A specific amount or a percentage of income should be earmarked for savings and investments. It is only after these amounts were set aside that spending should be considered.
“The older I get, the smarter my father seems to get” is a reality check that every individual undergoes at some point in life. Among many endowments bequeathed over the period, fathers pay special attention to pass on the value of wealth – both the creation and preservation of it to their children.
According to Lincoln Financial Group’s recent study – Father Knows Best, fathers show a better understanding of personal finance than the general population – including friends – whom we often turn to for such advice. The study also shows that 88 per cent of fathers initiated and prioritized talking to their children about personal finance and financial planning to explain key aspects such as savings and loans, life insurance, annuities, retirement savings and so on due to their life experiences.
In my case, my father’s advice was more about developing a successful financial philosophy rather than just crunching numbers. Let’s look at some of the fundamental habits of a successful financial habit:
- Do not view your wealth or financial wellbeing as a status of privilege, but rather view it as a means to help others – The true measure of one’s wealth is the ability to help others. Being in a position to help others is a privilege and this should always be viewed with a sense of gratitude.
- Spend after you save, not the other way around – A specific amount or a percentage of income should be earmarked for savings and investments. It is only after these amounts were set aside that spending should be considered
- Don’t put all your eggs in one basket – Asset allocation is a key matter of discipline that must be adhered to at all times. This ensures that risks in any one particular class are offset by gains in others. One should participate in multiple asset classes as a matter of prudence. At the same time, one must watch all baskets carefully to avoid losses.
- Health is the real wealth – True health is not merely the absence of disease or infirmity, but about well-being in various facets-physical, mental, social and more.
- Power of compounding and consistency – Few youngsters understand the power of compounding over their life savings; compounding works like a multiplier effect since the interest/gains earned by the initial capital also earn interest/gains, leading to steady growth in the value of the investment. Compounding helps an investment to grow at a geometric rate than an arithmetic rate. Consistency requires investment decisions to continue through tough market cycles as well. This ensures that investments in these cycles generate much higher gains when market conditions improve.
- Don’t always go for the big wins – be prudent about when to exit and book profits regularly- Most investment advice is geared towards buying, but money is made only when you sell something. Thus, booking profits, too, has an important place in one’s investment strategies. Chasing exorbitant returns or unrealistic goals can lead to losses and distress. In addition, an exit strategy must be used to exit a non-performing investment and limit losses.
- Learn from every opportunity – Like much of our lives, one should start a successful investment journey, by understanding the basics of each and every investment option – more knowledge resulted in a higher probability of greater gains. Today, there are multiple sources of information that explain investment approaches and models to build your own philosophy of investing.
My father achieved financial success through the right combination of superior knowledge, personality, and resources, I believe it is an example that can be easily emulated with the right amount of prudence and discipline.
Fathers are often the primary teachers of financial literacy for most children. Financial literacy helps one manage personal finances efficiently. Gaining greater insight can guide and enable everyone to make healthy financial decisions to achieve both short-term and long-term goals.
By Sathya Kalyanasundaram, Country Head and Managing Director, Experian India