"A father is a banker provided by nature." When we were kids, we often saw our fathers doing the best in terms of managing the finances and providing the best for our education and other needs. We often wondered how did our father do such a good job with limited finances? Well, the financial practices and behaviour of our older generations have evolved and some old-school finance ideas used by our forefathers have stood the test of time and continue to be effective. Some of these are:

1) Maintain a cash-flow diary: 

Many of us have noticed that our father would keep a cash-flow book where all our inflows and outflows were noted. We frequently tend to keep incurring expenses without keeping track of them. As a result, a lot of us find ourselves broke before the end of the month. Thus, we should keep a cash-flow journal so that our consumption can be tracked and carried out appropriately to avert this. The availability of numerous digital diaries for free can make maintaining records easier. Further, keeping a record and filing all of our utility bills, bank statements /passbooks, invoices & warranty cards of purchases and other basic things is also an age-old practice that probably most of us would have learned and followed from generations. This could serve as an important way to maintain track of your expenses.

2) Envelope budgeting:

Envelope budgeting is a concept that has been practised for several generations now. Many of our materialistic expenditures are planned even before we make a budget at the beginning of the month. We have a history of following the trends to keep our social status. Because of this, we frequently overspend, which causes us to reduce our savings and investments. Since an expensive purchase today could cause us to fall behind on our financial goals, this issue needs to be remedied. Therefore, budgeting should be done methodically and rigorously. Envelope budgeting is a simple practice whereby we put money into different envelopes or categories at the start of the month and then start spending on our relevant expenses by withdrawing from the related envelope. You may sometimes have some money left by the end of the month i.e., you have spent less than what you have budgeted for, you can make use of this by adding an extra amount in ongoing investments. You can carry this practice of budgeting either by using physical envelopes, or this can nowadays be maintained in the form of digital accounts, budgeting apps or simply having different bank accounts or wallets used for different expenditures.

3) "Out of sight, out of mind" strategy:

Any savings left idle in our bank account causes our hands to itch. The equation, “Income (less) Expenses = Savings’ is often true for us. Any income balance available to us makes us feel rich and we tend to spend it on shopping, entertainment or crossing items down the bucket list. We often make impulsive decisions on our expenditure in the mistaken belief that we have enough money. So it's best that we change this equation to, ‘Income (less) Savings = Expenses’ as early as possible. A SIP in mutual funds schemes can make this happen easily whereby SIP investments would be deducted at the start of the month. Transferring your income towards an investment, which is the best possible way to make it useful. This will also put your unplanned and impulsive spending in check. This simple approach of keeping money out of sight or reach, if aggressively practised, can do wonders for your financial well-being and could help you in bringing discipline towards your investments. 

4) Protect your health, protect your wealth:

In today’s hasty world, work stress, erratic sleep patterns, bad eating habits, consumption of alcohol & tobacco have become common in our social lives. With rising disposable income, social life revolves around get-together parties on most weekends with outside food & drinks. This not only cuts pockets but more importantly, has an impact on our health. In contrast, a different form of social life is still enjoyed by the older generation. Meetings at parks during walks, discussing topics at the tea stall corner, samosa parties and an occasional home visit for a regular lunch or dinner with home-cooked food is more healthy, saves money and more importantly sounds possible and meaningful. A balanced diet, good sleep, and exercises are all necessary to safeguard one's health and we all would agree, health is wealth. 

5) Be patient:

Being patient is a key virtue for success in financial investments. With the right asset class, it allows you to harness the power of compounding interest. Patience is required not only in financial decision-making but also in our daily routine. Like, taking the “Buy and hold” investment position takes a lot of patience, but the fruit that one gets out of it is sweeter than being impatient. One has to give reasonable time for their investments to perform. Being patient also does not mean being idle. One has to make sure that important decisions are not procrastinated and that regular monitoring and periodic adjustments to your portfolio are still necessary.

Bottom Line

While these old-school ideas remain evergreen when they are combined with modern financial techniques, they can help everyone to survive and grow in today’s financial world. Perhaps most of us would also like to explore the old ways, the simple and slow-paced life where the focus was more on quality of life, relationships, emotional stability, savings, living within means and where the display of wealth and acquisition of possessions and being too greedy and materialistic was looked down upon. We may have gotten educated and rich, but there may still be a long way until we become wise and wealthy.

Do you love to have junk food and want to have it every day? But practically, you cannot have it daily because it can never grab all the nutrients required for your body making it risky for your health. Hence, there should be a proper balance of nutrients for making a healthy lifestyle. Likewise, the same logic works for your investments. A single asset class could risk your overall portfolio so, there needs to be a proper balance between different asset classes to reduce risk in your investments. Therefore, one should maintain balance by choosing the right asset allocation strategy according to his investment objective and risk profile. 

Before moving forward with asset allocation strategies, let's first understand asset allocation. 

Asset allocation and its’ benefits: 

Asset allocation is the process of dividing an investment portfolio among different asset classes such as equity, debt, real estate, commodities and cash. The purpose of asset allocation is to create a diversified portfolio that maximizes returns while minimizing risk. Asset allocation is recommended to be followed by investors because it can provide several benefits such as:

• Goal Setting: Asset allocation allows you to set clear investment goals, objectives and expectations. By determining your investment goals and the time horizon for achieving them, you can create an asset allocation strategy that aligns with your financial objectives. 
• Balancing Risk & Returns: Asset allocation can help manage risk by spreading investments across different asset classes (diversification) with varying levels of risk and return potential. The idea is that by allocating assets among different asset classes that have low correlations with each other, it is possible to minimize portfolio risk while maximizing returns
• Decision-making: By maintaining an asset allocation strategy, investors can avoid making emotional decisions based on short-term market movements and help reduce the risks of wrong decision-making and benefit from market opportunities. 
• Portfolio performance: Asset allocation has been found as the most important determinant of long-term portfolio performance as against investment /fund selection and market timing. It helps the investors achieve more consistent and better returns over the long run.

It would be interesting for investors to know to what extent does asset allocation determine the long-term performance of the portfolio? A few of the important studies done in the years 1986, 1992 and 2011 found that asset allocation accounted for approximately 93.6%, 91.5% and 95% of the variation in returns. As investors, we should not be concerned about the exact percentage. What is important for us is to understand the simple fact that following an asset allocation strategy religiously would determine how well our own wealth creation journey will take shape in life. 

The main asset allocation strategies: 

1. Strategic Asset Allocation: This approach involves setting a long-term target allocation to a mix of different asset classes and periodically rebalancing the portfolio to maintain that target allocation. The target allocation is based on the investor's goals, risk tolerance, and investment horizon. This strategy involves periodic rebalancing of the portfolio to maintain the target allocation and the allocation here does not change with the influence of the market. Say, for example, you have chosen 50:50 asset allocation, so you allocate Rs.50 in equity and Rs.50 in debt. A year later, the investment of Rs.100 grew to 114, Rs. 60 in equity, and 54 in debt. Now the portfolio will be rebalanced to the original portion of 50-50, i.e. Rs. 57 in equity and debt respectively. 

2. Tactical Asset Allocation: Tactical asset allocation is a short-term approach to portfolio management that involves making adjustments to the portfolio based on changes in market conditions or economic outlook. The goal of this approach is to take advantage of short-term opportunities or mitigate potential risks. Unlike strategic asset allocation, tactical asset allocation does not have a fixed target allocation. Instead, the allocation to different asset classes is adjusted based on the investor's expectations for future market conditions. For example, if an investor expects interest rates to rise in the near future, they may reduce their allocation to debt and increase their allocation to equity. The idea is to make adjustments to the portfolio that are not necessarily based on the long-term outlook for the asset class, but rather on short-term fluctuations in market conditions.

3. Dynamic Asset Allocation: Dynamic asset allocation is a combination of strategic and tactical asset allocation. This approach involves setting a target allocation to different asset classes, but with the flexibility to make short-term adjustments based on market conditions. The adjustments are typically based on a set of rules/logic that takes into account market conditions, economic indicators, and other factors. A dynamic asset allocation strategy may increase or decrease the allocation to equity and debt from time to time as per some rules & logic. This strategy can be more responsive to market conditions than strategic asset allocation, but it can also be slightly more complex and difficult to understand and implement on our own.

Deciding upon an asset allocation strategy:

Each of the asset allocation strategies has its advantages and disadvantages, and the choice of strategy largely depends on the investor's risk profile and investment expectations. However, while determining any strategy, one should understand that the asset allocation is for the entire portfolio, including all your investments in traditional avenues like bank FDs, PPF, small savings, real estate & gold, i.e., anything which has been made for investment purposes. Thus, deciding and following an asset allocation just for your mutual fund portfolio is meaningless as it should be at the overall portfolio level. Investors who are following a financial plan are a step ahead as they have a clear target and time horizon in mind. Thus, the asset allocation can now be decided for each financial goal on the basis of the investment horizon, the required returns for the savings available and the risk you can take on it. 

The Bottom Line 

Determining an asset allocation strategy and the discipline to follow it should be the basic, core activity in your wealth management journey. This is not a one-time decision, but a continuous process that requires monitoring and periodic adjustments to ensure that the asset allocation strategy and the actual asset allocation remain aligned with the investor's objectives. It would be best if one approaches the experts who can help simplify all these things and help you manage your asset allocation in an effortless manner.

Are you the one who used piggy banks in your childhood to store all the money gifted to you by your relatives? Do you also remember getting happy at unexpected big amount of money you managed to save?

For most of us, the simple piggy bank was our first exposure to the concept of savings. Today, probably in the digital age, the piggy bank is seemingly lost somewhere. The world has changed and children today have much more exposure to finances and money. Teens today are one of the most sought after consumers for a large market, not just toys but things like clothes, entertainment, education, consumables, gadgets, games and so on. In such a world, our intent of exposing them to the basic personal finance principles and building good habits towards finance is a big challenge.

Its time for us too to upgrade our approach. During the adolescent and character building years of children, it becomes very important that we also build good money management habits and understanding amongst our children. The broad objectives for us as parents can be to:

1. Give understanding on the importance of money 
2. Make them comfortable and confidently in handling money 
3. Make them capable of managing money safely 
4. Make them financially responsible 
5. Develop enthusiasm for them to learn more and start saving for future 

As parents who also happen to be investors, we surely can do a lot on this front with out children, especially when the usual academic education does no justice to this very critical aspect of life. Here are a few ideas on how we can pursue our objectives on money matters with our growing children…

Pocket money:

In many ways, the pocket money to children is not different than the salary you earn. This simple understanding opens up to a lot of things which can be done with the pocket money. Pocket money is often the first taste of financial responsibility for many people. Giving your child a set amount of money on a regular basis, as well as the responsibility of paying for something they want, allows them to good money management habit. With pocket money, we can imbibe the principles of budgeting, savings, planning for big expenses, being disciplined & responsible, and so on. So the next time you think of giving pocket money, also think of so much more you can give along with just the money.

Budgets & Pocket money:

Understanding the value of money is crucial during the growing years. With most parents affluent today, they tend to pamper their child and fulfil most of their demands. Doing so, the child may not value money and the effort you have done to earn the same. We can always seek participation of children while planning for household expenses /monthly budgets for the family. You can also encourage them to do some household activities or tasks to earn some extra money besides the pocket money. How about asking them to properly wash your car say once a week and show how much the regular car washer is earning? With digital skills, you can also reward them for completing courses or doing some digital activities on your behalf. Making them understand the value of money will surely impact a lot of other money related behaviour.

Spending Money:

There is no limit to how much children can spend today. From entertainment to dining out, to travel, to electronics, and so on. Monitoring their spending and asking them to limit their expenditure to a set budget is crucial here. As parents, we should also learn to say ‘No’ to a lot of unreasonable demands which children place on us. We can also help our children to learn from our own habits and money behaviour while planning our own /household expenses. So the next time you decide to a buy an phone, why not just have a random talk with your child and ask for inputs? If we show discipline in spending ourselves, the children will surely learn a lot more than preaching them something.

Working with Money:

Handling and dealing with money is another great skill to have. You can ask your children to go and open bank account for themselves. Transfer a bit of money to the bank account and let them manage /handle their money digitally. You may also give them pre-loaded money cards instead of hard cash. Ask them to track their expenses online with budget apps. Having a bank account and letting your children manage it on their own is a real time skill required to be learnt soon.

Investing Money:

Seeing money grow gives a very different level of learning to children. Experience is the best teacher and we should expose our growing children to some real investment /wealth management experience. Share with them how and where you are investing and let them listen to your discussions with financial advisor /MF distributor. It would be the best if we can actually open an online mutual fund investment account for your children along with a bank account and ask them to invest regularly with SIPs. Let them make some saving and investment decisions themselves and let them learn. Ask them to present and discuss with you on their investment choices and performance from time to time. Real-time experience on savings can really make a huge difference to their attitude towards money.

Being careful about money

Last but not the least, with the benefits of digital world, there is a dark side where all types of online frauds and scams are prevalent. A lot of children get addicted to games and there have been cases of spending absurd amounts on such online games. Further, with constant online exposure, children also need to be learn on how to be safe online not just with money but also with privacy and a lot of other things which are very risky. Teach them of all different types and ways of fraud, cheating, scams happening online. Digital security is something that needs to be put on the top of your list as parents of growing children.

Conclusion:

As parents, we wish the best for our children and wish them to build skills, knowledge and behaviour that are essential to be successful in life. We do not wish our children to be attracted to money or materialistic life but a the same time, we should teach them how to smartly use money as a limited resource so that it does not become a problem in life. Learning the virtues of contentment, happiness, sharing, caring, self-reliance, discipline and delayed gratification are the true lessons we should teach our children beyond just money management skills. We are sure, with little efforts and planning, your children will surely be thankful to you for life for what you teach them during these growing years.