08 May 2017 15:24 IST

How to alleviate your financial anxiety

Refrain from buying real estate when you're concerned about your financial well-being

Never mind the returns from the stock market. Financial anxiety among working professionals in India has increased significantly in recent times. Are you concerned about your financial well-being too? In this article, we discuss why financial anxiety levels have increased and what you can do to moderate your anxiety.

Uncertain outcomes

Many individuals are nervous about their job. For one, there is uncertainty regarding offshore technology jobs. For another, media reports suggest that many non-residents want to return to India. Whether these factors eventually lead to job losses for resident Indians is a moot point. But the fear of the unknown has led to increasing levels of financial anxiety among working professionals. There is logic for this anxiety.

Your human capital is the present value of all your future active income. When you are nervous about your employment, you believe that your human capital is unstable. This causes financial anxiety. After all, your current consumption is not just based on your current income but also on the expectations of your future income. Will you take a vacation or enjoy fine dining with your family when your job is at stake, even if you have some money to spend at present?

So, what should you do to moderate your financial anxiety? Remember, financial anxiety is the outcome of your behavioural attitude to uncertain future. A behavioural attitude has to be addressed by a behavioural response. So, one way to moderate your anxiety is to surround yourself with liquid wealth. That way, you will feel the abundance and suffer less anxiety. You should, therefore, strengthen your protective assets.

Readers who are familiar with our wealth mapping process will know that the protective assets are meant to protect your family’s minimum standard of living. They contain health-care insurance, life insurance and emergency funds. Of this, emergency fund is relevant to moderating financial anxiety. So, increase the size of your emergency fund. Keep this money in savings bank account and short-term bank deposits.

You should also avoid investing in real estate! Why? Real estate is a lumpy investment that requires you to take a bank loan. A bank will lend money based on your human capital. When you borrow money to buy a house, you are converting your human capital into a single lumpy illiquid asset -- your house!

If you believe that your human capital is unstable, you may have trouble repaying the home loan. And even if you actually do not have such trouble, the mental stress associated with an outstanding loan can be too much to bear. So, refrain from buying real estate and taking loans when you are concerned about your financial well-being.

Investment portfolio

You should continue investing for your core portfolio but stop investments for your satellite portfolio when your anxiety levels are high. Why?

Your core portfolio is a goal-based portfolio. This portfolio is typically set-up through a systematic investment plan (SIP) in equity mutual funds and recurring bank deposits. As financial anxiety is more a state of mind and not based on an actual bad outcome, you should continue with your SIPs and work towards achieving your life goals.

Besides, your core portfolio is a buy-and-hold portfolio with periodic rebalancing to align with your asset allocation policy. This works in your favour because you do not have to take active decisions each time you invest; for your decision-making is likely to be faulty when your financial anxiety levels are high. This is precisely the reason why you should not invest in satellite portfolio; for that portfolio requires you to frequently take active decisions to profit from short-term movements in the stock market.

Finally, remember this: No matter how effectively you manage your finances, you can only alleviate your financial anxiety through significant behavioural changes. So, make efforts to remain emotionally calm, and practice meditation!

(The writer is the founder of Navera Consulting. Send your queries to portfolioideas@thehindu.co.in. The article first appeared in The Hindu BusinessLine.)

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