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Why Karthik’s six-off-the-last-ball doesn’t work in personal finance

Author: Kumar Shankar Roy/Wednesday, March 28, 2018/Categories: Financial Planning

Why Karthik’s six-off-the-last-ball doesn’t work in personal finance

Just a week back, Dinesh Karthik did something incredible. Needing five runs off the last ball, Karthik hit a flat-bat six over extra cover to keep India's T20 record against Bangladesh intact. A six off the last ball can land you a win in cricket, but you will end up as the loser if you follow the same blitzkrieg approach in your real life when it comes to managing money. 

Brought up on a fodder of 'chamatkar' (miracle), and 'in the end, everything will be good' statements, we Indians often leave lull ourselves into a deep slumber and a misplaced sense of security. Be it about catching a train/flight, studying for an exam/interview or saving for long-term financial goals, our lack of planning can only be matched by our not-so brilliant last-minute ideas that are risky and often ineffective. 

Failing to plan is planning to fail - Any financial goal leads to a finite numerical value. For some, a worry-free retirement may require Rs 50,000 a month. For others, Rs 30,000 will do. Your child's higher education may require over Rs 1 crore if you plan to send her/him abroad. If you manage to save only half of it, your child may require significant financial help from a bank or a grant from the education institution. A daughter's marriage will require about Rs 8-10 lakh in a middle-income household and over Rs 20-25 lakh for the slightly richer. 

In all the cases if you do not reach your financial goal with the set time-limit, life becomes harder and uncertain. This is why a last-ball six move never helps. If you are planning to build a corpus of Rs 50 lakh in 25 years, start investing as little as Rs 3,000 a month in an avenue that gives 12% annual return. You will reach your course. If the return drops to 11%, you will still reach Rs 48 lakh if you repeat the exercise diligently. But if you want to build Rs 50 lakh in 10 years, you will require a sizeable Rs 24,000 a month. If you want to build Rs 50 lakh in 5 years, you will need an impossible Rs 65000 a month. For an industrialist or a rich businessman, the cost of not saving enough for daughter's marriage is virtually nothing because they can always make up for the shortfall from their assets. For a middle-class parent, however, not planning adequately is a too heavy price to pay when the goal stares at you.

One-offs cannot happen regularly - How many cricket matches have you seen where the batsman wins the game by hitting a six off the last ball? Not many. The beauty of a last-ball six is in its improbability. It is a miracle. Many families receive a large sum of money once in a lifetime. Proceeds from a rural land sale, a share of family property or an old relative leaving quite a chunk of their fortune are possible. However, we cannot count on them. There is a reason why these lump sum inflows happen just once (twice if you are lucky) in a lifetime - one can get family share of property only once because most of us have one family; land sales happen in 20/30 years because unless land is held for long years it does not generate wealth; old relatives may die but only very few can leave a sizeable portion for each one of us. 

Financial events where you will be a beneficiary without playing an active part are extremely rare. Hence, depending on such inflows of money to attain a life goal or to support your retirement or child's education or marriage is an extremely erroneous strategy. We live in a world where consumer brands have perfected the art of pandering to instant gratification. So, losing track of the long-term is easy when loans are being given to help you enjoy your next foreign vacation. Salaried employees are preponing expenses even when the annual bonus is unsure. The only way to survive in such a world is to totally forget one-offs, even if they are remotely certain. Being forgetful about such windfalls will shape your brain towards a more sustainable and regular plan to attain goals.  

As spectators we enjoy a cricket match going down to the wire. The sheer unpredictability gives us the excitement. Yet, these fluctuations are what makes us afraid if they happen in your financial lives. Real life is not a cricket match. List out your financial goals and arrive at the steps that should be taken by you to reach the destination. Stay on the course and remain disciplined.

Happy investing!

The author is a personal finance journalist with over 13 years experience.


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