Arriving with the heat wave it’s the month when performance reviews are on the cards. You are probably hoping for that hard-earned performance bonus, an increment, and/or the corner office.

Being a Registered Investment Advisor (RIA), we are privy to these important milestones in our clients’ lives. Our client, Mr. Prakash (name changed) (45), a Deputy General Manager with a public sector bank, called us a couple of days earlier to share his joy of earning a 25% performance bonus. Like most individuals, he had made plans to splurge the money on foreign vacation, the latest gizmos, and extravagant dinners while his financial health was in pink!

It is important to share an objective outlook with our clients during such situations. We know it is hard to let go of the urge to fritter. Yes, an objective outlook is unromantic and mundane and probably the last thing on our minds, but as Davey Ramsey, a US based Financial Coach says,“You must gain control of your money or the lack of it will forever control you”.

In today’s article, we share the steps that you should follow before emotions get the better of you.

Step # 1: Repay any existing loans. Become debt free before allocating money to financial goals. Make sure you repay loans with high interest first. The EMI saved could be channelized towards the financial goals.

These were Prakash’s liabilities...

And here’s what we r`ecommended to him...

Repay all the liabilities. You’ll save Rs 20,400 per month and also become the legit owner of the house.

Step # 2: Build an emergency fund, if you don’t have one yet. The emergency fund helps to tackle life’s uncertainties. If you are the sole bread earner, hold at least 6 months of expenses in liquid funds or savings account or even consider a sweep-in fixed deposits depending upon your liquidity needs. If you have an earning spouse, the emergency fund may stand reduced to 3 months of expenses for each of you. Make sure you consider equated monthly instalments (EMI) and SIP too while calculating the amount required in your emergency fund.

“Your emergency fund is not an investment, its insurance with one purpose—to protect you and your family”—Dave Ramsey

Here is how we planned the emergency reserve for Prakash...

Prakash needed Rs 57,417 per month. We allocated his bank balance towards the contingency reserve. This amount was distributed between savings account, sweep-in-fixed deposit schemes, and liquid funds. (Since we suggested that he repay the outstanding home loan, monthly EMI obligations aren’t considered while calculating the Emergency Fund.)

Step # 3: Insure yourself optimally. This is the most neglected area. Either client’s over-insure themselves by purchasing insurance policies that they don’t need, thus blocking their hard-earned money which could be put to a better use, or alternatively, they under-insure themselves by not purchasing an adequate amount of insurance.

If you haven’t purchased an insurance policy, make sure to calculate the amount needed by using our Human Life Value (HLV) Calculator. This will provide you the approximate amount of life insurance coverage you need, taking into account host of factors.

Make sure to purchase the right term insurance and health insurance policies before you even think of investing.

“Saving must become a priority. Not just a thought. Pay yourself first”—Dave Ramsey.

While evaluating Prakash’s insurance portfolio, we realised his outlook towards life insurance. He looked at insurance as an “investment product” rather than a tool to cover risk. Moreover, the term insurance policy he had purchased was expensive and advised to be surrender.
 

Similarly, we reviewed his health insurance policies too.

Step # 4: Invest for your financial goals. Financial Planning emphasises the importance of linking your assets and income towards your financial goals. This helps in nurturing a focused approach to investments. By having your financial goals written down, you invest towards vital goals such as education, marriage, and retirement before frittering your money. You know it is important to save for an important event that would arise in the future.

“Don’t give up on what you want MOST, for what you want NOW”—Dave Ramsey

In the last 19 years, as Financial Planners, we have realised that most individuals believe that there is a silver bullet, somewhere, yet to be discovered, which will solve all their problems miraculously. They seldom realise that the real problem lies in their outlook towards money.

Till the magic elixir is discovered, here’s a food for thought:

“CHANGE! If you keep doing what you are doing, you’ll keep getting what you are getting”—Dave Ramsey
 

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