As a race, we are renowned foodies. At any gathering, you can be sure that the talk will ultimately end up in food, whether it’s cooking techniques or ingredients or taste. Sadly, as a nation, we are equally known for our lack of understanding of family finances.
Over the ages, we might have produced ministers who could balance the budgets of large kingdoms, but when it comes to our own earnings, we are quite happy to stash the cash under the bed — or in a savings account, its modern equivalent.
|EQUITIES: Like proteins build muscle, they add strength to your portfolio|
|FIXED INCOME: As healthy as fibre, these are the best option for secure returns|
|REAL ESTATE: These carbohydrates lay the foundation for your finances|
|INSURANCE: Misjudged by many, but for financial security don’t ignore fats|
|ALTERNATIVE: An occasional sweet indulgence can give spectacular returns|
This was possibly the only thing to do till a few decades ago. But now, with a zillion investment opportunities available, it’s criminal to let money rot away. Frankly, it’s time we became as knowledgeable about personal finance as we are about food. It’s amazing how much we can learn about financial management — especially the core of it, asset allocation — from food.
Imagine that your portfolio is a living creature. Just as the body needs its daily allowance of proteins, carbohydrates, fats, fibres, vitamins and the like, so too does your portfolio need its regular quota of nutrients to stay healthy. As you grow older, your appetite changes.
You might, for instance, find that your palate does not any longer crave for fried food, or your doctor has warned you off it. It’s like your appetite for risk. You start off ready to bet your shirt on any tip. As your responsibilities grow, you are less ready to risk your finances.
From the financial perspective, there are five ages of man — the 20s, 30s, 40s, 50s, and the 60s and after. No matter what your age group, it’s good to know what you can expect or what mistakes you might have made in the past. What we have tried to draw up is basically your ideal financial diet across ages.
Before we get there, let’s take a look at the major food groups and their financial equivalents. Proteins, which literally means “of prime importance”, are the food equivalent of equities. Sufficient protein in your diet helps the body grow. That is what equities — direct or through equity mutual funds — provide to your portfolio. Then, there’s energy, which largely comes from carbohydrates. The asset we chose to represent carbohydrates is real estate, the biggest component of most Indian’s networth.
Real estate is necessary to give shape and structure to your portfolio, as well as add value to it. It’s like your staple grain — wheat or rice, depending on which part of the country you come from.
Debt is the closest financial equivalent to fibre, which aids digestion. Like fibre, you tend to need more debt instruments as you age.
Every diet needs its quota of fat. Before the diet conscious begin ranting, let us hasten to add that fat per se is not bad. You need it to provide energy. Also, the fat that’s not burned serves as a cushion when you fall. That’s exactly what insurance does to your portfolio. Insurance, with pension plans and annuities, acts as your cushion in times of need and as you grow older.
Loans that aid in asset creation — as home loans, for instance — or which help further your career (car loans might do that) are more assets than liabilities over the long term. Like trace minerals or vitamin supplements, they are good for you in small amounts. Too much could lead to unpleasant repercussions.
We all need to indulge our craving for desserts or fine wines sometimes. You know the risks of over-indulging, but the occasional binge is fine. It’s like investing in art or jewellery. They are good add-ons but can never be the main course.
No matter how right you eat, exercise is vital. In fact, if you’re physically active, you can play around with your diet and get away with eating food suited to someone half your age. Exercise your portfolio too — review it at specific intervals, re-balance it, rebuild it if you see fit. And if you think your risk appetite is that of a younger person, there’s no real reason for you to stick to the safe path.
All of what we’ve said and all that we will be saying is merely to be used as a tool. These are broad guidelines and should not take the place of specific, individualised financial planning.