5 steps to achieve money goals with limited income

Asset allocation and diversification are not textbook ideas, but real tools to managing risk and return.
By Uma Shashikant

Whenever there is a limited resource, and we want to allocate it to multiple things, there is conflict. There is only so much time, and we want to spend it with family, but demands of work mean we can’t. We tell ourselves that we work and earn for the wellbeing of the family, and these sacrifices are part of the deal. Or we regret not being around as much as we should have. Such goal conflicts cause stress.

Unless we have a very comfortable position with our personal finances, we routinely deal with goal conflicts. We spend a disproportionate amount of our income and savings on our children. We see it as a duty to fulfill, pulling all stops. We send our children to schools that charge steep fees; we enroll them in sports and activities way beyond our league; and we buy stuff and take them out with the goal to provide them the best. Paternal indulgence has now gone overboard.

The portion of our income spent on children also has other uses, and if the income is not too high, other goals such as retirement may be compromised. The farmer who sends the child to college by selling off a piece of land is acting in distress. Faced with years of inadequate income, he feels investing in a good education that would offer an income for the son is a better idea. Whether the son will indeed earn that income, and even if he does, whether that income will be available to the parents to use, are questions to answer.

Using the PF money for a child’s wedding; liquidating investments to build and modernise the house; keeping all surpluses reinvested in the business; using annual surpluses for short-term goals such as holidays; keeping saving ratios low to ensure a good lifestyle; and spending on comforts to feel motivated to continue working are all instances of allocation that feeds one goal and starves another.

Ask a businessman about investments and he would laugh at the suggestion: “When my own business needs money and is returning a higher rate on the capital, why will I invest elsewhere?” he will say. There are instances when even personal properties are mortgaged for the business and personal guarantees represent a substantial charge on assets. Someone trained in personal finance will point out that there is no diversification in the assets and that the family would be impacted severely if there is a downturn in business. But the businessman would laugh it off saying that for generations his family has learnt to spend well when there is enough and hold back when there is a lull.

This approach is most commonly found when there are conflicting uses for money: the simplest solution is to fund whatever one sees as the best choice. There is hardly any strategy in play. The millions of rupees that temples across the country receive from businessmen and traders is a rudimentary risk management tool, where the Gods are placated to protect the businesses into which everything has been staked.

For most of us, there is an active window in which income is available to spend and save, and an inactive phase when we draw on the assets to survive. Building assets has to be a strategic choice, and should take into account the priorities for the present and the future. Asset allocation and diversification are not textbook ideas, but real tools to managing risk and return.

First, ensure that your assets are diverse and accessible. Too much of money invested in the business, in property and in kids are all choices that won’t yield an income and won’t be available to liquidate when needed. Diversify your investments in financial assets that can be used as required.

Second, be willing to rearrange your assets as your goals change. Investing in a 3-bedroom house to live comfortably and in the heart of the city when the children are growing up, or having a guest house to network and entertain, might have been a great idea. It can turn out to be burdensome after retirement. Do not hesitate to liquidate and recover precious money that can be put to other uses.

Third, invest small amounts in secondary goals even if they don’t seem substantial at the start. Keeping the PF and NPS accounts inaccessible for any other use; ensuring that income allocation for elderly parents is not discontinued even when demands of a young family are high; and putting aside a small sum as SIP for higher education even if current activities demand a lot of money are all methods to prevent an all or nothing bargain.

Fourth, be willing to earmark and mentally account for your assets in terms of their use. Many of us habitually buy property, gold or invest in shares and funds, telling ourselves that these are good things to do and will be around and help as needed. In a situation of surplus wealth, that is quite fine. But if a limited amount has to serve many purposes, earmarking an asset for a specific use is valuable. It is tempting to liquidate the deposit and renovate the house, but a better approach is to have a house renovation fund that is earmarked, funded and used once in five years.

Fifth, rework an asset’s purpose as the priority of goals change. A large house that was needed when children were growing up can be partly rented in retirement to generate income; the land that was bought in the outskirts of the city can be leased to generate a farm income; and the gold that was a safety net earlier and now remains unused can be liquidated to pursue a new post-retirement interest.

Treating money as a limited resource is a skill learned over time as we make decisions. We can make these choices impulsively and as directed by what is in sight and demanding attention. Or we could keep in mind the multiple needs the same income and wealth has to serve, and allocate resources, even if it is painful. I recall how my uncle supported his widowed sister with income that could have been used by his own family in many ways. He knew that allocation was important, however, painful it might have been. We may have lost that discipline in the modern times.