Change is the only certainty in life and possibly nobody knows this better than we Bipolar Disorder affected. How does this factor impact our Financial Planning and thereby, security? The sheer unpredictability and the turbulence associated with Bipolar Disorder affects our ability to bring in steady incomes. This is a challenge many of us have to face. Frequent job hopping or career switches, or worse, long periods of unemployment make the possibility of Financial freedom seem like a fanciful dream.
Precisely because of these daunting challenges, the need for Financial Discipline and
Planning becomes even more critical for our community.
We all know that awareness about Mental Health is very poor. What we don’t often realise is that a majority of us, even drawn from the general public, know so little about managing money and the importance of having a plan in place. It is often said that we spend more time planning our dream vacation than on meeting our financial goals. We spend a substantial part of our lives earning a living but make little effort in making the earned corpus work for us. Given the vagaries of our illness, it is imperative for us to secure our financial future to the best of our ability.
Is basic Financial Planning really too complex a field to master?
That is what puts people off at the outset and leads to procrastination on this front. Key is to make it simple for the lay person to understand and implement. During the World Bipolar Day Convention 2018 in Mumbai, I had made a presentation on this very topic. I thought a follow up article on it could make it accessible to a larger audience.
“What you do with what you earn is more important than how much you earn”
Basic Tenets Of Financial Planning
(With an emphasis on adapting it to the peculiar needs of our community)
1) The earlier your start to save and invest, the more time you allow your wealth to grow into a substantial corpus.
This might seem obvious but we often overlook this golden rule. There are multiple advantages of beginning early. One can invest more in riskier assets at say, age 30 than at age 48. Also, your investments can tide over multiple upheavals and cycles of the equity markets.
2) Discipline is everything in Financial Planning
We drive the point home endlessly about how important it is to be disciplined in managing Bipolar Disorder. The same kind of outlook is required to build wealth.
a) Save regularly
b) As your income grows, increase your investments correspondingly.
c) Resist withdrawing from this corpus for needs other than defined Goals.
d) Do not get discouraged by equity market ups and downs~ in the long run you win.
e) Distance emotions from financial decisions (or delegate them to a qualified professional)
3) Creating an Emergency Fund
As such, this is recommended for everyone, even more so for our community. We can have long periods of layoffs in our careers due to ill health. If there is an unforeseen setback, this acts as a buffer to replace our income for a short duration. The amount of this fund should be sufficient to replace between 6 to 9 months of your expenses. It could be in the form of flexi-deposits with a Bank or in a liquid fund.
4)) Identifying and Quantifying Important Goals is at the heart of Financial Planning
It isn’t sufficient to invest with discipline. Having a sound Financial Plan in place is a roadmap to much coveted financial freedom.
a) Identify your Key Goals: (for instance, Retirement Planning, Purchase of Property, Children’s Education)
b) Quantify how much you need for each Goal in realistic terms (adjusted for inflation)
c) Arrive at amount to be invested every month for each Goal.
d) Decide on mix of Assets you will need to invest in given the time frame (Equity, Debt, Gold, etc)
e) Monitor your Financial Plan at regular intervals> you could use Portfolio tools available on most financial websites.
f) Know your Net Worth: this is arrived at by deducting all borrowings from your total assets.
5) Understand your Risk Profile
An individual’s Risk Profile determines his/her ability to invest in riskier assets such as Equity and determines the asset mix. Factors to be considered~
a) Current age
b) Retirement age
c) No of earning members (Spouse)
d) No of dependents
e) Whether income/job is steady
f) Extent of Debt servicing
6) Retirement Planning
Arguably, this is the most important Goal one needs to plan for. The fact that earnings will stop at a certain age (unless you are entitled to a pension) and expenses will keep rising is the reality we need to face and prepare adequately for.
One area people struggle with is at arriving at the right quantum of corpus required to ensure a comfortable retirement. This involves complex calculations but to put it simply, if you are going to retire at say, age 58, you need to calculate what will your annual expenditure be at that age after taking inflation into account. You could then target 25 times this estimated amount as your desired corpus at Retirement.Of this Corpus, you can draw down 5% each year to pay for your expenses. It is always prudent to plan for the unforeseen~ we typically think that expenses will nosedive as we age. Healthcare expenses usually rise sharply as we age.
7) Investment Planning
People often confuse saving with investing. So, saving in a Bank Savings account or Fixed Deposits have their utility but should only form a small part of our overall investments. The idea is to consistently generate returns that beat inflation.
Financial Assets that you can invest in:
a) Equity based instruments: Listed Equity shares, Mutual Funds and Exchange Traded Funds (ETFs). Although risky, they are proven wealth creators over a long term horizon.
b) Debt or Fixed Income: PPF, Bank Fixed Deposits, Debt Mutual Funds and Bonds: these instruments give stability to the portfolio and also generate income.
c) Property: a self owned and occupied house might be a necessity but is not an encashable asset. However, a second house or commercial property can not only generate rent but can be a useful asset which appreciates over time. Disadvantage is that property is a highly illiquid asset
There are other avenues to invest in such as precious metals, art and antiques.
8) Asset Allocation
Asset allocation is the most important factor in wealth creation and preservation. Our Risk Profile gives us an idea of how much risk we can take by investing in Equity. Although many nuances need to be considered, a simple calculation of the percentage of wealth we can invest in equity is: 100- current age. So for a 35 year old, 100-35= 65. Thus, 65% of one’s investments can be in Equity instruments. As one grows older, our exposure to equity could be pared down to match changed risk profile. Please note, these percentages are not cast in stone.
Based on your decided asset allocation, you can choose from a mix of Investment vehicles mentioned in para 7. Keep checking whether your allocation has changed and make adjustments accordingly (a bull market might take the equity component of your portfolio to beyond decided percentage, so profit booking can be resorted to and shifting that amount to fixed income instruments.
9) Have Joint Holdings across all Savings and Investments
During mania, one is rarely in a position to take important financial decisions. In fact, one should ideally delegate responsibility at such times to a trusted family member. It could be your sibling or spouse or parent. It is ideal to have a ‘Either or Survivor’ holding for bank accounts as well as investments in Mutual funds.
A Caregiver from family should ideally ensure that Credit cards and cheque books are secure with them during the patient’s phase of full blown mania. Bipolar Disorder affected have been known to blow away lifetime savings in a few weeks of indiscretion. Borrowing is a necessity of our times, something that there might be no way to avoid. Special care needs to be taken by Caregiver to ensure that Loans are taken only for productive purposes and that repayment of these will not add undue pressure on cash flows.
10) Make a Will
While everyone of us needs to make a will, our community needs to ensure certain steps are taken to enable smooth transmission of wealth to legal heirs. A Certificate by a Doctor stating that the Will has been made and signed by you in a sound frame of mind is necessary to preclude someone challenging the validity of the Will. I have been told that a Doctor’s signature as a Witness to the Will is and added precaution.
A Financial Plan must consider other factors such as Tax planning & cash flow management. Am not elaborating on these in this article.
I have not mentioned the importance of having Health Insurance for a reason. As of now, Mental Illness is an exclusion in most products offered by Insurers. A few insurers, though, have launched products which cover mental illness. The IRDA has given the Insurers a deadline of 1st April, 2020 to ensure all Health Insurance policies cover Mental Illness on the same terms as Physical illness. One should make use of this opportunity to get oneself secured on this front.
Similarly, Life Insurance, an otherwise fundamental aspect of Financial Planning, might be out of bounds for our community due to Insurers’ reluctance to take on the risk. (I am thankful to Life Insurance Corporation of India for covering me for a substantial amount despite my disclosure about Bipolar Disorder.)
My Presentation on Financial Planning~
How have I gathered all this knowledge? I had a career as an Insurance Agent with Life Insurance Corporation of India. This led to an in depth study of financial planning as well.
Guess what, it helped me secure myself and my family financially to a great extent. It is never too late to choose a path of prudence. Hope this article motivates you to commit yourself to a life of Financial discipline.