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My last article was about how just like we frequently do a stress test as part of our regular health check-ups, we also need to periodically check our personal financial health to test preparedness for financial calamities. I had also shared a simple yet effective question-based “stress-test” to do the same.

While many of us thankfully may be financially secure and prepared for calamities, we nevertheless can still do better when it comes to taking our money decisions. And there are enough practical life situations around us that we face (or observe) that we can learn from about how we can take our money decisions better.

Take a look at these seven real-life situations that many of you would have faced (or observed) in the last 12 months and identify your actions/behaviours.

1. You have loans and at work you faced a 25% salary cut. You took one of the following actions
a. I took benefit of the moratorium to defer my EMIs by 6 months
b. I withdrew from some of my short-term assets (FDs, etc) and paid the EMIs
c. I do not have any loans

2. Because of the salary cut, you faced a cash crunch. You took one of the following actions
a. I took a personal loan / revolved money on my credit card
b. I took benefit of the “loan from EPF” to tide over
c. I withdrew some contingency short-term funds that I have kept ready for such situations

3. In March, markets crashed by approximately 30% from their Jan/Feb highs. Your reaction was
a. I panicked and sold all my equity/MF holdings in March and April at a loss
b. I didn’t want to sell at a loss, but I stopped all my SIPs/STPs in April and decided to wait for some months for the sanity to return
c. I was quite shaken but felt that in the long-term things would get better and hence held on to my portfolio

4. In April, Franklin Templeton shut down 6 of their high-risk debt funds in India, leaving their investors in the lurch. Your reaction was
a. With this episode following the March crash, I lost faith in all market assets, withdrew all my mutual funds and moved them to bank FDs
b. While I understood that this was a specific AMC related issue, I stopped investing further in mutual funds, and thought sticking to big names is best
c. I evaluated my portfolio (took help from an expert where needed) and made sure that I was not carrying any undue risks for the long term

5. Between May and October, markets recovered nearly most of their March losses. Your reaction during this period was
a. I had sold at a loss in March/April and hence did not want to risk my capital further and kept it in safe assets
b. I kept my existing portfolio intact but did not have the courage to buy more when the market crashed
c. I had diversified my portfolio across asset classes and hence had ready funds available in debt that I quickly re-deployed into equity at attractive valuations between March and June

6. Due to the lockdown, your expenses also came down drastically and you had additional surpluses. Your action to deploy these surpluses was
a. I had a lot of spare time at home and my friend suggested stock trading was a good option. I have made good money and seem to have a knack for it.
b. I used those savings to shore up my contingency funds since I realized times were uncertain and they could come handy
c. I had adequate contingency funds so I used some of the savings to increase my health insurance cover and invested the rest towards long-term purposes

7. As a result of the pandemic, you realized that additional skill-sets are needed to build on your existing strengths, for you to continue to do well in your work area. Your action to address this was
a. I think that the company will take care of skill upgradation at the right time since I am a loyal employee and the company will take care of me
b. I was not sure whether my job will be secure and hence didn’t think spending on upgrading my skills was worth it
c. I spent the spare time fruitfully and used some of the surplus savings to sign up for some digital learning courses in my current work area and its adjacencies

To know how you did, use the below key to score yourself.
For every “c”, score yourself 2 points, 1 point for every “b” and 0 points for every “a”. The maximum you can score is 14 and the minimum 0. If you scored
12-14 – Well Done!! You have a very good understanding of how to manage your money and the emotions that come along with it
9-11 – Not Bad! You have done ok, but do seem constrained by your knowledge about how markets work as well as your ability to control your emotions while taking money decisions.
0-8 – Not Good at all! You seem to have serious trouble understanding money decisions as well managing the emotions that come with it. You must seek expert help to manage your money.

So, how did you do in this practical “personal finance quotient” exam above? Research shows that the maximum return (or “alpha”) that an investor can generate comes not from choosing the best products or timing the markets well, but from managing his or her behaviour well during those crunch moments, when the right decisions can give you a leap forward and the wrong one can pull you back significantly, on your long term financial journey.

As a popular quote goes, “personal finance is more personal than finance” and the key is to focus more on the “personal” rather than the “finance” and your financial journey will reach its destination sooner than later.

Girish Ganaraj is an NISM-certified investments practitioner and Co-founder of Finwise Personal Finance Solutions