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Published on 9/01/2019 1:36:06 PM | Source: HT Media

Opinion | Not just a brick in the wall. See the whole wall

Posted in Top Stories| #Expert Views #Wealth

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We just don’t get the big picture. The more I talk to people about money, the clearer it is that we compartmentalize our money lives so tightly that we totally fail to see the big picture. Every conversation with whoever I meet now swings around to money. People share their stories, their worries and their fears. They share the power equation within home that money causes. While housewives have always shared stories of the skewed power money equation, working women have equally scary stories. That’s because those who earn more than men have a triple burden—to manage work, home and the male ego. But most often the usual story is the fuzziness about how we think about money and how we simply are not able to see the whole money story.

A typical conversation goes like this: I’m managing to save—it’s is a small amount, but I’ve started a recurring deposit in a bank. But didn’t you say you have a credit card EMI that you are paying? That’s right. Why not pay off the card first? Because I must save also, no? But the RD gives a pre-tax return of less than 8% and the credit card interest is 24%. The money would be better used to pay off this high-cost loan first rather than saving in a product that earns so little. On my new show Money With Monika (you can see the digital series here), a viewer asked a question that is typical of the millennial situation: shall I pay off my education loan or should I invest? He had a surplus of ₹25,000 a month and is faced with this question of EMI versus SIP. The loan payment versus investment question is answered simply by looking at what you are paying as interest on the loan and what you can hope to earn from the investment. There are good loans and bad loans. For example, a home loan, that comes with a tax break can be a ‘good’ loan to keep because it reduces your effective interest paid. If the investment you target can do better than the interest paid, sure, no rush to pay off the loan. In fact, financial planners recommend against paying off the entire loan, especially if it is an old loan, to harvest the tax benefit. The student loan versus investment problem is solved in a similar way—look at what you think you can earn off the investment and compare to the effective interest that you pay. Sometimes the student loan comes with a tax break, if that is so, compare the post tax benefit effective rate of interest on the loan and then see what return you think you can earn. If you are a risk averse investor and will hug FDs for the long term, the loan prepayment may be a better deal because FD or RD returns will not outstrip a loan interest rate. But if you are using equity funds, and the loan interest is lower than the expected return on equity, you need not rush to pre-pay. But do choose either a wellperforming fund or a low-cost exchange-traded fund to get the maximum bang for your money.

But thinking of money in compartments is not just restricted to the EMI versus SIP decision, it can be much wider and deeper. A friend shared her story some time back. She and her brother were to inherit the parental assets. Since the brother is ‘well settled’ and she is still struggling, she was getting to choose whether she would pick the house or the stock portfolio. She said that she picked the parental home. I asked a basic question: what is the value of the house and what is the value of the stock portfolio. Friend had not thought about the deal in this way. She was happy to get the house because she does not own one and the brother does. And he knows about shares and stuff. But, I reasoned, you live in Mumbai, the house is in Bihar, you will sell and buy here eventually, no? And the stocks can also be sold and invested in whatever you are comfortable with—you don’t need to manage them. Therefore, if the value of the stocks is higher, isn’t it better that you take that since you are being asked to choose? You could sell the stocks and then buy the house you want where you want to finally live. She’d never looked at the deal like that. It helps to be clear headed and non-emotional when we deal with money. Difficult but can be done.

Another story that plays out over and over again is the absorption with current stories of our lives, putting at risk the future. We are looking at the bricks and not the wall. Everybody has complicated lives, dysfunctional families, political office spaces, acrimonious neighbours and a truck load of work. We get consumed by the drama of everyday life and forget to pause, step back and see the big picture of our lives. The energy spent on earning the money is depleted by the time it comes to managing the money. Every time I have done a basic average annual return over 10 years calculation using the savings numbers that people have themselves given me, the look of sheer disbelief of what it can add up to is priceless.

I know that every year beginning brings its own load of promises to yourself of things we will do differently this year. Add one day a quarter for your money. That is the day you spend thinking about the big picture of your money for today and tomorrow. Download an ageing app and look at your own picture in 10 years. That face will thank this face if you see the entire wall instead of just the bricks.