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What’s lifestyle stagnation – and how a techie got over it

Lifestyle creep: That is a problem many people grapple with. For others though, lifestyle stagnation is a real issue. For the uninitiated, lifestyle creep or lifestyle inflation is a pattern when discretionary spending by people on luxuries becomes the norm as their lifestyle upgrades. Lifestyle stagnation is a situation when a person’s income and purchasing power increases with progress in career, but they continue to be stuck in a low orbit of spending and hold back from fulfilling aspirations that are within their reach.

Bangalore-based tech professional Krishna Rao, 49, realized this when he was budgeting for a car purchase. The amount that he earmarked towards this purchase was nearly 60% less than what he finally spent on owning a bigger vehicle. So, what changed? “Old habits die hard,” as Rao puts it.

“I stuck to a conservative budget instinctively. I changed my mind after getting clarity on my net worth, how my investments were doing and what my financial future looked like. “Getting this clarity gave me a better idea of ​​what I could afford and what I couldn’t,” said Rao.

A nudge from his financial adviser, Ram Kalyan Medury, founder and CEO of Jama Wealth, a Sebi registered investment advisory firm, also helped. “My job as an adviser is also to show people that certain possibilities are well within their reach without jeopardizing their financial goals,” said Medury. “Krishna’s financial goals are clear, he is right on track to achieve those goals and will be an empty nester in the next five years. So, why not spend a couple of extra lakhs on buying a bigger car so that he can enjoy his hard-earned money and create good memories with his family. People should not hesitate from opening up to possibilities that they can afford.”

In fact, getting clarity on his finances and how to make his money work for his financial goals as well as aspirations is the main takeaway for Rao from collaborating with a professional advisor. Mint spoke to Rao and his financial guide of three years Medury to understand his personal finance journey.

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Power of equity

Spending within his means and saving for his family’s future always came naturally to Rao. What he lacked was a focused approach to investing. “All my surplus savings were going into bank deposits and not earning much,” Rao said.

Until 2019, his investment portfolio was heavily tilted towards traditional debt instruments, which included fixed deposits, traditional insurance plans and Ulips (Unit-linked Insurance Plans). Although he had substantial savings, he did not have a well-defined emergency corpus and all his savings were idling away. “At this point, I realized that I needed a plan,” said Rao.

As a first step, Rao, with the help of Medury, compartmentalized and assigned existing savings to different goals. As part of the readjustment exercise, Rao also exited a few insurance plans that were not efficient. This exercise gave Rao the clarity and confidence to approach his other short-term aspirational goals, like upgrading to a luxury car and buying a small piece of land to pursue his hobby of organic farming.

In the last three years, his overall equity exposure has increased from 4% to 40%, of which a major chunk is in direct stocks. “His equity portfolio has nearly doubled during this period,” Medury pointed out. “We buy high quality companies that have high return on equity, low debt and consistent growth in sales and earnings with a 5-year horizon. About 90% of Krishna’s direct stocks portfolio is made up of large and mid-cap focused portfolios,” said Medury.

On being asked how Rao adjusted to this substantial increase in equity exposure, Medury said it wasn’t easy. “He had a high-risk ability as most of his goals are many years away, but he had a low appetite. I educated him on how inflation eats into every other investment instrument and only equity can help him amass wealth.” The fact that Rao had already dabbled in the stock market earlier helped, and Medury also carried out a goal setting and asset allocation exercise before increasing the exposure.

However, direct stock investing can trouble even seasoned investors in the event of a market crash, and Rao was no exception to this. For instance, in March 2020—the early days of his direct stock investing, Rao’s portfolio took a major beating and went deep into the red, he said. “I got worried but Ram advised me to stay on the ground, saying fluctuations are part and parcel of stock market investing.”

This was also the time when Rao lost his job as a result of Covid-induced economic uncertainty. However, having an adequate emergency corpus gave him the financial cushion to tide over it. “Emergency corpus took care of the cash flows so there were no financial setbacks. He did not rush into taking up any job because of the available financial cushion,” said Medury.

Rao has adequate life and health insurance in place. He has two pure vanilla term covers–one from his employer and another bought personally–2x of his annual gross income. He doesn’t have traditional life insurance policies anymore. He has a combined health cover of 12 lakh from the policy provided by his employer, besides a standalone health policy.

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