We are living in such strange times. I know, I know, me and probably everyone around you has been saying that. Today, the novelty factor of that statement is probably as low as noticing you have another sink full of utensils to be tackled. However, this time has made me philosophical, even more so if that’s possible. What I realised was that the two main twains of Elementum Money – Personal Finance and Personal Growth – are actually intimately connected. So, today I will talk about 5 fundamentals of Personal Finance and how they work to help us traverse our lives as well.
1. Compounding is really magical
Before you roll your eyes, I hereby solemnly promise not to invoke the quote attributed to Einsteing about compound interest being the eighth wonder of the world. However, compounding, a concept we learnt in school is not really limited to finance, at all. Think about almost any sphere of your life – relationships, health or work. It is the small consistent deposits that we make in life, which keep building up and expanding our base to grow beyond our imagination. For instance, when you look at your career, it starts small. Gradually, compounding over the years with your work being the input, it keeps snow balling to be bigger and bigger with every move. There might be some years of volatility or where you feel stuck. But then, the boom years are that much bigger and overall the trajectory is only up. In this respect, James Clear puts it out really well when he talks about why habits are the “compound interest” of self-improvement.
2. Diversification in all spheres of life reaps rich dividends
As humans, we often like to draw our boundaries. We know what we want and might as well not venture into the unknown. However, let me present to you the idea of diversification. We see diversification as a very defensive strategy when it comes to investing. In life, though, diversification is a proactive strategy of making the most of our time. When you meet people from all walks of life you get a view into things that never even breached your thinking. Eating varied food expands the palette and taste buds like nothing else. Venturing out to try new, novel experiences and learning new skills helps us evolve to grow as a person. All put together, it is this cross pollination of thoughts, sensations, interactions and experiences which makes us who we are. In my experience, the more varied this melting pot, the more our lives are enriched.
3. Risk and potential return are directly related
Like a coin, everything in life has two sides to it – the risk and the reward. In money terms, we run after the reward throwing caution to the wind when it comes to risk. Funnily enough, this mindset is often reversed when we go about our life. So many of us are afraid of taking that risk, getting out of our comfort zone and facing up to possibility of failure. However, like a lot of people say, the magic happens outside the comfort zone. I can’t help but quote one of my favourite filmy dialogues from a fantastic hindi movie called Rocket Singh Salesman of the Year – Risk toh Spiderman ko bhi lena padta hai. Main toh phir bhi salesman hoon. (Even Spiderman has to take risk. I am merely a salesman)
4. Do not over leverage
Credit or borrowing is often heralded as one of the wonders of the modern human world. In some ways, it makes the world go round. With credit though, there is a fine balance to be maintained. Tip a little towards the wrong side and you could easily lose your balance and have a great fall. This holds true in life too. Most relationships (parents being notable exceptions) are built on inherent trust and often depend on doing things for each other. Now, if you end up being someone who simply remembers and calls up friends when you need something not to be found when the tables are turned, it is highly probable that you will soon be downgraded to the status of acquaintance and gradually enough to that of being a stranger. This philosophy is often what makes me take out the time to exercise. I cannot just be putting my body through the grind for everything, doing nothing in return. Some day, that debt could very well blow up in my face if I don’t keep up the giving side of the bargain.
5. Rebalance at regular intervals
Most prudent investors understand the logic of rebalancing their portfolio to ensure the weights are distributed to their original balance. In life too sometimes it’s important to just take a deep breath and assess whether our lives are balanced. Are we happy with the time we are investing in various components – work, leisure, relationships, health etc? Is there a rebalance that can make the portfolio of life work even better?
Before I come across as an annoying prick with a holier-than-thou attitude, let me clarify that I am not exceling at all these parameters. But, when in doubt it sure helps me remember these and act as per time tested mantras, be it in Personal Finance or in life.
Have you unwittingly applied any of these fundamental rules of Personal Finance in your life? Is there any other such rule that you have found useful to follow? Let me know in the comments below.