My Personal Financial Plan

In the endnotes of his brilliant book, Winning the Loser’s Game, Charles Ellis wrote about two of his best friends who, at the peak of their distinguished careers in medicine, agreed that the two most important discoveries in medical history were penicillin and washing hands (which stopped the spreading of infection from one mother to another via the midwives who delivered most babies before 1900).

Ellis’s friends also counselled him there was no better advice on how to live longer than to quit smoking and to buckle up when driving.

The lesson Ellis leaves the reader with is this –

"Advice doesn’t have to be complicated to be good."

I have been an investor for 20+ years, which has been a good enough time to make me aware of a profound investor bias toward complexity.

Over these years, I have seen too many investors trying to fight complexity by adding even more complexity into their investment process and financial lives.

The world, you know, is complex. And so are financial markets.

Amidst this, how do you deal with such complexity in your wealth creation journey without losing your sanity?

I believe the answer is to have a personal financial plan that is elegant in its simplicity.

And so, when it comes to my own money and finances, I try to keep it very simple. 

Like this simple financial plan that I have been practicing for the past few years, and one that has served me very well.

Personal finance is, well, personal. But I hope this outline helps you in reviewing your own finances to find out the 

So, here's my simple personal financial plan -   

1. Earn more money than I need now (amidst too much focus on saving money, working hard to earn more is an underrated idea. But I believe it holds great importance. I can only save so much. But I can work hard to earn much more.)
2. Save money (first save, then spend)
3. Emergency fund (around 8-12 months of household expense, saved in a bank account or liquid fund)
4. Medical and life/term insurance (I do not need any other forms of insurance)
5. Invest the rest - 
   (a) Money needed in <5 years - Allocate more to debt (this is money I would need in the short term, and so I focus more on capital protection here than any return)
   (b) Money needed in >5 years - Allocate more to equity (this is money I would need in the long term, and so I focus more on capital appreciation that's faster than rate of inflation. Also, I avoid investments that can destroy this money permanently)
6. Write a Will (I understood the importance late, but now working towards it)
7. Avoid debt (all high cost debt, like credit card debt, personal loans, etc.)
   1. Document (so important to let myself and my family know what I am up to)
8. Review every 6 months (maybe, 12 months. Not to tinker around, but just to check if things are moving in the right direction).

Oliver Wendell Holmes, the American physician, poet, and humorist, said –

I wouldn’t give a fig for the simplicity on this side of complexity, but would give my life for the simplicity on the other side of complexity.

Simple can be harder than complex. You have to work hard to get your thinking clean to make it simple. But then, as Steve Jobs said in an interview in 1988, “…it’s worth it in the end because once you get there, you can move mountains.”

That’s also true for managing your personal finances. In practicing simplicity, and staying the course, over time you can also move mountains.

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Stock Market + Entertainment = Disaster

Paul Samuelson wrote - 

"Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas."

There is no denying that a lot of investors like to have "good looking" portfolios, invested in the period's most exciting industries.

For them, my advice is to resist the temptation. 

An investment's long term expected return correlates inversely with its short term entertainment value.

Greater the entertainment now (hot stocks, IPOs), lower the long term expected return.

Lower the entertainment now (boring businesses), greater the long term expected return.

So, choose your investments well. Seek what is good for your in the long run, not what makes you 'feel' good in the short run.

* * *

Reasons to Stay Alive

One of the best short books I have read in recent times is Matt Haig's Reasons to Stay Alive.

A passage from the book reads - 

“And most of all, books. They were, in and of themselves, reasons to stay alive. Every book written is the product of a human mind in a particular state. Add all the books together and you get the end sum of humanity. Every time I read a great book I felt I was reading a kind of map, a treasure map, and the treasure I was being directed to was in actual fact myself.”

If you are feeling down, or anxious, or panic stricken, or depressed, or just seeking an inspirational boost, this book will pick you up. Read it.