Save wealth from inaction

Simplify your financial activities to derive maximum gains from your money

There is always a gap between intention and action. Our resolutions to take charge of our financial lives suffer a fate similar to other well-intended promises we make to ourselves about healthy eating, regular exercise and work-life balance. What can we do to at least partly save our wealth from our own inaction?

First, split your financial activity into three heads. The first part is regarding assets that need a huge, one-time effort. House and property fall in this category. The stamp duty, registration and title deed process is tedious, but is a onetime effort. The second part includes assets that were accumulated on an ad hoc basis, say, on a whim. Buying gold during festivals, investing in IPOs, acting on tips of a friend in the stock market, opening trading accounts hoping we will trade in derivatives, taking a personal loan to fund a holiday, frenetic tax-saving investments at the end of the year are examples. These ad hoc decisions run the big risk of neglect, especially if you are weak on implementation. The third part involves routine investing decisions that are the saving grace for so many. The PF deduction is a silent saving in the background, the SIP that goes out before spending the salary, and recurring deposits and sweep accounts with banks are all default choices made to ensure your money is deployed even if you did not act.

Second, you need to align your financial habits with how much of it falls under which head. Trying to take a loan and buy a property every time you move to a new city will leave behind a trail of incomplete paperwork. For professionals who buy property at every instance, it is important to have a broker take care of and complete the paperwork. If you are the kind who invests money on an ad hoc basis, you are likely to have a mess on your hands. You may need a helpful parent or an uncle to manage the records as outside help may be tough to get. If you are the type who has made investment a habit, you may have won our battle against inaction, somewhat. It is a good idea to move to this space, over time.

Third, it may make sense to have consolidation as a goal. Dealing with fewer banks, advisers and consultants can help use their services to consolidate all that you do with your money. Several banks enable an online review of your bank and investment holdings and this may help to have the much-needed holistic view. Additionally, if you need a loan or have to offer a collateral, a long-term relationship and assets held with the bank help immensely.

Fourth, you need clarity on how much effort you will put in yourself and what you will outsource. If you let your advisers know about the NSCs that you hold, they will track the maturity date for you and help you invest the proceeds. They will also help set up systematic transactions and switches for you, so that you can move ad hoc transactions to habitual ones. Some of them also offer referral services that can help you get your will drafted or your PPF account opened. Choose those that deal with a range of products and get them to do a good amount of your leg work. Remember to pay them a fee for their services.

Fifth, be aware of event-linked actions that you cannot escape. A change of address when you move; a change of a bank account that you have closed; an alteration in name for women after marriage (if needed); a change of nomination after marriage or divorce; a transmission of investments after the death of an investor; and changes in status after a child turns 18 are all events that need action from you. The inactive investor’s bane: find a way to deal with it. Your money will be stuck if you did not complete the procedural requirements.

Sixth, find friends. Just as you would when you work out or run the marathon, find friends with whom you can work on your finances. Applying for a permanent account number (PAN), completing the know your customer (KYC) norm, filing an IT return, or calling a broker’s office can be somewhat less painful if you have someone with you. Do not extend the friendliness to sharing passwords since it may place your money at risk.

Seventh, try and devise your own rules and habits so you get them to work for you. If your PPF account is in the name of your child, you can deposit all the gifts and money into it, whenever it is given, without a worry. Since an investment in a PPF is also eligible for tax deduction, you may have built it quietly in the background. If you find a SIP in a tax-saving scheme too much of a bother given the three-year lock-in period for each instalment, open a recurring deposit and transfer the money as a lump sum at the end of the year into an ELSS. Saves you the scramble of finding funds at the end of the year when you have to complete your investments.

The trick, as you can see, is to try and convert most decisions into routines. The advisers will be able to take over if they also see a pattern in your investing habits. Decision-making becomes easier if you do not have to consider too many options and make a conscious choice every time. If you are able to move most investments and financial actions to the auto mode, your wealth may benefit from the default action.

Courtesy:
Uma Shashikant

—The author is Managing Director, Centre for Investment Education and Learning, and can be reached at uma.shashikant@ciel.co.in

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