Podcast Transcript

As an investor and an advisor, I have had the privilege of closely interacting with thousands of people on matters relating to their personal finance. There is on running observation that keeps recurring. People who have done very well in life are often the least prepared, financially, for future crisis. This is most ironic. Families which have seen economic mobility, where children have raised the lifestyle of the family by several notches just with the period of one or two decades achieved so much by way of increasing the family income, social standing, lifestyle, and aspirations, tend to somewhere take things for granted. Ironically, this happens mostly at a time when the typical pressures start rising in their lives. We often refer to a phrase called the ‘mid-life crisis’. In simple terms, as these young people get into their 40s, they tend to be unprepared for problems typical of that age, and the times that they live in. Jobs become difficult to find if there is a job loss. Health setbacks happen either to them or to those dependent on them, like their parents. Often there are emergencies in the family, mostly the extended one, where they need to step in to help somebody in a crisis.

The aspirations of the family have grown significantly. Meeting those aspirations itself becomes a challenge even to these hugely successful individuals. Maintaining this lifestyle becomes challenging when some parts of their cost universe go out of whack. We are seeing a water crisis in Chennai, the city I live in, and families are forced to fork out up to Rs.10,000/- a month just to meet their water requirements. The irony is that people who managed a much bigger financial crisis in the early years grew themselves out of a state where they had literally nothing. They find it virtually impossible to coup with the financial pressures of mid-life.

As an advisor, when I look at their finances, typically I get to do this when they come to me with a problem or when they come for a plan. When I look at their finances, there are some overarching patterns that worry me. The first thing is that there is no organized approach to finance. The second thing is that there is a lack of adequate resources for any contingency. The third thing is that the assets are gathered through impulse rather than through detailed planning. The fourth thing, most people do not know where they are heading financially. Ask them whether they would be able to maintain their current lifestyle 10 years down the road and most people do not have convincing answers. They speak more from emotion than from logic. If they are faced with a situation where they need to suddenly raise resources or live off whatever wealth they have created, they are mostly lacking in liquidity. While people do have assets, these assets carry liability in the form of loans, or they simply cannot be sold and converted into cash even with a timeline of 1 or 2 years.

Liquidity is something that most people have not appreciated enough. The investments that they have made are not easy to liquidate. I ask myself, “Why have people who have done so well in life, who have thought on their feet, who have acted smartly in every situation to progress economically, to bring their families socially forward.. why have these people not thought adequately about finance?”. The only answer is that the appreciation of the need to organize one’s finance, the need to have financial plans, the need to implement those financial plans consistently, the need to grow your financial plans as your financial stature expands, the need to contract the financial plan if there is a crisis in either job or under family circumstances. These are things that we have not really given the importance that they deserve.

The only option before people is to get more convalescent with financial planning, set their house in order, solve financial problems through diligent analysis and action. Appreciate that managing finances and investments is not a hobby, it is not a game, it is a very boring business where you need to act concertedly over long periods of time. Problem-solving requires expertise. As we head into more troubled times of job loss and churn, I believe that one must understand that he can ill afford to overestimate the duration of his career. He needs to understand the risks associated with careers, the longevity of careers, the ability to sustain income and lifestyle are most important. He should be able to find a solution to those crises, much before the crisis happens. There is only one way to do it, and that is to organize your finances, think differently, get the right counsel and make sure that when you are faced with a problem, you are ready!

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