Let's Talk Money
My recommendation of emergency funds has now changed. For those forty years and below in secure jobs, you are fine with six months of living expenses in an FD, but as the age increases and as the riskiness of the job goes up, ramp up the fund to reach two years for older cohorts in jobs that are not that secure.
Page: 13, Location: 127-129
Note: Apply.
You are doing OK if … you have between six months to two years of emergency funds in a mix of FD in a scheduled commercial large bank – both public sector and private sector banks are fine – and very conservative debt funds; your loans are less than 30 per cent of your take-home salary; you are increasing safe assets as you age; you have your own medical cover; you have your wills in place; you are building a second and a third career even as your work your current job.
Page: 18, Location: 212-216
Note: Summary.
2 DON’T STASH THAT CASH
Page: 23, Location: 262-262
Note: CH. 2
Not a nice place to be in – you lose the money, you lose respect for the other person, and somewhere for yourself for getting into a situation like this. That was a lesson well learnt. I move the money away from temptation. I found a useful way of doing that. I’ll
Page: 25, Location: 298-300
Note: Lesson.
This is your entry-level product – setting up an FD with your emergency money in it. If you are banking with a bank that allows flexi-FDs that allow you to sweep out just the amount you need, rather than breaking the entire deposit, go for that. Else split your emergency fund into smaller FDs so that you don’t have to lose the interest on the entire deposit.
Page: 35, Location: 431-434
Note: Apply.
This is the go-to fund when disaster strikes in the form of a job loss or death. Even if you have a life cover, the money takes time to come, but the ongoing costs don’t stop. I can’t stress the importance of this fund. It is the difference between slipping into disaster and staying afloat. You are doing OK if … you have six months’ to two years’ living costs in an emergency fund; you are a double-income family with no dependent parents and have three months’ living expenses; you are a single-income home with dependent parents and have a year’s living costs in an emergency fund; you are in your 50s and have two years of living expenses in this fund; your emergency fund sits fixed deposits or very safe debt funds.
Page: 36, Location: 444-450
Note: Summary.
One, ensure that you have a policy that does not have something called a ‘co-pay’ clause.
Page: 42, Location: 539-540
Note: Imp.
Two, check for a ‘pre-existing’ disease clause. Insurance companies will not cover diseases that you already have when you take the policy. Insurance rules allow a company to refuse to pay for any treatment related to any condition, ailment or injury for which you were diagnosed or had symptoms when you took the policy, for four years.
Page: 43, Location: 548-550
Note: Imp.
Three, check if your policy has a ‘disease waiting period’.
Page: 44, Location: 558-559
Note: Imp.
Many companies have a cool-off period of thirty to ninety days during which they will not pay any claim. Some ailments such as cataract or hernia may have a ‘waiting period’ before the company will pay. Ask the agent to list out all diseases that are covered under this clause. Look for a policy that does not have a waiting period on diseases or coverage.
Page: 44, Location: 559-562
Note: Imp.
Six, ask how much of the costs before and after hospitalization the policy will cover.
Page: 45, Location: 577-578
Note: Imp.
Seven, ask for a list of ‘day-care’ procedures that don’t need you to stay for twenty-four hours in a hospital any more.
Page: 45, Location: 580-582
Note: Imp.
Eight, look at the ‘no-claims bonus’ feature. When you don’t make a claim in a year, you get rewarded by the insurance company.
Page: 45, Location: 584-586
Note: Imp.
One, how many claims does the company settle? Out of 100, if the company’s claims history does not settle more than ninety-five claims, don’t buy from the firm.
Page: 46, Location: 594-595
Note: Imp.
Two, look at the claim-complaints data and look for a policy that has less than thirty complaints on every 10,000 claims made.
Page: 46, Location: 597-598
Note: Imp.
You need this cover more than you need a life insurance cover since you are more likely to break a leg than die. This cover is the difference between using your savings for a medical emergency and simply flashing your cashless card. You are doing OK if … along with your work cover, you have your own family floater; you live in small-town India, and have a family floater between Rs 3 and 7 lakhs; you live in the large metros, and want the five-star hospitals, and have a minimum of Rs 15 lakhs’ family floater; you are over sixty years old and have a top-up plan to bump up your basic cover.
Page: 50, Location: 652-657
Note: Summary.
5 What if you die
Page: 51, Location: 659-659
Note: CH. 5
Endowment plans destroy wealth over the long term. The day you realize that it is in your best interest to separate your investment and insurance products, is the day you move solidly towards building your financial security. Else you are building wealth for the seller and the insurance companies.
Page: 58, Location: 773-776
Note: Imp.
I prefer to unbundle my investment from my insurance, and stay with a large term plan for my life insurance needs, and buy mutual funds for my investment.
Page: 59, Location: 790-792
Note: Imp.
When’s a good time to buy? Buy as soon as you have dependants or the possibility of getting dependants arises. Typically, you will buy a life cover once you get married and have a dependent spouse.
Page: 60, Location: 805-807
Note: Imp.
The job of the life insurance cover is to serve you till you are debt-free and financially independent.
Page: 64, Location: 866-867
Note: Imp.
6 FINALLY, WE’RE INVESTING
Page: 66, Location: 884-884
Note: CH. 6
We all need to remember this: We are not stock market traders or speculators. There is a role for day traders and speculators in a stock market – but you and I are not traders. We are investors. Understand that difference.
Page: 69, Location: 931-933
Note: Imp.
The Indian habit of gold, FD and real estate is hard to break. But why buy the ’60s and ’70s products when you have the millennial financial products to invest in. Count the costs, count in the years of investing, and look at post-tax returns to see the true face of your investment returns. You are doing OK if … you have no more than 5 to 10 per cent of your portfolio in gold and they are in the form of government gold bonds; you own one house as the roof over your head, and no more; you have your FDs, PF and PPF, debt funds and no other debt products, no corporate deposits, no chit funds, no AT1 bonds; your debt allocation is equal to your age; at age thirty, no more than 30 per cent of your portfolio is in debt products;
Page: 86, Location: 1185-1191
Note: Summary.
Page: 101, Location: 1398-1403
Note: Summary.
FOREWORD
Page: 5, Location: 23-23
PREFACE TO THE REVISED EDITION Your money oxygen mask in times of uncertainty
Page: 9, Location: 68-70
The fact is that there is no one safe haven for your money. Each investment comes with some risk and you have to decide which one you are able to take.
Page: 13, Location: 137-138
asset allocation is not an option, and even high-risk appetite people like me, need to be less risk happy.
Page: 13, Location: 139-139
We need to understand the difference between risk appetite and risk capacity. Risk capacity is the ability to take risk. Risk appetite is the willingness to take risk. Capacity is about your age, stage, number of dependents, confidence about your ability to keep generating income for a long time.
Page: 13, Location: 140-142
Appetite is the desire to take risk. This depends on how well you understand money, finance, your own skills, your own ability to manage your portfolio or ability to hire a planner to do this work. My biggest lesson was that both risk capacity and appetite need to be aligned.
Page: 14, Location: 143-145
Ideally your total fixed obligation-to-income ratio (FOIR) should be 30 per cent or less. This means that all your EMIs put together must not be more than 30 per cent of your take home money. If your take-home is Rs 1 lakh, your EMIs are no larger than Rs 30,000. Remember, this is a maximum. I would be much happier with a 15–20 per cent ratio. Imagine a salary cut of 25 per cent and then look at your paying capacity.
Page: 14, Location: 151-153
Ideally your total fixed obligation-to-income ratio (FOIR) should be 30 per cent or less. This means that all your EMIs put together must not be more than 30 per cent of your take home money. If your take-home is Rs 1 lakh, your EMIs are no larger than Rs 30,000. Remember, this is a maximum. I would be much happier with a 15–20 per cent ratio.
Page: 14, Location: 151-153
The way we behave when we have dependents is very different than when we don’t.
Page: 15, Location: 161-161
This is actually a great lesson to learn – how to live each day as if it were one of the last few, but also how to live each day as if it was just another of thousands ahead. That balance if you can find, is the balance of life!
Page: 16, Location: 174-175
1 THE MONEY ORDER
Page: 19, Location: 217-218
You will understand that the current ‘buyer beware’ in the financial sector – or transferring of responsibility to the investor of buying the right financial product – is a regulatory failure. It is not unlike a car vendor flinging open the bonnet and saying: ‘Go do your
Page: 21, Location: 253-255
Two things happen if you track each expense down meticulously. One, you get bored and junk the whole exercise after a week of being good. Two, you get obsessive about money and forget to enjoy the coffee or the dinner, as you busily think about how much you’ve spent today. If
Page: 24, Location: 288-290
My salary account I label ‘Income Account’. The second account I call ‘Spend-it Account’. The third is called ‘Invest-it Account’.
Page: 26, Location: 306-308
Why does the bank want higher deposits? Because your money is lent out to others – loans earn the bank anywhere between 10 per cent to 18 per cent, while you get around 4 per cent interest on your savings deposit. The difference between what you get and what the bank earns, minus costs, is the bank’s profit.
Page: 26, Location: 314-316
Moving money from Invest-it to Spend-it is not allowed in my book.
Page: 28, Location: 341-342
Two things happened when I began doing this. One, I began to question my spending. Once you realize how much is going into your Spend-it Account, you can’t hide from yourself any more. Two, as the Invest-it Account begins to build up, you see how much your saving capacity
Page: 28, Location: 346-347
Two things happened when I began doing this. One, I began to question my spending. Once you realize how much is going into your Spend-it Account, you can’t hide from yourself any more. Two, as the Invest-it Account begins to build up, you see how much your saving capacity is.
Page: 28, Location: 346-348
What stops you from dipping into your Invest-it Account to pay for your spending? This is where behavioural economics steps in. Putting a label on money prevents people from using it for any other purpose. This is called ‘mental accounting’ and it means that we like to separate our money into separate accounts according to intent, and dislike using it for any other use.
Page: 28, Location: 349-352
You are doing OK if … you have a three-account system that separates your income, spending and savings; your spending on living costs is no more than 45–50 per cent of your take-home income; your EMI payouts are no more than 25–30 per cent of your take-home income; your savings are at least 15–20 per cent of your take-home income. 3 EMERGENCIES NEED A FUND Keeping money ready for an emergency is important.
Page: 29, Location: 362-367
You are doing OK if … you have a three-account system that separates your income, spending and savings; your spending on living costs is no more than 45–50 per cent of your take-home income; your EMI payouts are no more than 25–30 per cent of your take-home income; your savings are at least 15–20 per cent of your take-home income.
Page: 29, Location: 362-365
3 EMERGENCIES NEED A FUND
Page: 31, Location: 366-367
The unwillingness to take risks also comes from this fear of not having the money when it is needed. Therefore, people stay with money in near-liquid products or bank deposits that are easily cashed if need arises.
Page: 32, Location: 383-385
Let’s understand the logic of having a defined emergency fund. You’d typically need money ‘midway’ under two circumstances – planned and unplanned events.
Page: 32, Location: 387-388
In life, the planned expenses – such as buying a car, making the down payment for a house, sending kid to biz school, going on a foreign holiday, staying fifteen days at Jindal Farms to cure your back problem, sending brother to detox in Ananda – are all things you can prepare
Page: 32, Location: 390-392
In life, the planned expenses – such as buying a car, making the down payment for a house, sending kid to biz school, going on a foreign holiday, staying fifteen days at Jindal Farms to cure your back problem, sending brother to detox in Ananda – are all things you can prepare for.
Page: 32, Location: 390-392
What about the unplanned things – like the car getting rammed while quietly parked outside the house and needing a fender change? These are unplanned expenses, and unless you have a comprehensive car cover, you will be out of pocket for the cost of getting the car back in shape. There are many such unplanned emergency expenses that living our urban mass affluent life brings us: a large hospital bill, getting fired and not having an income, Chennai-like floods needing a full replacement of the basement furniture and gadgets.
Page: 32, Location: 393-397
A rough rule of thumb says keep aside six months’ to two years’ living costs. Include everything in it – rent, EMI, school fees, utilities, premiums, credit card charges, club memberships, whatever. The cash flow system that we created earlier will tell you what your monthly transfer to your Spend
Page: 34, Location: 412-414
A rough rule of thumb says keep aside six months’ to two years’ living costs. Include everything in it – rent, EMI, school fees, utilities, premiums, credit card charges, club memberships, whatever. The cash flow system that we created earlier will tell you what your monthly transfer to your Spend-it account is. Multiply that by six.
Page: 34, Location: 412-414
So, lower the risk to the household, lower is the number of months’ spending you need to cover for in the emergency
Page: 34, Location: 420-421
So, lower the risk to the household, lower is the number of months’ spending you need to cover for in the emergency fund. And higher the risk, higher the amount you save. Specially for people in their 50s, an emergency fund of two years becomes useful when negotiating a bizzare event like the 2020 pandemic that caused salary cuts and job losses.
Page: 34, Location: 420-423
There are several advantages to this product. It earns you a better return, is more liquid than an FD and can have a lower tax incidence
Page: 35, Location: 437-438
Understand debt mutual fund products before you begin to use it for an emergency fund. There are several advantages to this product. It earns you a better return, is more liquid than an FD and can have a lower tax incidence than an FD if you plan its use well. The higher post-tax return as compared to a bank FD makes a debt fund a great choice for an emergency fund. I know some investors who, once having understood mutual funds, moved to a balanced fund with a small equity exposure as their emergency fund.
Page: 35, Location: 437-440
This is the go-to fund when disaster strikes in the form of a job loss or death. Even if you have a life cover, the money takes time to come, but the ongoing costs don’t stop. I can’t stress the importance of this fund. It is the difference between slipping into disaster and staying afloat. You are doing OK if … you have six months’ to two years’ living costs in an emergency fund; you are a double-income family with no dependent parents and have three months’ living expenses; you are a single-income home with dependent parents and have a year’s living costs in an emergency fund; you are in your 50s and have two years of living expenses in this fund; your emergency fund sits fixed deposits or very safe debt funds. 4 BUILDING YOUR PROTECTION You don’t want to discover you have the wrong policy when you reach the hospital.
Page: 36, Location: 444-453
4 BUILDING YOUR PROTECTION
Page: 37, Location: 451-452
Getting a good medical cover is probably more important than buying life insurance – you’re more likely to go to hospital with an illness or accident than die. But identifying this ‘good’ policy is so difficult.
Page: 38, Location: 475-478
But we can still work with some rules of thumb. You need a basic cover of Rs 3–15 lakhs per person. Use the Rs 3 lakh number for smaller towns and less posh facilities, and the Rs 15 lakh number for metros and all the bells and whistles. For a nuclear family it makes sense to get a product called a ‘family floater’ that allows the insurance cover to whichever member of the family that needs it.
Page: 40, Location: 504-507
Look at the policy as a three-part decision. One, how does it perform on the metric of price. Two, how does it perform on the metric of benefits. Three, how does it perform on the metric of claims. You may have the cheapest policy with the best benefits, but if the company’s claims policy rejects a large number of claims, the policy is not of much use.
Page: 41, Location: 523-526
Unlike a life cover, where your premium gets locked when you buy a term cover, the premium of a medical cover changes as we
Page: 42, Location: 528-529
Unlike a life cover, where your premium gets locked when you buy a term cover, the premium of a medical cover changes as we age.
Page: 42, Location: 528-529
This is called ‘co-pay’ because you agree to pay a certain percentage of a bill to share the costs with the insurance company. Unfair, you exclaim. It is, except when a senior citizen goes to buy a cover, co-pay allows him to at least get a cover.
Page: 42, Location: 540-541
But a caveat here: People with any pre-existing disease find it difficult to get a cover. Some insurance companies use this clause to refuse claims for totally unrelated ailments. It is a good idea to disclose your correct present and past medical history to the insurance company when you sign up for the policy. Else they will have a tool in their hands to refuse your claim. And, believe me, they use it to refuse claims on very flimsy grounds.
Page: 43, Location: 553-556
Four, check if your policy has ‘sub-limits’.
Page: 44, Location: 562-563
You need to check this carefully. A sub-limit is a limitation on what the company will pay out for specific things. We usually stumble upon a sub-limit on room rent. There are two kinds of limits on room rents – either by price or by category.
Page: 44, Location: 567-569
Five, check for exclusions. A policy will list out diseases, conditions and medical services that the policy does not cover. Dental treatment, pregnancy and cosmetic surgery are standard exclusions.
Page: 44, Location: 572-574
It is a good idea to get a list of all that is excluded in the policy you buy. What you can’t do much about is when the policy you buy excludes something at some future point in the policy.
Page: 45, Location: 574-575
Eight, look at the ‘no-claims bonus’ feature. When you don’t make a claim in a year, you get rewarded by the insurance company. It does this by giving a ‘no-claims bonus’ (NCB). The usual way is to raise your cover by 10 per cent for the same premium.
Page: 45, Location: 584-586
Be careful of firms that give data on complaints as a percentage of policies sold. What is relevant is how many people, how many made a claim, then how many went on to complain. This number should be low in the policy you finally choose.
Page: 46, Location: 598-600
If you fall in this category and are not getting cover, there are still some things you can do. You
Page: 47, Location: 607-608
Some companies take their aversion to giving cover to people with a pre-existing ailment to ridiculous lengths. If you fall in this category and are not getting cover, there are still some things you can do. You can buy a policy with sub-limits, co-pay and an exclusion period for your existing ailment.
Page: 47, Location: 606-608
What to do? The best way to get a larger cover is to use what is called a ‘top-up’ plan. Think of this as a policy that will pay up after a certain threshold amount has been paid by you. Suppose you have an existing policy for Rs 3-lakh medical cover. Now you buy a top-up plan that gives you another Rs 5 lakhs of cover, but after a Rs 3-lakh deductible. If your medical bill is Rs 4 lakhs, you will pay Rs 3 lakhs from your basic policy and Rs 1 lakh from your top-up.
Page: 47, Location: 618-622
Do I buy a critical illness and accident cover while I’m at it? Yes, you do. A critical illness, like cancer, is a disease where you may not spend too much time in hospital but have very large out-of-pocket expenses
Page: 48, Location: 626-627
person buying the plan. You should be able to add a ‘rider’ to your existing policy on the policy renewal date. A rider is an add-on at a very low cost to a basic policy.
Page: 48, Location: 631-633
You should be able to add a ‘rider’ to your existing policy on the policy renewal date. A rider is an add-on at a very low cost to a basic policy.
Page: 48, Location: 632-633
How much insurance you buy depends on how insecure you feel about your health and the future. An old wise uncle, now deceased, once told me that we all need to decide what level of safety makes us feel safe. Do you need a helmet or a seat belt on the road or do you need an armoured car? The answer will depend on who you are and what danger you perceive, and what you are able to afford.
Page: 49, Location: 639-642
You need to treat the insurance industry and those who sell the same like walking through reptile-infested waters; you need to stay on the path that is safe. They’re out to get you. You need to look after your money.
Page: 52, Location: 679-680
Possibly the most difficult to say no to are the people you know very well. If you want to benefit somebody, give them money for nothing. Please don’t give this donation or charity respect by making it a financial transaction where you get something in return.
Page: 53, Location: 694-696
You need a life insurance cover for only one reason: to protect your family’s financial health if you die an untimely death.
Page: 53, Location: 698-700
In its purest form, a life insurance cover should pay your beneficiary a lump sum when you die for the price of the premium. If you outlive your policy, no money comes back.
Page: 55, Location: 723-725
A pure life insurance policy is called a ‘term plan’. This is not a policy that your agent or bank will tell you about. Why? Because it is cheap and does not soak up too much of your money.
Page: 55, Location: 726-728
The typical endowment insurance policy gives you a tiny crust of life insurance cover; it is usually ten times your premium. So if your premium is Rs 50,000 a year, your life cover is Rs 5 lakhs. It also promises to give you a return on your money. And that is the carrot for you – you get a ‘cover’, so your family’s safe; you get a return and you get a tax break. The pista on the jalebi is that the money at maturity is tax-free.
Page: 56, Location: 739-742
An easy way to cut through the tyranny of being hit by large numbers is to use the Rule of 72.
Page: 56, Location: 747-748
To know the rate of return every year of a double-your-money proposition, simply ask the question: Over what time does my money double? Then divide 72 by that number.
Page: 56, Location: 749-750
It is like a bank FD saying: Hey dude, you get a bonus. We not only return your money you invested at the end of the year, but even give you a 7 per cent bonus on it! Just as calling ‘interest’ a ‘bonus’ is silly, so is calling a return that the policy gives a ‘bonus’ bizarre. But that’s the Indian insurance industry for you. They feed off your trust and willingness to believe in their bad products.
Page: 57, Location: 760-763
The price of an insurance cover (called mortality price) cannot be different for the same person for a term policy and for a bundled policy because it is based on what are called ‘actuarial tables’.
Page: 57, Location: 764-766
but just understand that the price of your pure life cover is calculated by keeping in mind, among other things, how long an average person lives, what the gender is and at what age they are today.
Page: 57, Location: 766-767
now we know that the price of the pure risk cover should be the same across a term policy and an endowment policy.
Page: 58, Location: 767-768
Why do they get sold so hard? Because of the way the incentive structure is built into life insurance in India. The first-year commission (in 2020 for a more than 11 years regular premium traditional policy) is up to 35 per cent of your premium. For Rs 1 lakh that you invest, up to Rs 35,000 goes to the agent who pushes the policy at you. This is the legal payment. Insurance companies find ways to give commissions on top of what is legally allowed. One large agency firm told me that they can easily get 80 per cent of the first premium as commission.
Page: 58, Location: 781-785
The first-year commission is the big ladoo every agent is after. Who cares about policy servicing or annual renewal once the first premium is in the bag. The subsequent commissions fall to 7.5 per cent.
Page: 59, Location: 786-787
What about ULIPs?* Think of a ULIP (unit-linked insurance plan) as a mutual fund with a crust of insurance on top of it.
Page: 59, Location: 787-788
The rule of thumb is that you need eight to ten times your take-home annual income. Or fifteen to twenty times your annualized monthly expenditure.
Page: 59, Location: 794-796
So buy the policy the moment you realize that other people in the family will suffer financially if you die suddenly. Buy as early as possible because you get locked in for the duration of the policy from your first premium. And this is something you need to know: The younger you are the cheaper you lock in for.
Page: 60, Location: 809-812
You have plenty of options in the 80C basket. But for investment, you can do a special five-year bank deposit that gets you the same tax break. You can invest in the public provident fund (PPF), the National Pension Scheme (NPS) or a tax-saving mutual fund. These mutual funds are called equity-linked savings schemes (ELSSs) and are my favourite for long-term investing while getting a tax break.
Page: 61, Location: 825-828
Rule One: Get a cheap plan. The online plans are the cheapest since they remove the agent commission (up to 35 per cent of your first-year premium) – from the price of the insurance. When term plans were launched online some years ago, the prices dropped by almost half! A policy sold by an agent costs twice as much as the policy you buy online.
Page: 62, Location: 838-841
Rule Two: When buying a term cover, check the claims experience of the insurance firm. Shortlist three or four policies that you like in terms of low prices for your age, cover and tenure, and then start looking at the claims experience. This is not so easy to find. A claims experience of over 95 per cent is fine.
Page: 62, Location: 844-846
Let me repeat that. If there will be nobody to miss your income – do not buy a life insurance cover.
Page: 63, Location: 859-859
When are you financially free? When you don’t need to go to work to pay your bills, EMI, fees and other living costs. Your investments are large enough to look after all your expenses – current and future. Most people reach this milestone around the age of sixty, when they retire. Retirement either comes with a pension or a lump sum that is invested to harvest an income.
Page: 63, Location: 860-863
situation in which you don’t need a cover – when you are financially free. When are you financially free? When you don’t need to go to work to pay your bills, EMI, fees and other living costs. Your investments are large enough to look after all your expenses – current and future. Most people reach this milestone around the age of sixty, when they retire. Retirement either comes with a pension or a lump sum that is invested to harvest an income.
Page: 63, Location: 859-863
A life cover is a crucial piece of your money box that allows your family to maintain their lifestyles and future goals. You have been misled about this product for decades. You are doing OK if … you have a pure term insurance plan; you bought this online to remove agent commission cost; you don’t have a single ULIP or ‘traditional’ plan in your money box; you have a sum assured that is eight to ten times your annual take-home income or fifteen to twenty times your annual expenditure.
Page: 64, Location: 874-878
Money is never in plenty in the early years. But getting into debt to fund current spending is not the way out. Either find a way to raise income or spend less. There is no third option.
Page: 68, Location: 917-919
Not having money to invest is one of the four big reasons we put off the investing decision. At number two is the desire to keep money in a liquid form for a future emergency. Third is the fear of making a mistake and fourth is the lack of knowledge
Page: 68, Location: 922-923
The important thing to do is to start rather than wait for that golden moment when you have a big amount to hit the market with.
Page: 69, Location: 940-941
Setting up of an emergency fund and buying insurance covers are ways to protect our money box from unavoidable events as you journey through life, and to reduce the damage to your finances they bring.
Page: 70, Location: 947-949
But the financial seat belt does another thing – it reduces the need to keep most of your money ready at hand.
Page: 70, Location: 949-950
A big reason why people stay in fixed deposits, gold, insurance and real estate is the fear of making errors.
Page: 71, Location: 959-960
The purpose of this book is to migrate you from low-return, clunky products into financial products that look after the needs of a very different Indian citizen than of the 1970s angry young man.
Page: 71, Location: 963-965
What you need to remember is that understanding investing is a one-time fixed cost in terms of your time.
Page: 71, Location: 970-971
Remember that each financial product you buy must solve a problem you have.
Page: 72, Location: 984-985
Pull out your mental money box and look at it again. Remember that the first cell has your cash flows, the second is the emergency fund, the third your medical cover, and the fourth has the life cover. We now create three more cells in the box for our investments. We name each cell: The first is called Almost There; the second, In Some Time; and the third, Far Away.
Page: 73, Location: 994-997
Financial products are similar. Not everything suits everybody – we need to match our financial needs to financial products.
Page: 75, Location: 1022-1023
Each financial product has a certain time period over which it works best. A product that is very safe in the long run becomes very risky in the short term. And a product that works in the short term becomes a drag on returns if you hold it too long. When you now think of a financial product, learn to ask the question: Over what holding time period does this work the best?
Page: 75, Location: 1025-1028
You are doing OK if … you are committed to drawing up an investment plan; you have written down your near-, medium- and long-term goals; you have put a monetary value to these goals; you understand what amount you need to invest today.
Page: 76, Location: 1035-1038
7 LET’S DE-JARGON INVESTING
Page: 77, Location: 1039-1040
Get this straight. It is in the interest of the financial sector to keep things tough for you. The less you understand, the more you can be cheated.
Page: 78, Location: 1055-1056
There is a purpose for each product you buy, and each product needs to fight with others to grab that place in your box. There are three asset classes that we need to understand. Debt, equity and real assets.
Page: 78, Location: 1065-1067
Debt is just an umbrella term for all financial products that are based on borrowing. Equity is ownership of a business and the risk that it brings, either directly (through stocks) or indirectly (through mutual funds). Real assets are those that can be physically seen. Debt and equity are called ‘financial assets’, while real estate and gold are called ‘real assets’.
Page: 79, Location: 1067-1070
But when used by the sharp Suits, debt means the cell with products that give you an assured return – like a bank fixed deposit or a tax-free bond or a public provident fund.
Page: 79, Location: 1073-1074
The core of the product is a loan. When you make a deposit with the bank, it treats it as a loan from you. And needs to give a periodic return, and then the principal back to you after an agreed upon time. These are products where two things are fixed – how much you will get back and when you will get it back. You are loaning money to the bank or the bond issuer and the interest is the price of this loan.
Page: 79, Location: 1074-1077
Why do you get an interest on your money? Because by not using it today you have postponed consumption – you need to be compensated for that. By pushing the use of Rs 1 lakh to five years later, you take the risk of the money losing value to inflation – you must be compensated for that. By lending money, you also take the risk of the borrower not returning it – you need to be compensated for that.
Page: 79, Location: 1077-1080
The higher the return it promises, the higher is the risk – even in a product you think is ‘safe’ like a company deposit.
Page: 80, Location: 1083-1085
A benchmark is a standard you measure something against.
Page: 80, Location: 1085-1086
Without a benchmark there is no comparison of returns in finance. If somebody offers you a rate of interest that is much higher than a bank FD, understand that the risk of non-payment of both your investment and the interest on this deal is much higher.
Page: 80, Location: 1088-1090
The role of debt products in your money box is to provide money at short notice and to provide stability to your long-term investments
Page: 80, Location: 1094-1095
Debt products are good for stability but not for growth.
Page: 81, Location: 1100-1101
Remember these are bullion prices. If you bought jewellery thinking you are making an investment, the numbers in the table above are all much lower. You lose 30 per cent straightaway to making charges when you buy gold as jewellery. No, I’m not saying no to jewellery. I enjoy my own gold trinkets, but I’m sure that these are not part of my investments at all. I buy jewellery because I enjoy wearing or gifting it. For my investments, I stay with mutual funds.
Page: 81, Location: 1114-1118
Few people actually sell gold jewellery to bring home the profit; it is usually gifted one generation to the next. So buying gold jewellery as investment just does not make sense.
Page: 82, Location: 1120-1121
Not more than 5–10 per cent of your total portfolio goes into gold. You do not buy jewellery as investment. Your options to buy gold are coins, bars, gold exchange-traded funds (ETFs) and gold bonds from the government. As of 2017, the smart investment decision is to buy the bonds issued by the Government of India; these bonds give you not only the full market value of gold when you sell the bonds in the future, but also a small
Page: 82, Location: 1123-1126
Not more than 5–10 per cent of your total portfolio goes into gold. You do not buy jewellery as investment. Your options to buy gold are coins, bars, gold exchange-traded funds (ETFs) and gold bonds from the government. As of 2017, the smart investment decision is to buy the bonds issued by the Government of India; these bonds give you not only the full market value of gold when you sell the bonds in the future, but also a small interest on your investment each year.
Page: 82, Location: 1123-1126
So much of our buying decisions has to do with what other people think of us.
Page: 84, Location: 1147-1148
It is a horrible, clunky, chunky investment that has lots of costs, which people forget to add to the profit maths.
Page: 84, Location: 1156-1157
Why do we like it so much? There are three reasons why people can’t think beyond real estate. Habit, black money and fear. We’ve grown up thinking of real estate as a long-term investment.
Page: 84, Location: 1160-1161
And that brings me to my second reason for our love for real estate – black money. Gold and real estate have been the sumps of black money in India. Most of the second sales in real estate take place in cash, and dealing in black is like a treadmill – once you get on it, you have to keep running with the money.
Page: 85, Location: 1170-1172
The third reason to choose real estate is just fear of the unknown. Twenty to thirty years ago, there were not many investment avenues – gold, real estate, bank deposits and LIC were what everybody had chosen to invest in. But now the presence of mutual funds, which have a product for most needs, does give a better choice set.
Page: 85, Location: 1178-1181