The aunt lives in a flat her husband left her, and is fighting off the daughter-in-law who wants it badly. The widow’s pension is enough for her to get by. The niece got nothing from her bitter divorce and had to start over. The personal finance lessons from their experiences are noteworthy.
First, secure your source of income. No one, not even your near and dear ones, will be ready to spend on your needs unquestioningly. The aunt depends on her son for large ticket expenses that her pension can’t cover. She dreads the daughter-in-law’s questions during such times. The niece has learned in a few short years that even the loving siblings will not support someone they see as dependent. She found herself a job. Secure a source of income, from your job or profession or from your assets and investments.
Second, manage expenses sensibly. The niece decided to live and work in a smaller town, primarily to manage expenses better.
Third, assets matter immensely. The aunt is able to live comfortably on her meagre pension because she owns the flat. She is considering letting out the spare bedroom to a working woman to earn rent. Assets are useful for their value and the income they can generate. The niece worked with her back to the wall, with no assets to fall back on.
Fourth, keep loans in control. The niece went through a traumatic time rebuilding her life from scratch and thought owning a house was priority. The home loan EMI kept her chained to the city she disliked. When she decided to move, she sold the property and was relieved from the burden of debt.
These four points seem simple and obvious. But virtually all of personal finance’s precious lessons are encompassed in these four blocks: income, expenses, assets and liabilities. Just like the finances of a business. The business has its products and profits, the household only has its human assets.
How much income is adequate for a household is defined by its expenses. It is only when income exceeds expenses on a consistent and significant basis, that a household can build assets. Assets are cushions for future income.
When a household borrows, the repayment of loan hits all three blocks we just discussed: reduces income, increases expenses and impairs the ability to build assets. The loan has to build an asset that will nullify all three effects to be worthwhile.
All personal finance decisions are about managing these four blocks so that assets are built with surpluses. The SIP is more important than the EMI only for this reason. It builds assets, and enables those assets to grow in value over time.
Personal finance is actually quite simple. We tend to complicate it because we like to justify our money decisions, post facto, mostly. We build assets that don’t work for us; we accept incomes that are inadequate; we fail to control expenses being overconfident about the future; and we do not know our net worth for the most part, forget managing it actively.
The aunt has leveraged the house to generate much-needed income; the niece has leveraged location to reduce expense and begin to save. Both have taken charge of their finances because the levers are all in our hands, always.
(The author is chairperson of The Centre for Investment Education and Learning)