score them, it’s also about conserving wickets, restricting the opposition from scoring runs, taking their wickets, taking catches, the weather conditions… Managing your personal finances is no different really, is it?

1. A good early start always helps

It’s all about starting with a plan and then going about executing it. Whether a team is setting up a score or chasing one, batsmen do have a clear target in mind and the approach to scoring runs stems from this target. If it’s a huge score they are after, more often than not the run chase has to start in earnest at the earliest. Similarly, the sooner you start investing, the easier it is for you to achieve your financial goals as your investments have a longer time period to grow with the magic of compounding. Let us take an example of two young men Suresh and Mukesh, both aged 20 and wanting to have a retirement fund at the age of 55. Suresh invests Rs. 10,000 in the first ten years till the age of 30 while Mukesh invests Rs. 25,000 starting at the age of 30 till age 55. Assuming a 15% annual return on both investments, Mukesh will be able to accumulate only Rs. 70.64 lacs as compared to Suresh’s Rs. 88.39 lacs at age 55 despite his annual investment being 2.5 times that of Suresh. Leaving it for too late can cost you the game.

2. Pace your innings right

Know when to take risks and when to consolidate and conserve. With wickets in hand, it is always easier to go after the bowling, isn’t it? And then there are times when you just need to preserve your wickets. Deciding your asset allocation should be guided by the same principles.

If you are at a stage in your life where you have another 10-30 years of your earning life ahead of you, then it is quite possible for you to recover from any short term volatility with regular investments in riskier but higher return yielding assets like equities and equity oriented investments which can help you create meaningful capital appreciation over the long term (the winning score!).

On the other hand, a person approaching retirement can see a significant depletion in his life’s savings on account of market volatility. At this stage, the remaining tenure of his investments is lower (less wickets in hand!) and he is bound to have a lower risk appetite. This is where moving a higher proportion of your savings back into fixed income instruments makes more sense.

Market volatility has a different impact on investments based on tenure; and life stage on risk appetite. The fact is that needs and risk profiles change over time; and therefore asset allocation (or how much to invest in which type of investment) should change with life stage and risk profile.

3. It can’t be 11 Sehwags
Just like a winning team can’t be made up of only attacking batsmen, your portfolio also needs optimal deployment and diversification. Each player has a role to play and fulfils a different need and it takes the right combination of good batsmen, bowlers and fielders to win a match; and yet there can be only 11 players in the playing team.

Similarly your pot of savings and investment is also limited and should be deployed optimally to meet varied needs like risk protection, insurance, savings and asset/wealth creation. While buying only insurance will not help you create wealth, only savings and investments will leave you and your dependents financially insecure against unforeseen risks. At the same time, within your portfolio of investments there needs to be a fair amount of diversification across asset classes to help you spread your risks and optimise your returns commensurate to these risks.

But the playing 11 also change from time to time depending on the format of the game, the opposition, the playing conditions etc. Likewise, it always helps to assess your needs and review them from time to time. How much insurance you need is bound to change with time, your financial goals will also witness changes with your lifestage and associated events. Similarly external environment and conditions may require a change to your portfolio mix. For e.g. in a rising interest rate scenario you may want to move to shorter duration fixed income assets etc.

4. Restricting the opposition or outscoring them
Winning is about outscoring your opposition; the returns on your investments and savings should always be benchmarked against inflation. If you are earning an interest rate of 7% on your deposit and the inflation rate is at 9%, then you are not even covering the loss of your purchasing power on account of rising prices.

Just like cricket is not just about scoring runs but also about restricting the opposition and bowling them out, your personal finance management should not just focus on wealth creation but also on liability management. Keep an eye out on your liabilities, know what you can afford and try to minimise leveraging to the extent of possible and under no circumstance take on a liability beyond your foreseeable means.

Always try and keep the tenure of your loans to the minimum as that can help you tremendously on reducing your interest costs. With a lower duration of loan, the EMI may be higher but what you would pay as interest over the term of your loan would be substantially lower. If you can’t afford the higher EMI and have to necessarily take a higher duration loan, it would help to try and manage your savings in a way that help you pre-pay the loan with intermediate payments in the initial years itself so as to reduce your overall interest burden.

Have a good game and happy winning!

(c) 2010