Do you want to be a slave—wage slave of your employer, tax slave of the government and loan slave of a bank? Why are you adamant about working for money when money is willingly ready to work for you? Once you move from financial slavery to financial freedom, you will be able to fulfil your dreams and achieve your higher self-actualisation goals. You become financially free when you can stop working for money and when money starts working for you. In the New Year, as you make different wows to improve your health, social and family life, here are 10 commandments to improve your financial health so that you are on the path to achieve financial emancipation.
Commandment 1: Thou Shall Make a Proper Asset Allocation Plan
Asset allocation is the primary premise for investments. Long-term statistical analysis has shown that 90% of the variability in returns is due to asset allocation 9% due to stock selection and 1% because of market timing. All assets move in business and economic cycles of their own and, while one asset might be in a bear market, another asset class might, simultaneously, be in a big bull market. The broader asset groups of equities, bonds, commodities and real estate (others being art and currencies) will lead you to the gateway of long-term wealth creation and sustenance. Portfolios behave differently from their individual constituents. The aim of optimal asset allocation is not to invest only in safe assets but to invest in a combination of safe and risky assets whose combined risk is much less than that of the individual constituents and, at the same time, offer a higher degree of return. While selecting assets, remember to allocate only those funds to equities which you don’t require for at least the next five years and which you have the courage to lose with its value reducing by up to 50% in the short term and not panic on it.
Commandment 2: Thou Shall Do Proper Budgeting
Thou shall not invest what is left after spending but spend what is left after investing. Remember that income-tax reduces your gross income; interest on loans on unnecessary expenses/bad capital assets diminish your net income and the monster of inflation eats up your remaining income. So, unless you budget properly to create investment assets, your dream of achieving financial freedom might remain just a pipedream. Saving must be a priority. You must think of it as a compulsory ‘expense’ which you have to incur for yourself the same way as you pay tax to the government and loan EMIs (not 9 equated monthly instalments) to the bank.
Commandment 3: Thou Shall Take Proper Family Protection
Thou will not confuse insurance with investments. Thou shall take proper insurance cover of at least 10 times your annual after-tax expenses (revenue and average of past three-year capital expenditure). Thou shall also take proper medical insurance.
Commandment 4: Thou Shall Take Proper Asset Protection
Before starting to build fresh wealth, it is our duty to protect our existing assets. Assets like a house, flat, or car must be insured against accidents and natural perils. The event of earthquake or terrorist attack to our flat/ house seems to be remote; but the impact of such events could turn your financial stability upside down. Therefore, protect your house and other major assets with proper insurance.
Commandment 5: Thou Shall Buy Your Own House for Self-occupation
Thou shall look into buying your own house in 2018 with some bargain and discount from the developer while we are close to the bottom in the current interest rate cycle.
Commandment 6: Thou Shall Not Over-invest in Speculative Items
This would include speculative or penny stocks, junk bonds, non-cash-flow-generating commodities like gold or silver and non-revenue-generating posh real estate like beach houses. Investments in these can be done only when you have a clear view on these asset classes and expect to gain from their price movement. But you have to remember that they are speculative in nature and will not go up in perpetuity; hence, you should not remain wedded to those investments but sell them when the right time comes.
Commandment 7: Thou Shall Learn the Difference between Good and Bad Debt
Learn to distinguish between good and bad debt. It’s pertinent to know that bad debt would be what is used to create bad capital assets—assets like car, holiday home or a house—which take away money from your pocket and do not put any money in your pocket. On the other hand, good debt would be that which helps you in creating an asset which then puts money in your pocket (income) as well as has scope for future capital appreciation, e.g., property which earns rent, shares which earn (tax-free) dividends and both have the potential for future capital appreciation. Never borrow to incur a revenue expenditure, like taking a foreign trip or buying a bad capital asset, like a car or beach house, because these will not only take away money from your pocket in the form of interest payments but also put you into recurring wasteful revenue expenditure in the form of maintenance of that bad capital asset like petrol, repairs, property taxes, etc.
Commandment 8: Thou Shall Make a Proper Retirement Plan
If you want to enjoy the same lifestyle that you are currently enjoying even after your retirement or have the joy of bequeathing your wealth to your children, start planning for it today. And be realistic about it—make an estimate of your needs which will keep evolving with your age and time and also consider inflation in your computations.
Commandment 9: Thou Shall Remember These Principles While Investing in Equities:
- Bull and bear markets run for several years. Hence, determine the primary trend of the market and don’t generally go against the primary trend;
- Market is supreme and above everybody: no government, central bank, industrialist or operator can alter the primary trend of the market. They can only complicate the wave structure;
- Right asset allocation and getting the macro view right are far more important and profitable rather than individual investment ideas;
- Never invest or trade more than you can reasonably afford to lose;
- Put stop-loss at a logical, not convenient, place and always adhere to it;
- Cut losses and let profits run. Don’t let a profit get converted to loss;
- If you wait too long to buy, until every uncertainty is removed and every doubt is lifted at the bottom of a market cycle, you may keep waiting and waiting;
- Act on your own judgement or entirely on the judgement of another;
- Tips are for waiters and not investors;
- When in doubt, stay out and don’t get in when in doubt;
- Don’t over-trade;
- Don’t invest or trade based on hope;
- Learn to accept your mistakes in the market (otherwise, market will make you accept it in a cruel way) and then analyse and learn from your mistakes;
- Wherever possible, trade liquid markets;
- Don’t believe everything which a corporate official says about his / her company’s stock;
- When opinions in the market are unanimous—beware, because markets are famous for doing the unexpected;
- Never be sentimental about an asset class or individual stock;
- Playing the market is more of an art rather than a science;
- Simple logical things work far better in the marketplace rather than complex algorithms, theorems, valuations principles, etc;
- Buy the stocks of companies that have shown consistent growth in earnings and producing those goods / services which people cannot do without;
- Last, but not the least: never try to catch the top and the bottom because only liars and fools can do it.
Commandment 10: Thou shall not forget the above nine commandments and keep reviewing, changing, rebalancing and refining at regular intervals along with changes in your financial condition.
Wish all the readers a very happy and prosperous New Year. May this year commence the financial freedom journey for each and everyone one of you.