Get money savvy in 2006!

New Year's Eve is the time when the lessons of past experience weigh lightly on the mind. It is the time when we become momentarily rational and hope that the logical mindset would continue through the year and beyond.

Here are some resolutions that I made to usher in some sense into the way I handle money.

I will not swallow any rule of thumb without checking if it holds good for me.

Someone told me that the proportion of stocks in my portfolio must be 100 minus my age. Since I am 28, that meant 72% of my investments should be in stocks.

The rationale: when I grow old I must invest less in stocks and more in bonds and fixed return instruments.

Another told me that I must hold every kind of asset for the sake of diversification.

Many more pearls of wisdom were thrown at me. But, till now, I never bothered to question any of them.

Instead, I suppressed questions that sprang to my mind.

What has my age got to do with stocks in my portfolio?
Why shouldn't I time my entry into the market even if I intend to hold stocks for a long, long time?
Should I save for my children's higher education when I am reasonably certain that a decade from now, my children would be able to walk into any bank and get a loan for their college expenses?
Should I take my house to be an asset when I know that I will never sell it but may bequeath it to my daughter?

From now on, my answers to such questions will guide my actions. Not rules of thumb or received wisdom.

Will not keep a hefty balance in my savings accounts while having outstanding dues on my credit card.

The reason is obvious: you pay more on revolving credit card dues (24% per annum at the least) and earn less on savings account (3.5% per annum).

Extend the logic to the following situations: Why do we keep large sums in fixed deposits with banks when they could be earning superior returns elsewhere at the same level of risk?

Why do we go to great lengths to save money on air travel by hunting online for the cheapest flight ticket, but frequently visit expensive restaurants when better food could be had at home for far less money?

The answer: we make disjointed decisions in money matters. We don't think logically all the time and across spending, saving, investing decisions.

How wise we are is a measure of how frequently we make mistakes. I will try to bring down the number of such logical errors I commit in money matters.

I will not try to avert losses at any cost.

Behavioural experts tell us that our pain of losing Rs 100 is three times higher compared to the joy of gaining Rs 100.

This explains my tendency to prefer avoiding losses rather than acquiring gains.

I would go for a smaller, certain gain rather than go for a larger, uncertain gain, even if I know that risks are equal in both options.

For example, I would prefer a bank deposit that gives me a low return to a bond mutual fund where the potential for higher return exists, without additional risk. Or, I would prefer keeping my money in a savings account, when actually I can park it in a liquid fund with virtually no risk.

Tendency to avert any loss at any cost is irrational.

Not for me. From now on, I will take a risk with my investments.

I will pay back my loans within the quickest possible time

When I went for a home loan, I preferred a 20-year loan even though I knew that I could easily afford the slightly higher Equated Monthly Installment (money paid every month towards the repayment of the loan) of a 15-year loan.

In absolute terms, I would have saved a decent sum in interest if I preferred an affordable, shorter duration home loan.

I fell for the trap of lower EMI extended over an unnecessarily long period.

From now on, if I can afford it, I will prefer as big an EMI as possible. The sonner you pay back the loan, the less you eventually dish out.

I will take all of the above resolutions with a pinch of salt

Every year I resolved to become rational in every monetary decision that I made, fill my budget plan with every detail I can think of, and track every rupee spent.

The exercise was futile and it collapsed even before the first week of the new year wore off.

I realise that the only sensible thing that I can do is to be aware of my follies, dispassionately analyse how much they could cost me and if it is a shocking figure, then try and do something about it.

Have a great year!