By Sanjay Matai
No, there is no mistake in the title of this article—managing money is really and truly NOT about managing money.
Money, after all, is just a medium of exchange. You don’t eat money; you don’t drink money; you don’t drive money; money doesn’t play music for you; you don’t stay in money. Money enables you to buy food you can eat, juices you can drink, cars you can drive, MP3 players to play music on and a house where you can stay.
Similarly, money is merely a medium of management. What, on surface, looks like you are managing money (whether it is investing, borrowing, spending, tax planning, insuring, etc) is, in reality….managing emotions.
Greed, fear, envy, love, hope are amongst the many emotions underlying your day-to-day monetary actions.
You hope to go on a world tour; hence you invest your money to build a suitable corpus. Most of your money is in bank FDs, as you fear the stock markets. Greed makes you fall prey to fancy schemes that promise to deliver extraordinary returns. You insure yourself, as you love your family and don’t want them to suffer if, God forbid, something unfortunate were to happen. You crave for the iPad because you envy your colleague having one. You plan your taxes because you hate giving money to the government.
However, more often than not, emotions lead to wrong choices that, in turn, result in poor money decisions. Logically, therefore, if you are good at managing your emotions, you automatically become a good manager of your money. And when you become a good manager of your money, you will make the best use of it.
So what is emotional management? Well, emotions are an extremely strong and powerful force. Overcoming and overpowering them is not easy. Very few people succeed in such attempts viz. the sants and the mahatmas. Since we ordinary mortals can’t suppress or conquer them, we have to simply make sure that our financial decisions become, as far as possible, emotion-free.
There are many ways to do so. Given below are some of the strategies.
- Normally, we try for higher limits on our credit cards. Don’t! Rather, ask your bank to fix a lower limit. This will automatically restrict your wasteful expenses.
- Automate your investments. If most of your money is automatically invested in RDs, SIPs, premiums, etc as soon as you receive your salary, there will be nothing much left to pay for any EMIs. This will ensure that you don’t unnecessarily get into debt.
- We don’t buy stocks when the markets are falling…Fear. We don’t sell when the markets are surging ahead…Greed. What is the best way out? Rebalancing! Fix a debt-equity ratio and stick to it. If equity markets rise faster than debt and the portfolio becomes over-weight on equity, sell equity and buy debt to restore the ratio. If equity markets fall and the portfolio becomes over-weight on debt, sell debt and buy equity to restore the ratio.
- We all love to gamble on the stock markets. Therefore, rather than doing research, we seek help of astrology, numerology, etc. Instead of being patient, we want the stock to double tomorrow. Instead of buying in cash, we opt for leveraging in the futures & options segment. Instead of buying good companies, we chase penny stocks. Sure do all this… but with ONLY 3%-5% of your money. Let the rest go to the professional fund managers or mutual funds.
- Very few have the courage to book losses. If the stocks are down, we don’t sell; instead we always hope to at least break-even. But often this doesn’t happen and our losses keep mounting as the stock slides further and further. Hence, instruct your broker to immediately sell your shares as soon as they are down by 10-15% without waiting for any further instructions from you. If, in the process, your good shares also get sold off, so be it. You can always buy them back if you really feel that they have any potential to recover.
You all are intelligent and smart. So I am sure that you can definitely think of many more ways to bypass and con your emotions.
The bottom line is that emotions are the main culprit behind many financial problems. Therefore, shift your focus and efforts from managing money to managing emotions. Don’t waste your time on the symptoms. Rather go to the root cause and deal with the emotional syndrome itself.
The writer is the promoter of The Wealth Architects.
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