Tenure Matching

One of the fundamental concepts of finance is to match the tenure of assets and liabilities. That the tenure of source of funds (equity, debt, etc.) need to match the tenure of what they are used for. So, if you need money to tide over till your next payday, you need to take an extremely short-term loan. If you need to borrrow to fund a house – an application that has a long tenure – you need to take a longer-term loan. And so on.

In fact, a common refrain about banking crises is that they happen mainly due to the tenure mismatch – banks borrow by means of short-term deposits, and then invest these in long-term loans. Most theories regarding liquidity crises cite this as a common problem.

Now, my contention is that this banking/finance rule is just a special case of a much larger rule in life. Remember that funding, or raising money, can be looked at as a “problem”. By classifying it as a problem, I’m not necessarily saying it’s a very tough problem. All I’m saying is that it’s a problem. And when you do raise money, it is a solution to the problem. Thus, the generalized form of the rule

The tenure of the solution needs to match the tenure of the problem.

So before you look for a solution for any problem in life, you need to first figure out about the tenure of the problem. And then generate a list of possible solutions which have similar tenures, and then pick the best among them. And based on my limited anecdotal experience, most people don’t really appreciate this concept when they suggest, and sometimes even implement, certain solutions.

So on Monday I called up a friend and told her that I was going through a strong bout of NED and we should meet up. She started philosophising and said that this is a fundamental problem and that I should think of a fundamental solution. That I should get a new hobby, or learn a new instrument, or some such long-term thing. Of course, I know myself better than she does, and so I knew that my problem was short-term, and so all I needed was a nice evening out. A short term solution to a short term problem.

On the other hand, during my previous job, I used to go through prolonged periods of NED. A little analysis revealed that the fundamental reason for this NED was my job, and that until I got a new one, I wouldn’t be happy. It was a long-term problem that deserved a long-term solution – of finding another job. However, most of the advice I got for my NED was of the nature of “go get drunk, you will be fine”.

My mother also doesn’t seem to appreciate this tenure concept. Nowadays I’m afraid to crib to her about anything, because if I crib, she assumes it’s a long-term problem and suggests that I should get married and that she’ll intensify her efforts in the arranged-marriage market.

Yes – people not appreciating this tenure concept is a long-term problem. The solution to this should also, thus, be long-term. They need to be taught such a lesson regarding this, that they won’t forget this concept for the rest of their lives.