Rajat Srivastava
Jul 27, 2017 · 11 min read

A wise man once shared with me his definition of a successful man. Someone who can balance these 3 things well -

  • Personal health
  • Personal relationships
  • Personal finances

Shockingly, while we spend a lot of our “precious” time chasing success as defined by financial goals (job / real estate / bank balance etc.) , a lot of us still don’t have a planned approach. Sure, we have some investments. Possibly even bought some insurance disguised as tax-savings or have a few fixed deposits in banks etc. but,

  • Is there a better structured way to build a portfolio that meets most of one’s needs?
  • How does my next investment fit into my grand scheme of wealth planning?
  • Given where I am, should I invest in option A or in option B?
  • Since financial planning impacts practically everyone who isn’t born with a silver spoon, isn’t there like a guide or a rulebook that recommends best practices basis collective wisdom?

To answer these concerns, let’s first ask ourselves a few fundamental questions -

  • What do we do with the money we earn?
  • What is it that we want to achieve when we decide to “invest” our hard-earned money.

IMO, there are 3 broad buckets where the answers lie. Think of this as the Maslow’s hierarchy of financial needs.

  1. Fulfillment of short-term needs — Buying a car, running daily household expenses, entertainment & travel, hedonism, indulgence etc. In essence — maintaining a certain lifestyle.
  2. Planning for medium to long term life goals — Retirement, buying a house, kids’ education and eventually a sizable inheritance when you decide to kick the bucket.
  3. Protection against unfavorable outcomes & emergencies — health issues, job loss, dues owed to others & similar emergencies.

Hence, ideally, our financial planning should also be structured to meet these. However, given one’s life stage the order of importance might change. A bachelor who has just started working could choose 1 > 2 >3. A retired person might go for 3 > 1 >2. The key to disciplined investing that continues to give higher returns though lies in 3 > 2 > 1!

This is important. Take a minute to ponder over it and let it sink in..

Once you have the necessities taken care of, you can afford to choose higher-risk-higher-return investment options without impacting outcomes. While short-term needs can be adjusted, long term goals take time and hard work to achieve and hence an earlier start is always better. Also the magic of compounding makes it easier for early starters to reach the same goal with less effort/hours spent slogging at work.


GOAL A: Protection against unfavorable outcomes & emergencies

STEP 1: Reducing the risk of short-term emergencies & cash needs.

Calculate your typical monthly expenses HONESTLY. Next, add your ad-hoc annual expenses and divide by 12. Add this to the monthly expenses. Example -

Now, multiply this number by 3. Then, add a 10% buffer. This is now your kitty for funding 3 months of expenses in case of any unforeseen circumstances (such as loss of job or sudden need of cash). Put this amount away in either 1) Sweep-in savings account (SBI recommended as has low minimum fund requirement) or 2) Short-term liquid funds that offer return rates close to 9–10% vs 6–7% in FD or 4% in savings account with very low risk. This fund should never be lying idle in a savings account.

STEP 2: Ensuring well-being of your loved ones no matter what happens to you.

Your family needs your help. Even more if you are not around. While awareness around the need of Insurance is still low in India, given our inactive lifestyle and uncertainties all around, it is important to ensure your loved ones don’t suffer financially. So -

BUY A TERM INSURANCE — (How much you ask?). Think of the worst case scenario (Example — I’m 30 now, I die when my family’s future expenses are highest. Say kids’ college education plus family’s healthcare expenses). Keeping inflation in mind, will your insurance cover be sufficient if your died at this phase?

Pro tips — 1) DO NOT mix insurance & investment. 2) Cover AT LEAST all your major debts. 3) Keep into account inflation. 4) Take a cover equivalent to at least 5 times your current annual salary 5) Opt for MWPA while applying 6) Link all your insurance policies in an e-insurance account for easy access and record-keeping 7) Compare online plans. Recommendation as of 26/07/17 — HDFC 3D Life given critical illness cover, rejection rate, reputation and premium amount.

STEP 3: Protection against major emergencies & life-shattering diseases.

BUY A HEALTH INSURANCE — Medical inflation in India stands at a whopping 15–18%! Hence, healthcare costs (ONE emergency) can easily eat into a big portion of your savings. Don’t let that happen and jeopardize all other future plans. Health issues also might need consistent & long-term expenditures. So protection is an absolute must once you reach mid 30s.

Pro tips — 1) Buy a family floater plan but buy a separate plan for elderly or sick members as that might inflate premium of the overall floater plan 2) DO NOT depend on your employer’s health cover. The robots are coming and your job is no longer safe :) 3) Instead of buying one high value plan, buy a small floater plan and add a top-up plan separately (Same cover & benefits, much lesser premium) 4) Full body health check-up every year after you turn 30. 2000 Rs. spent per annum can easily save 20000+ Rs. in medical bills every year if diseases are diagnosed early. Resonates with my definition of success being defined also by the state of one’s personal health.

RECORD KEEPING — Write (using a pen) in a diary all your bank account, loan account, insurance policy details, PF, demat & other online account logins (utility, employer, credit cards etc.) for record-keeping so that your family can retrieve all your financial details from ONE PLACE. Keep this updated. Review for changes at least once every 3 months. Keep this alongwith other valuables handy at home or in a locker.


GOAL B: Groundwork for dream projects & life-goals

They are far in the future, yet demand sacrifices in the present. Dreams for some, checklist items for the others but they can’t be achieved without commitment. Did I tell you these get easier if you keep compounding in mind?

I know I did. Just reiterating given how crucial this is. :)

STEP 3: Dedicated investment plan for each one of your goal

DREAM GOALS — I’m sure each of the goal is BIG. And so would be the effort to get to it. 6–7% return rate in a safe FD may not be the best way to get there. Equity investments (Mutual funds not stocks) should provide the extra boost to power this journey.

Are Mutual funds risky? Yes. So is driving a two-wheeler on the road and yet we do it. Over a shorter time-interval this risk is even more, but if one were to look at a larger time-window, equity markets overall win and continue to do so.

Ask yourself again, are you afraid of mutual funds because they are risky or because you don’t have enough understanding of related performance data.

Another point to consider, assume you had 100 Rs and 2 options -

OPTION 1 — Invest Rs 100 in an FD @ 6% return = 106 Rs after 1 year.
OPTION 2 — Invest Rs 80 Rs in an FD (@6% return), remaining Rs. 20 in a diversified mutual fund (15% return) = 107.8 after 1 year. (30% benefit with 20% additional risk)

Clearly, without assuming too much risk also, there are chances of greater wins! The real reason folks are afraid to invest is because in the absence of an emergency fund, they are forced to sell in case there is a loss to fund short-term needs. Having said that, exposure should be limited at all times and shouldn’t exceed 50% of overall portfolio for safe/rational investors. Depending on time horizon for each goal, have a mix of mid/small cap, large cap and balanced mutual funds. With the emergency fund in place, ad-hoc requirements to eat into this will get lower and leave this money to work harder.

Current recommendations —
LARGE CAP — Kotak Select Focus
SMALL-MID CAP — L&T Emerging Businesses
BALANCED — HDFC Prudence
Other — Sundaram Rural India (more so given strong monsoon)
FD Alternative for ‘safer’ investment — Reliance Corporate Bond Fund

RETIREMENT — The farthest and the most neglected one. Even though Indians are better than rest of the world here given strong savings rate & tighter family bonds for dependencies, inflation, rise in life expectancy & medical facilities are making sure people live longer and spend more to do so. Same principle of investing hold true just that horizon is longer than the rest for most people.

Advanced investors also work towards building a dividend ladder which acts a secondary source of income while preserving the capital. Simplest way to imagine a ladder is — investing 10 Lacs in FD every month. From the 13th onwards, you get 60,000 Rs. every month as interest payout from each of your FD. That’s a neat amount for taking care of regular expenses while preserving the 1.2 Cr (10 lac per month for 12 months capital).

STEP 4 — Reduce risk as you get closer to the goal

Use SIP to enter when goal is far. Use SWP to exit and reduce risk when closed to the goal.


GOAL C: Powering the lifestyle you want & you deserve

Our present is what usually gets the most focus for financial needs. The dinner outing over the weekend, the shiny new smartphone or paying the bills every month. “Where did all my salary money go!” Ever had that feeling at the end of the month? You may not be alone.

STEP 5 — Optimization of regular spends

Turns out, there are only 3 ways to save more money.

  • Earn More (Unfortunately, one may have limited control on this. Depends on employer, skillset & a lot on external factors)
  • Spend less (Minimalism & Frugality are in vogue).
  • Less brand love, more product love. 3 items for the price of 1 if choosing a private label VS a big label.
  • Take a ‘Uber Pool/ Ola Share’ instead of a full cab.
  • House parties once a while instead of going out every weekend.
  • Save more from the same spend.
  • Ruthless deal-hunting everywhere (Best phone plan for your needs? / Food joints with happy hours / bulk buying during sales period for use later / Coupons, coupons!).

Pro Tips — 1) I check the Gmail Promotions tab once in a while and add a star to the mails I think have offers I can use later and revisit this list, before making a purchase online. 2) Use browser plugins like ‘BuyHatke, MakkhiChoose’ and coupon sites etc. for price comparison & offers across sites. 3) Have 1 more gmail account for getting referral benefits from the main account & multiple uses of limited period one time use offers. 4) Add-to-cart and keep items for a while. Quite a few sites offer ‘Cart Abandonment’ offers to drive conversions. Also helps in price-drop alerts if the need is not immediate 5) Browse shopping sites in Incognito mode always.

  • Plan & book your travel well in advance.
  • Shop online as much as you can. ALWAYS look for coupons when shopping online.
  • Friendship with Credit Cards. These are a no-brainer and you MUST build the discipline to use them wisely. There are 3 broad benefits -
  • Cashback & Rewards on cards include Lounge access, free movie tickets etc. (HDFC Regalia used to be a good card with ~1.8% return rate). See toolkit at the end for more insights before choosing a card.
  • Credit-free period for ~45–50 days so extra interest if this money stays in the bank.
  • Visualization of spends. Good way to understand where your money is going. Some card accounts offer bucketization of spends under gorcery, entertainment, retail etc. which makes it even easier to understand.
  • No joining fee, sign-on bonus on reward points & easy signup means switching cards is also much easier for even a one time benefit.
  • Use a productivity tracker (like Evernote) or create monthly alerts in your Google calender 1 week before payment due date and ensure payments are made on time. ALWAYS. Never, never ever, let a payment roll over. With 3% monthly interest rate, this can become a disaster if delayed.
  • Wallets & Cashbacks — there is some promotion always running on one or the other. Have no loyalty and shamelessly switch between the one offering the better value for a specific transaction. In essence, if you are shopping online you could — get discount on the site for the product, pay from wallet and get cashback and receive rewards points when you use your credit card to load money in the wallet! THREE opportunities for save with ONE transaction!
  • Follow and subscribe to bloggers who write often on such areas. Example — here & here.

Like any other skill, getting good at this requires reading, staying abreast of latest trends, and making mistakes ( start small so impact can always be limited, realign as you see approaches work or not work). Start today.


Cheatsheet: Financial Wisdom Toolkit & Hacks

  • Read about financial instruments available — Liquid, Debt funds & others
  • Investment Strategies — SIP, SWP, Portfolio allocation strategies & points to consider
  • Tax Savings list — ELSS advantages over others, LTA twice every 4 years, debt instruments tax treatment, double indexation etc.
  • HUF!
  • Index funds (their performance & how they are >>>> risky stocks)
  • NPV & CAGR (understanding these terms will demystify complex financial instruments immensely)
  • Credit cards — (Which one to choose? More resources — here & here)
  • Diversify!
  • Set aside SIP and investment money as close to the salary credit date as you can to avoid temptations.
  • Review your portfolio at least once every 6 months. Swap non-performers with category performers for mutual funds every year keeping tax gains in mind.
  • Think twice before investing in real-estate. Iliquid, risky and not a great investment option any more IMO.
  • Ditto for gold (consider Gold ETF instead)
  • Thumb rule 1: Savings rate should be at least 20–30% until you start a family
  • Thumb rule 2: Rent paid should be < 30% of monthly salary
  • Thumb rule 3: Equity investment share: 100 — current age to equity, rest to debt
  • 4% rule
  • Pre-requisites: Savings bank account / A demat account / Credit card(s) (MUST be no annual or renewal fee without constraints) / One tool to track & vizualize ALL your investments ( I use moneycontrol portfolio manager)

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