Personal Finance
When you sit down with friends or family, what small talk do you indulge in? General stabs at life lessons and practical philosophy, I suppose, or common interests like movies or cricket. A conversation trope that keeps coming up, in my experience, is a discussion on a minimum set of skills everybody should have. Many point to cycling or swimming. A majority sighs thankfully, crossing them off as life goals achieved, while a minority bashfully own up to not knowing one or the other.
The life-skill I wish people can talk openly about is, personal finance. Such topics require some nuance and shared comfort, which friends and family engender. Yet talking about financial ‘good practices’ or experiences among such groups are rare. Anecdotes are almost always around extremities — horrible losses or windfall gains — which are not really replicable. When I first began to dig into the subject, it was really difficult to find anybody I could talk to. Thankfully, there was Tanay, and the internet.
Let me first list what I don’t mean by discussing finance. I have had numerous encounters with people I barely know who, two minutes into asking me about work, ask, “what is your CTC?” without blinking. I also do not recommend indulging in that other horrible past-time: stock-tips and unqualified stories of people making it rich overnight. Neither am I interested in multi-level, peer-to-peer marketing schemes (99% of the participants lose money).
Here are the three things I wish people told me when I first began to earn.
1. Basics
Save money. Everybody will tell you this is a good idea, but it is difficult to find exactly how one is supposed to go about it. The personal finance columnist Monika Halan suggests that everybody should build a ‘money box’. What goes into the box?
- Emergency fund — 3 to 6 months of your monthly expenses.
- Health insurance, over and above the statutory cover your office gives you.
- Term insurance (see below)
- Public Provident Fund
That’s it.
How do you figure out your expenses? It pays to build a spreadsheet and mark your expenses every month. Here is a simple, annual budget you can use to work out annual expenses. Don’t keep this emergency money in a savings account. Get an auto-sweep account that transfers multiples of 5 or 10,000 rupees into a fixed deposit.
Most companies have a co-pay Health Insurance plan for their employees or simply choose the cheapest they can to meet statutory requirements. Find a good plan that suits your needs (Livemint has an excellent guide here). Remember, more than half of Indian households fall into poverty because of out-of-pocket health expenses.
For those who can save upto INR 1.5 lakhs a year, the PPF is a great tax-saving and long-term value building resource. For those who have more, read on.
2. Financial planner
Get professional help. Pay for it. Before I go on, it is important to note that in Indian contexts, “Financial Planner” is a loose title for everybody from your neighbourhood CA to mutual fund distributors, insurance agents and such. A Financial Planner must be registered with the Financial Planning Standards Board of India. All accredited members are listed on their website — ask for their registration number, don’t be shy.
However, many mutual fund distributors also get certified by this board, so be careful. They offer “free advice” and act as agents. They make a small commission — about 1% — from the mutual fund; compounding over the life of your investment. Some also ‘churn’ funds — they make you move funds so they can make commissions every year. All in all, your interests are not aligned with your “planner”.
To check this, it’s best to work with a Securities and Exchange Board of India (SEBI)-certified financial planner. SEBI registration means the planner has a fiduciary responsibility towards you. They charge a fee; see what percentage it works out to your annual savings and pay it. Again, ask and check the registration details. You may then choose to make them your mutual fund agent (at which point they earned the aforementioned commission), or invest directly yourself (Aadhaar makes it easier).
Cross-check their recommended instruments with online tools like LiveMint’s Mint 50 and Value Research. Crudely put: more stars, better fund (there’s more to it, of course).
Finally, if you are asking around for a financial planner, do check if those who recommend planners have actually used them. If they did, that’s a good sign. Two key things to remember: Financial Planners are not meant for wealthy people only; if you want to accrue wealth you need a plan. Two, even doctors need independent advice for their own ailments.
3. Insurance
Don’t buy LIC policies — endowment and ULIP policies — or their private equivalents with names to tug at your heart strings, like “children’s growth fund” or “retirement benefit”. It takes a few hours to work out their returns, even for the LIC officer. Mostly, they are below inflation and are only better than a savings account.
Indian insurance companies have also largely succeeded in convincing people that they should get money back after the policy term ends. This is almost always bad. You are better off investing in mutual funds where the returns are better, and the cost of picking a wrong fund is minimal. No insurance policy gives you money back. Do you get your car insurance money back?
Buy simple, no-frills, term insurance. For a 35-year-old with 2 kids and a spouse, a policy for INR 1 crore costs about INR 12,000 p.a. You won’t get money back unless you die — and that’s a good thing. You can look at IRDAI’s latest annual report to check a company’s claim settlement ratio to pick your term insurance provider. Any company above 95% is good.
Extra: It helps to draw up a will. I know it sounds grim, but I mean a list of all your investments, people to contact and passwords. If something happens to you, your spouse should have access to this information.
Finis.
In medieval Europe, aristocrats spent their money carelessly on extravagant luxuries, while peasants lived frugally, minding every penny. Today, the tables have turned. The rich take great care minding their assets and investments, while the less well-heeled go into debt buying cars and televisions they don’t realy need — Sapiens, Yuval Noah Harari.
