Accept financial anxiety in moderate doses

It is not possible to completely avoid concerns, so tackle them logistically

We would all like to avoid financial anxiety if we could. In this article, we discuss why it is not possible to completely avoid such distress relating to our personal finance. That said, we do discuss how we can moderate it.

Anxiety, regardless

If you invest in equity, you are uncertain as to whether you will be able to accumulate the required wealth needed to achieve a desired life goal.

That substantially adds to your anxiety levels. In addition, stock prices are visible. This means you are continually aware of how your equity investments are performing. And that is not good for your emotions.

You will be happy when your investments move up in value by, say, 20 per cent. But you are likely to be more unhappy when your investments decline by the same magnitude. This is because we hate losses more than we love gains. So the anticipation of pain can also cause financial anxiety.

This does not mean that you can avoid anxiety by investing only in bonds. Why? If you invest in bonds (read bank recurring deposits), you are certain of the lump-sum money you will receive at maturity.

But because the post-tax return on bonds is much lower than that on equity, you have to save a lot more every month to achieve your life goal.

Suppose the post-tax return on equity is 11 per cent and on bonds is 5 per cent; if you invest 40 per cent in RDs and 60 per cent in equity index funds, you will have to save ₹53,000 every month to accumulate ₹1 crore in 10 years. But if you invest only in RDs, you have to save nearly ₹65,000 monthly.

Now, it is not easy to substantially increase savings given that you also have to maintain your current standard of living. So you may choose to invest, say, ₹55,000 every month and hope that you can borrow to bridge the gap at the end of the time horizon for the life goal. So the uncertainty now comes from the need to bridge the gap.

And that can cause anxiety as well. Therefore, with or without equity, you are bound to suffer from financial anxiety. So what should you do? In life, you typically regret the decisions that you had not made and not the ones you made and failed.

Applying this logic, we suggest that you invest in equity because you would significantly improve your chances of achieving your life goal.

If equity prices tank, you will have to borrow to bridge the gap. Remember, you will anyway have to borrow if you invest only in bonds.

Moderation

That said, how can you moderate financial anxiety? You can follow the ‘floor-upside’ rule.

Suppose it costs ₹1.25 crore to send your child to college in the US, and ₹75 lakh in India. The minimum accumulated amount (floor) in your child’s college education fund should be ₹75 lakh. You have to invest enough in an RD through the investment horizon to accumulate the floor. Then, you have to invest in equity every month such that the expected accumulated value at the end of the time horizon (the upside) is ₹50 lakh (₹1.25 crore minus ₹75 lakh).

Based on the floor-upside rule, you will have enough money to send your child to her preferred college in India. If your equity investment performs well, you may be able to send her to the US as desired. Knowing that your child can get her desired college education either in India or in the US can significantly reduce your financial anxiety.

The writer is founder of Navera Consulting. Send your feedback to portfolioideas@thehindu.co.in

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